5 Things You Need to Know About the FedNow Service

By Marcell King, Chief Commercial Officer, Tyfone 

It’s common knowledge that the FedNow Service was launched by the Federal Reserve in July of 2023. It’s also widely known that FedNow is a new payment rail that facilitates instant, real-time payments across all participating institutions. However, beyond that, there’s still some mystery for many institutions. What are the salient points regarding FedNow?

FedNow Is a Game Changer

Other countries around the world have been involved in real-time payments for a number of years – with great success, I might add. FedNow enables the United States – and particularly community financial institutions – to level the playing field.

To be clear, there are other real-time and pseudo-real-time payments systems available to community FIs. However, FedNow offers a few key advantages:

• FedNow is considerably less expensive to deploy than some other systems. This is important in itself, and will also likely help spur wider adoption, making FedNow more ubiquitous.

• FedNow is offered by the Federal Reserve, an organization committed to serving all financial institutions and not beholden to any big-bank interests.

• FedNow does not require a separate master account with the Fed; your institution can employ the same master account it uses for ACH and wires.

You Can Start With Receive Only, But Start Now

The Fed gives you the option to deploy the FedNow Service as “send and receive” or “receive only.” Your institution may be reluctant to start sending money via FedNow (the reasons for which I’ll address later), but I believe there’s no good reason to delay enrolling in receive only. In fact, I’d go so far as to say, if you don’t at least enroll in receive only, you’re doing your accountholders a disservice.

For example, at some point, an accountholder’s employer could offer real-time daily wage payments via FedNow. Think how life-changing that would be for families who are living paycheck to paycheck. Now think about your accountholder having to miss out because your institution isn’t on the FedNow network. Would that drive your accountholder to a payday lender? Or worse yet, would that drive your accountholder to a new institution? That segues nicely into my next point.

FedNow Gives You a Competitive Advantage

Your community FI is in the business of moving accountholder money from Point A to Point B. It’s really that simple. The more ways you offer to do that, the greater your competitive advantage. The data backs that up. According to statistics compiled by PSCU and PYMNTS.com earlier this year:

• 65% of accountholders want more innovative payment options from their FIs.

• 29% of accountholders would change or consider changing institutions for more innovative payment options.

• 39% of millennial accountholders would change or consider changing institutions for more innovative payment options.

As more and more community FIs deploy the FedNow Service, the ones who don’t may very well be left behind by their own accountholders. This is true for both consumer and business accountholders. After all, who doesn’t want to send and receive money as fast as possible?

Fraud Will Always Be There

Every new payment mechanism that comes along creates new opportunities for fraudsters to do what fraudsters do. FedNow is no different in that respect. The important thing to remember is that the FedNow Service is inherently very secure. Most online payment fraud relies on the accountholders doing something they shouldn't have done (clicking on phishing emails, giving the fraudsters credentials or one-time passcodes, etc.). And while you can never eliminate accountholder mistakes, you can mitigate them.

Consider these numbers compiled by PYMNTS.com and The Clearing House this past spring regarding the types of fraud associated with faster payments:

• 45% -- account takeovers

• 27% -- scams

• 18% -- stolen credentials

Fraud prevention and mitigation must start with accountholder education. The better you equip your accountholders with knowledge, the less likely they are to fall victim to financial fraud. Beyond that, though, there are some measures you can consider to help prevent fraud.

For example, your institution might implement “cooling off” periods for things like adding new recipients or changing credentials. This is, however, a balancing act because every measure you take like this adds friction to the process for the accountholder. The key point is that you need a robust set of fraud prevention and mitigation tools at your disposal that spans your entire payments offering, including FedNow. 

In Closing

Above all else, it’s essential that you educate yourself about what the FedNow Service is and isn’t, because there are some myths floating around right now. For example, someone recently asked me if it’s true you can run FedNow transactions from your FedLine terminal. It’s not. Just like your accountholders, the more you know about FedNow, the better equipped you’ll be to take advantage of this tremendous opportunity.