End-to-End Instant Payments
The FedNow Service (FedNow or Service) is now live. The Service went live on July 20, 2023, and allows businesses and individuals to send instant payments through their depository institution account – uninterrupted on a 24-hour, 7-day-a-week basis. At its core, the Service “interbank clearing and settlement that enables funds to be transferred from the account of a sender to the account of a receiver in real-time and at any time, any day of the year.” The Service results in real-time gross settlement (RTGS) service that permits financial institutions to “deliver end-to-end instant payments to their customers”.
To date, there are initially 35 Participating financial institutions, 11 Settlement Agents, and Liquidity Providers. Certain institutions have been designated “certified service providers” and have “completed testing certification to support payment processing for participants”. The Federal Reserve’s Operating Circular 8 (OC 8) provides operational details “including expectations, requirements and guidance” for participants within the program.
Notably, OC 8 provides guidance and eligibility requirements with respect to Anti-money laundering and sanctions compliance (Section 1), Fraud Reporting (Section 12), and ISO standards for participating institutions. Section 4 outlines the general expectations for participants, including maintaining a compliance program and a customer due diligence program. Notably, Section 4 emphasizes the account balance management protocols, emphasizing the importance of avoiding negative balances and staying within intraday overdraft capacity.
OC 8 also outlines general expectations for participants, including the Federal Reserve Bank’s right to terminate or restrict access if a participant poses a risk, and the Federal Reserve Banks’ right to change the operating procedures at any time (though they will attempt to provide 30 days’ notice for material changes). It also discusses operating rules, message response expectations, account balance management, and the FedNow Service Funds Transfer Business Day Rollover. Moreover, OC 8 provides technical specifications and message implementation guidelines for the FedNow Service, including information about key management, the differences between the production and test environments, and the requirements for FedNow Service profiles. It also outlines the different participation types, components and settings, connection party permissions, account management and permissions, participant profile statuses, and considerations for service providers and participants with multiple profiles.
Likewise, OC 8 highlights the FedNow Service’s “Negative List” feature, which allows participants to help mitigate fraud and the FedNow interface on FedLine and fraud reporting. It also outlines the different types of messages that can be sent through the FedNow Service, the requirements for sending and receiving these messages, and how to handle duplicate messages. Additionally, the document provides technical details about participant broadcast messages, FedNow Service broadcast messages, and the various codes and events associated with these messages. The document outlines the processes for sending and receiving value messages, handling exceptions, settlement, and notification, as well as the process for returning funds from a previously received Customer Credit Transfer or liquidity management transfer. It also discusses the payment timeout clock, FedNow Service rejections, the Accept Without Posting option, and the use of the payment status request message.
Additionally, OC 8 provides information on the process for returning funds, the use and availability of the Liquidity Management Transfer (LMT) feature, and the process for requesting and responding to a Request for Payment (RFP). It also outlines the process for canceling an RFP, handling an information request, processing account credit/debit notifications, requesting reports, and reconciling accounts. Finally, the document discusses the various reports and tools available to FedNow participants, response time requirements, and guidelines for various response codes, network limits, and error codes. It also outlines support services available to participants and the hours during which certain activities are not available.
The implications of FedNow are profound to businesses and consumers alike. The future promises an immediate uniform platform allowing safe and instant peer-to-peer processing. However, with the advent of new technology prudence and patience should govern. The coming months will showcase the ability of the Service and its providers to withstand service interruptions, cyber-attacks, and potential AML compliance issues.
TALG has extensive experience navigating the complex Financial Institution compliance regulations and statutes concerning payments, AML compliance, and ancillary regulatory issues.
 Federal Reserve Operating Circular 8, July 19, 2023, pg. 1