The Federal Reserve’s Real-Time Payments FedNow Service Launches On July 20, 2023: Potential Impacts And Considerations

The Federal Reserve’s Real-Time Payments FedNow Service Launches On July 20, 2023: Potential Impacts And Considerations

July 24, 2023, Covington Alert

Background

The Federal Reserve’s new interbank, instant payment infrastructure, called the “FedNow Service,” went live on July 20, 2023. The FedNow Service offers new payment rails through which banks, credit unions, and other eligible financial institutions can offer instant payments services to their customers, allowing them to send and receive payments within seconds at any time and day of the year.

As with other Federal Reserve Bank services, the FedNow Service will be available to any depository institution eligible to hold an account with a Federal Reserve Bank. While the FedNow Service will support instant retail payments (i.e., payments between individual consumers and businesses), consumers and businesses will only be able to access such instant payment services through financial institutions that choose to participate in the FedNow Service.

As a real-time gross settlement system, each transaction using the FedNow Service will be processed in real time and settled on a gross basis (i.e., payment-by-payment), as opposed to periodically settling several payments in batches. There is also liquidity management transfer capability to enable FedNow participants to transfer funds to one another to support liquidity needs related to payment activity in the FedNow Service. With an operating schedule of 24 hours a day, seven days a week, financial institutions participating in the FedNow Service will be able to clear and settle payments instantly any time of day of the year. The first release of the FedNow Service includes optional features such as fraud prevention tools, the ability to join initially as a receive-only participant, a request for payment capability, and tools to support participants in their handling of payment inquiries.

The FedNow Service now joins the RTP network, previously the only other interbank, instant payments infrastructure in the United States operated by The Clearing House since November 2017, in making instant payments solutions available in the United States.

Scrutiny of Existing Payments Contracts

Real-time payments will cost less to process than other types of payments transactions such as debit and credit transactions. The FedNow Service is also offering key pricing discounts for new customers in 2023.

Businesses could potentially lower their costs considerably with the use of real-time payments for certain types of transactions. Accordingly, businesses may scrutinize the rates they currently pay to facilitate acceptance of payment methods and re-evaluate the existing commercial arrangements in their payments contracts. The FedNow Service will expand the use cases for real-time payments in the United States, especially at the business-to-consumer level, and make instant payments generally more accessible.

Innovation in Payments Products

There will likely be a focus on innovation and new hybrid payments offerings from financial institutions and other payments service providers. Consumer credit products aren’t going anywhere, but they may evolve. Instant payments have benefits, but not every aspect of instant payments will be desirable in every situation or advantageous over other payment methods such as credit cards. Businesses and consumers will still benefit from the ability to pay later.

Certain features of both credit and debit card products may benefit from the FedNow Service, and some aspects of instant payment services and functionalities may find their way into traditional credit and debit products and their related services. Expect these offerings to involve a technology component as greater interactivity and “always on” status will be a focus for real-time payments and hybrid products.

Risk Allocation

Real-time payments introduce 24/7/365, always-on service and payment finality to a payments landscape wrought with fraud. While regulations such as Regulation E and Article 4-A of the Uniform Commercial Code will play a role in allocating risk responsibilities for real-time payments, there will be gaps to cover in the commercial agreements negotiated between business parties.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Financial Services, Fintech, or Technology and IP Transactions practices.