3 lessons for financial institutions implementing a maturing FedNow

FedNow, the Federal Reserve’s instant payments rail, is pushing deeper into its second year of service. In the relatively short time since launch, financial institutions have learned several lessons about security, use cases and more.

Whether a financial institution has already adopted instant payments, or its leaders are still determining their approach, there are some key takeaways from the first year of FedNow that provide experience-based insights to help banks and credit unions leverage the technology successfully in their organizations.

Checks and balances are crucial to mitigating payments fraud

As with any digital banking product, security is crucial for financial institutions implementing instant payments. While creating a seamless user experience for account holders is a high priority, simplifying the payments process can make it easier for fraudsters and other bad actors to exploit. Since payments processed via FedNow clear and settle immediately, detecting and stopping fraud as early as possible—ideally, during user authentication—is essential.

As financial institutions implement instant payments via FedNow, banks and credit unions need to ensure they have the proper back-office checks and balances in place, such as fraud detection provider integrations and appropriate limits and rules-based controls, to mitigate fraud.

FedNow offers some built-in risk management controls. These include negative lists, which allow banks and credit unions to block certain payments either in or out. Financial institutions can also define pairs of routing transit numbers (RTNs) and account numbers to be included in FedNow’s validation check. If a payment message fails a business validation check against a negative list enabled by either a sending or receiving FedNow participant, the Federal Reserve Banks reject the payment message.

FedNow currently caps the network maximum credit transfer transaction value at $500,000 per transaction. The default transaction limit for financial institutions is $100,000, but institutions can set their own limits (up to the $500,000 maximum) based on their individual risk management protocols. Leaders at financial institutions should examine average transaction sizes in their markets and choose a limit that is in line with those amounts and may opt to start with a lower limit that can be adjusted in the future.

Finally, with payments scams on the rise and regulatory pressures around security intensifying, banks and credit unions need to have a complimentary educational program for account holders to communicate the seriousness around evolving fraud threats.

Identify optimal use cases before implementing instant payments

Roughly one year following the launch of FedNow, many financial institutions are in the process of implementing the payment rail in their organizations. However, for those who have not yet begun, banks and credit unions should be strategic in proactively designing payments products around use cases that will result in adoption. Since FedNow is an instant payment platform, financial institutions should consider use cases in which consumers are looking for immediate money transfers such as business transactions or the likes of a down payment on a home.

Use cases in instant payments that may be most applicable to financial institutions and their account holders may include:

• P2P (person to person) – payments between friends and family or for informal services
• B2B (business to business) – transactions between businesses
• C2B (consumer to business) – consumer bill pay, ecommerce and funding investment accounts
• B2C (business to consumer) – payment requests, refunds, insurance claims, payroll, loan distributions and investment distributions

Financial institutions need to analyze transaction data within their ecosystem and understand how instant payments are being most used by their account holders. Do their users want to transfer money instantly to other financial institutions or between individuals? Do they want to offer instant payment options for transactions between businesses, or enable business account holders to process payroll instantly?

Implementing instant payments doesn’t have to be a ‘heavy lift’

Leaders at banks and credit unions often have a common misperception that because FedNow processes payments instantly, their institution must have dedicated resources to handle the transactions. The operational lift for most financial institutions is actually quite small, especially compared to wire transfers and automated clearing house (ACH) transactions.

When it comes to processing instant payments, third-party partners can work closely with financial institutions to reduce their operational overhead for instant payments.  The simplicity of the RTP (The Clearing House’s Real Time Payments) and FedNow systems yields a more seamless processing experience for financial institutions.

The FedNow instant payments rail opens doors for banks and credit unions to streamline payment processing and deliver added value to account holders. As organizations adopt this new tool, they should focus on security, optimal use cases and operational efficiencies to help ensure smooth implementation and use going forward.

Jeff Bucher is Senior Product Strategy Manager for money movement at digital banking solutions provider Alkami.