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Northern California banks, credit unions to test Federal Reserve’s new system for faster money transfers

FedNow for businesses, individuals and financial institutions

FedNow will roll out in phases. The first release will provide core clearing and settlement capabilities and certain value-add features like request for payment and remittance information, for account-to-account (A2A) and consumer-to-business (C2B) bill pay use cases at the initial launch.

Here are some benefits of the system:

CONSUMERS

• Account-to-account (A2A) transactions. Enabling money transfers at different financial institutions, including funding a newly opened account;

• PrePaid card refunding without the wait;

• Peer-to-peer (P2P) transactions. Family and friends can immediately send and receive money electronically;

• Pay individuals for services. Consumers can pay instantly for a variety of on-demand services, such as baby-sitting or dog walking, etc.;

• Mobile wallet funding/defunding, where individuals can fund or cash out accounts without a delay;

• Investment account management allowing funds to be moved from financial institutions to an individual’s brokerage account at another institution;

BUSINESSES

• Corporate cash pooling, where corporations can consolidate funds into a single account for payroll or other purposes;

• Consumer-to-business (C2B) Bill Pay, where individuals and businesses can pay bills for loans, utilities and more and feel confident that their payment is posted to the biller’s account in seconds thus avoiding late fees and enabling better cash-flow management.

— Home service payments: Individuals can pay upon delivery of a good or service, such as landscaping or home repairs.

— E-commerce: Consumers can select an instant payment option when purchasing goods online.

• Business-to-consumer (B2C)

— One-time payments: Non-recurring disbursements such as insurance payouts or rebate claims can be paid instantly.

— Immediate payroll: Payroll instructions for expediting payments can be initiated immediately rather than scheduled in advance.

• Business-to-business (B2B)

— On-demand payment: Businesses can free up working capital by paying suppliers upon receipt of products or services.

— E-Invoicing where billers can send a request for payment to their customers through the FedNow service with customers responding by initiating a credit transfer through an end-user interface offered by a financial institution. Such payments will include the applicable remittance detail from the request which facilitates posting of the financial transaction.

• Government and Municipal Payments. Businesses and individuals can make payments to government or municipal entities who, in turn, can make payments including tax refunds or other time-sensitive payments to businesses or institutions.

FINANCIAL INSTITUTIONS

• Opportunity to attract and retain customers by offering competitive instant payment services.

• Potential to grow revenue (e.g., transaction fees, fees for new service or product offerings).

• Reduced costs through increased efficiency (e.g., automation and operations).

• Real-time settlements in Federal Reserve central bank money.

• Reduced inter-bank settlement risk.

Source: Federal Reserve

The Federal Reserve has launched a two-year pilot program, called FedNow, designed to make the clearing and settlements process faster, cheaper and more convenient for individuals and businesses by speeding payments to recipient.

Five regional banks are among those participating in the program.

When fully Implemented in 2023, FedNow will also enable individuals and companies to transfer funds between accounts, pay bills and send or receive money to and from friends and family in near real time any time of day and any day of the year.

Immediacy is what differentiates instant payments from traditional payment methods – including those that appear to occur within seconds but can take many days before funds become available to the receiver.

On Jan. 25, the Federal Reserve announced that more than 110 participating financial institutions (including savings banks, commercial banks, saving and loan associations and credit unions) have signed on to support the development, testing and adoption of the FedNow Service during a pilot period.

In Northern California, the list of pilot participants includes First Republic Bank, Tri Counties Bank, Silicon Valley Bank, Pacific Coast Bankers’ Bank and First Foundation Bank. Participating California credit unions include Excite Credit Union, Farmers Insurance Federal Credit Union, and Star One Credit Union.

The FedNow Service will be released in phases. The first release will include fraud prevention tools, the ability to join initially as a receive only participant, request for payment capability, and tools to support participants in their handling of payment inquiries.

In addition, Reserve Banks will offer a liquidity management tool alongside the FedNow Service.

