Mitigating risks, maximizing opportunities: A cautious view of FedNow service

The FedNow® Service went live on July 20, 2023 and is accessible to depository institutions in the United States. As of this publication, there are 26 participating financial institutions. This service enables individuals and businesses to make instant payments through their depository institution accounts.

While it is undeniable that the Fed is a reputable and trustworthy entity, it’s still important to be cautious and aware of potential inherent risks of any new technology, especially during the initial launch phase. You’ll need to be proactive in fraud mitigation and take responsibility for ensuring the safety and security of all payment processes. Staying vigilant and implementing robust security measures will help protect both your credit union and your members during this period.

“The Federal Reserve built the FedNow Service to help make everyday payments over the coming years faster and more convenient,” said Fed Chair Jerome Powell.

Here are some key points about the FedNow Service:

• Real-time clearing and settlement: The service facilitates near real-time interbank clearing and settlement, allowing funds to be transferred from a sender’s account to a receiver’s account.
• 24x7x365 operation: The service operates uninterrupted with a 24-hour business day every day, including weekends and holidays.
• Security and data integrity: The FedNow Service is designed with security features to maintain payment integrity and protect data.
• Intraday credit: Participants have access to intraday credit under the same terms as for other Federal Reserve services.
• Liquidity management transfer: The service provides liquidity management transfer capability, allowing participants to transfer funds to support liquidity needs related to payment activity.
• Optional features: The first release of the FedNow Service includes optional features such as fraud prevention tools, the ability to join as a receive-only participant initially, request for payment capability, and tools for handling payment inquiries.
• Future enhancements: The FedNow Service will introduce additional features and service enhancements over time.

Top 3 important attributes to FedNow

1. Economic stability – A safe payment system is crucial for economic growth and financial stability. With the FedNow Service, the Federal Reserve can provide stability and support to the banking system and the broader economy during times of crisis.
2. Standardization in fraud disputes – The Federal Reserve, as the operator of the FedNow Service, will play a key role in promoting the development and implementation of industrywide standards for handling fraudulent instant payment transfers. This standardized approach can improve the security of transactions and protect against fraudulent activities.
3. Redundancy/layering practices – The development of the FedNow Service encourages redundancy in the payment system. By allowing depository institutions to join multiple services, they can establish backup connections in case of operational outages or issues with a specific service. This redundancy enhances the system’s resiliency and reduces the risk of disruptions in payments.

By understanding these aspects, you can make informed decisions and implement risk mitigation strategies when participating in the FedNow Service. A strong and secure payment system fosters confidence among users, supports economic activities, and ensures the smooth functioning of the financial markets.

As more financial entities adopt and consider participating in the FedNow Service, you should be aware of the available accommodations.

What credit unions need to know

• Financial institutions can dial back transactions
  • The Fed will cap transfer amounts at $500,000 (this is the default at launch) and set the default transfer limit at $100,000 for a financial institution; however, a financial institution can choose to raise or lower its limits
  • FI can delay send, must be set to receive 24/7; once the transaction is sent it is final and irrevocable
• Fraud mitigation will be the responsibility of the financial institutions
  • Take extreme caution at launch, lowering transaction thresholds to catch lower dollar fraud that evades alerts
  • Be sure FedNow is part of holistic fraud monitoring program
  • Fraud tools from FedNow will evolve after launch; Once more data has been collected, the FraudClassifier model and participant negative lists will offer more insights into potential fraud
• Authentication is crucial
  • Deploy multifactor authentication in order to access FedNow
  • Educate account holders on phishing attempts that may occur
  • Dual control for business customers

From a risk mitigation perspective, it’s important to fully understand the ins-and-outs of any financial services offering. The FedNow Service marks a significant step towards faster and more convenient everyday payments in the United States. With real-time clearing, 24/7 operation, and robust security measures, the service offers great potential for enhancing economic stability and supporting credit unions’ operations. However, it is still crucial to exercise caution and vigilance in fraud mitigation to safeguard your members and payment processes. By understanding the importance of a safe payment system, adhering to best practices, and implementing risk mitigation strategies, credit unions can fully embrace the opportunities presented by the FedNow Service and contribute to a more resilient and efficient payment landscape.