The Federal Reserve’s long-awaited new payment system, FedNow, will be here and available to financial institutions sooner than we expected. In fact, many organizations have already been participating in the FedNow Pilot Program, including a number of large financial institutions and core processors. FedNow is expected to have a significant impact on both large and small financial institutions in the ways they offer their business and consumer clients the ability to send and receive instant payments. Many fintech companies and other organizations that rely on existing payment networks have also kept a close eye on the unveiling of FedNow. The long wait is almost over—the Fed is aiming to officially launch FedNow between May and July of 2023, and the Fed recently announced the price tag(s) that will come along with it.
As a bit of background, FedNow is the Fed’s new instant payment system, largely meant to introduce some competition and serve as an alternative to existing payment rails, such as those offered by the real-time payment (RTP) network from The Clearing House, ACH transactions, etc. FedNow will process payments around the clock, every day of the year. Payments through FedNow will also be processed instantaneously and in real-time, whereas even same-day ACH transactions may take several hours to settle. The recipient of funds through FedNow will be able to access and use funds immediately after a transfer is made. FedNow promises to offer a significant improvement over traditional payments processes, which are often more costly and without instant settlement. The Fed has designed FedNow to offer businesses and consumers quicker access to funds, greater flexibility, and lower costs.
As mentioned above, a handful of organizations have already taken the plunge by participating in the FedNow Pilot Program. Once FedNow launches, many financial institutions will look to officially tap in to FedNow. Before doing so, however, financial institutions will want to first brush up on the Fed’s new Operating Circular 8, which establishes the legal terms and conditions that apply to payments through the FedNow. Generally speaking, Operating Circular 8 sets forth the legal “meat and potatoes” of FedNow, including the terms that each financial institution and its service providers will need to comply with in order to participate in FedNow.
So, how much does FedNow cost? Well, the Fed is currently offering key pricing discounts to encourage its widespread adoption. For instance, the Fed will temporarily waive its $25 monthly service fee and discount the $0.045 customer credit transfer fee (to $0.00) on the first 2,500 customer credit transfers per month. FedNow will also include a request for payment fee of $0.01 per item and a liquidity management transfer fee of $1.00 per transfer – these fees will not be discounted. It’s also important to note that this pricing is expected to change over time (although the Fed has not indicated when and how the pricing might change).
There are certainly proponents and opponents of FedNow, but one thing is clear: FedNow will shake up the industry by introducing some competition into the payments landscape. Financial institutions of all sizes will have the opportunity to participate in the program and offer the option of instantaneous payment transfers to their business and consumer clients. We anticipate business clients may be more willing to take advantage of this new payment option, while consumer clients may opt to continue using their familiar P2P mobile applications. Also, to the extent organizations rely on interchange fees as part of their business model, FedNow could certainly have an impact on those sources of non-interest income as FedNow takes a piece of the action.
In sum, FedNow will be an interesting new competitor in the payments landscape. There will be—and have been—some early adopters, and we anticipate that this competition may lead to cheaper and faster payment transfers for businesses and consumers alike. Time will tell whether the FedNow Pilot Program pays off, or whether there will be any glitches, delays, or other unexpected setbacks as part of the official launch in the summer of 2023.
As with any new and exciting payment network, we strongly encourage any financial institution or other organization looking to tap in to FedNow to perform the appropriate amount of due diligence to ensure that it fully understands what it means to participate in FedNow, including carefully reviewing the legal rights and responsibilities of those participating in FedNow.