As with current Federal Reserve Bank services, FedNow will be available to depository institutions eligible to hold accounts at its 12 Reserve Banks and 24 branches across the nation under applicable statutes and Federal Reserve rules, policies and procedures. The Federal Reserve’s goal is to extend equitable access to the instant payment system to more than 10,000 depository institutions or their agents in the U.S.

“We’re gratified by the industry’s tremendous interest and willingness to devote time and energy to help us develop FedNow,” said Esther George, president and CEO of the Federal Reserve Bank of Kansas City and executive sponsor of the Federal Reserve’s payments improvement initiatives. “As a result, we’ve adjusted to accommodate more participants than we originally planned.”

Here’s how JPMorgan Chase is approaching this project.

“As the largest real-time payment provider in the U.S., JPMorgan Chase will complement its existing payment offerings with FedNow, helping to provide our consumer and commercial clients with enhanced solutions for vendor and bill payments, payroll, account transfers, and more,” said spokeswoman Christina Dello Buono.

Allen Sztukowski, senior vice president for operations with Pacific Coast Banker’s Bank, said the demand for instant payments already exists, and it is only going to grow dramatically once viable solutions are available for community financial institutions (CFI) to offer their customers.

“Some PCBB concerns focused on interoperability with other payment platforms, the need for it to be affordable for CFIs, and structured in a manner so it does not take too much of a CFI’s resource commitment — both financially and due to the amount of effort required to support the platform,” Sztukowski said. “Participating in the pilot lets us play a key role in the formation of the product, making sure it fits the business model and use cases for CFIs.”

Sztukowski said one of Pacific Coast’s objectives is to help CFIs compete against larger banks and other providers.

“By enabling them to offer their clients real-time payment, we’re helping to ensure their success,” he said.

Automated Clearing House (ACH) items settle in batches at a point of time in the future, according to Sztukowski. Wire transfers provide settlements between banks in real time, but are usually processed in batches, with entries to end account holders generally processed later in the day.

“FedNow speeds up the time it takes from when the item is initiated until the item is settled and the recipient has access to the funds to less than 30 seconds. Not only is this a significant change for the experiences the payee and payer have today, but straight-through processing achieves a substantial efficiency gain for the CFI,” he said.

Sztukowski observed that PCBB’s vision is to provide a product to the CFIs that will be easy, cost effective to implement, and eliminate much of the burden associated with launching and supporting a new payment product.

FedNow for businesses, individuals and financial institutions

FedNow will roll out in phases. The first release will provide core clearing and settlement capabilities and certain value-add features like request for payment and remittance information, for account-to-account (A2A) and consumer-to-business (C2B) bill pay use cases at the initial launch.

Here are some benefits of the system:

CONSUMERS

• Account-to-account (A2A) transactions. Enabling money transfers at different financial institutions, including funding a newly opened account;

• PrePaid card refunding without the wait;

• Peer-to-peer (P2P) transactions. Family and friends can immediately send and receive money electronically;

• Pay individuals for services. Consumers can pay instantly for a variety of on-demand services, such as baby-sitting or dog walking, etc.;

• Mobile wallet funding/defunding, where individuals can fund or cash out accounts without a delay;

• Investment account management allowing funds to be moved from financial institutions to an individual’s brokerage account at another institution;

BUSINESSES

• Corporate cash pooling, where corporations can consolidate funds into a single account for payroll or other purposes;

• Consumer-to-business (C2B) Bill Pay, where individuals and businesses can pay bills for loans, utilities and more and feel confident that their payment is posted to the biller’s account in seconds thus avoiding late fees and enabling better cash-flow management.

— Home service payments: Individuals can pay upon delivery of a good or service, such as landscaping or home repairs.

— E-commerce: Consumers can select an instant payment option when purchasing goods online.

• Business-to-consumer (B2C)

— One-time payments: Non-recurring disbursements such as insurance payouts or rebate claims can be paid instantly.

— Immediate payroll: Payroll instructions for expediting payments can be initiated immediately rather than scheduled in advance.

• Business-to-business (B2B)

— On-demand payment: Businesses can free up working capital by paying suppliers upon receipt of products or services.

— E-Invoicing where billers can send a request for payment to their customers through the FedNow service with customers responding by initiating a credit transfer through an end-user interface offered by a financial institution. Such payments will include the applicable remittance detail from the request which facilitates posting of the financial transaction.

• Government and Municipal Payments. Businesses and individuals can make payments to government or municipal entities who, in turn, can make payments including tax refunds or other time-sensitive payments to businesses or institutions.

FINANCIAL INSTITUTIONS

• Opportunity to attract and retain customers by offering competitive instant payment services.

• Potential to grow revenue (e.g., transaction fees, fees for new service or product offerings).

• Reduced costs through increased efficiency (e.g., automation and operations).

• Real-time settlements in Federal Reserve central bank money.

• Reduced inter-bank settlement risk.

Source: Federal Reserve

Connecting to FedNow for banks and credit unions involves equipment and a configuration similar to what is needed to set up a connection to the Federal Reserve’s wire transfer system. Since FedNow is a payment system, the CFI would want to have the same level of redundancy as they have with wire functionality. Some banks have this as an in-house function, and some outsource that to their core provider or leverage the connection that a correspondent might have, such as a banker’s bank.

While most CFI users are consumers making peer-to-peer (P2P) payment transactions, Sztukowski said, “Business use cases involving real-time payments with FedNow have a tremendous potential, both in terms of volume and efficiency gained for all parties.”

Exchange Bank’s Senior Vice President for retail banking services, Ann Lobdell Hudson, said, “Although we are not currently a participant, as a future user we have the ability to comment and receive updates on the progress of the pilot. FedNow will support and empower banks in providing faster payments to their customers enabling them to compete with firms in the financial technology (fintech) industry, while also offering the potential for depositing and withdrawing funds from your account immediately, speeding the transfer of money, including payments to merchants and direct deposits to an account.”

Furthermore, if a person is on the verge of making a late payment, they could send a real-time payment using FedNow to their creditors in a few minutes and avoid overdue charges.

She said an example of a funds transfer that consumers use frequently is through ACH, where consumers credit their direct payroll deposit, tax refunds, and stimulus checks, for example, or debit their utility bill to their bank account or an electronic check. These items are generally processed to their accounts by the ACH payment method and usually take place in one business day.

Hudson said most financial institutions provide P2P options. Exchange Bank offers such a service called Pay a Friend. Others also include services that simplify paying for things, provided by Venmo, Zelle and Cash App, etc., without writing a check or handling cash.

“Pay a Friend and similar services have been gaining popularity and adoption rates are high, especially among millennials and younger generations,” Hudson said.

She noted that P2P providers use ACH or a credit card transaction to pull funds from a consumer‘s bank account or from funds stored in an online account with the provider. This system is called a “closed loop” network. “You need to establish an account with that provider and give them access to your bank account information.”

FedNow is an open-loop network that will allow financial institutions to provide credit and confirmation of receipt of their customers in near real time without a third-party provider. The benefit to the customer will be the immediate transfer of monies from their accounts, and the payee will receive the funds in a matter of seconds. This will be a simpler process for customers to transact without the need for multiple accounts and faster payments, according to Hudson.

“It can take days for some transactions to credit or debit your account. For instance, with a debit card transaction, a PIN (personal identification number) is used at the point of sale,” Hudson said. “The money is generally withdrawn immediately from the account.”

However, she said, when a signature debit transaction occurs, money will be withdrawn during a transaction process that takes two to four days. A personal check can take two days or longer to clear your account.

“If I go to my local Oliver’s, for example, and use a debit card to make a purchase and rather than entering my PIN, I choose to sign the receipt, the charge may not come out of my account for several days,” Hudson said. “When fully implemented, FedNow will offer consumers and businesses a range of useful innovations.”

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