A FedNow Service Update for Community Banks

Since going live on July 20, 2023, the Federal Reserve's FedNow^® Service has enabled participating financial institutions to transfer funds between sender and receiver accounts instantly, any time of the day, any day of the year. More than 500 financial institutions are currently participating, and the Fed says the number is growing every day.

Bernadette Ksepka, head of product management for the FedNow Service, recently provided The RMA Journal insight on how the program has performed to date, how the Fed is trying to make the service more accessible to community banks,  what security measures are in place to detect fraud, and what the future holds as more financial institutions adopt the service. 

RMA JOURNAL: How does the FedNow Service address the specific needs and challenges faced by smaller community banks in terms of instant payments and real-time settlement? 

KSEPKA: The FedNow Service offers smaller community banks an opportunity to retain customers by keeping up with customer demand. In today’s world, access to instant payments is more important than ever. Nearly seven in 10 (69%) consumers think it’s important for their primary financial institution(s) to offer faster payments. In a survey conducted by the Federal Reserve, most consumers (75%) are already using faster payments, and six in 10 (61%) say they are likely to use them more often. Smaller community banks participating in the FedNow Service can offer their customers products and services to meet this demand and ensure their institution is taking steps to future-proof their business.  

RMA JOURNAL: How has the industry responded to the FedNow Service since its launch, including community banks? 

KSEPKA: When the FedNow Service launched in July 2023, there were 35 financial institutions sending and receiving instant payments on the network. Since then, that number has grown to more than 500 participating financial institutions headquartered in nearly every state and ranging in size from under $500 million to over $3 trillion in assets. And more organizations, including community banks that see the value of instant payments for consumer and business customers, are added every day. Although we still have a long way to go in terms of market adoption, we have been very pleased by the response to the FedNow Service so far. 

The U.S. has one of the most complex banking systems in the world, with more than 9,000 institutions of various sizes and models. Some banks see the FedNow Service as a strategic offering to future-proof their business, while others favor cost savings associated with day-two processing. Community banks are eager to offer products that will help their customers consolidate processes such as bill payments.  

RMA JOURNAL: As smaller banks often have limited resources, how does implementation of the FedNow Service impact their operational and technological infrastructure, and what support measures are in place to facilitate a smooth transition? 

KSEPKA: Small financial institutions often rely on strategic partnerships to support their FedNow Service implementation. There is a range of service provider solutions available to support them in the market, from processing to customer-facing tools. The Fed developed the Service Provider Showcase to provide a way for financial institutions to easily search for providers that fit their unique business needs.   

Onboarding is another opportunity to streamline the implementation process as much as possible. The Fed offers a fully digital onboarding solution to help organizations and internal teams automate form signing and track progress through the entire onboarding process. 

RMA JOURNAL: What security measures are embedded in the FedNow Service to mitigate potential fraud or cyber threats, and how can community banks ensure the integrity of their transactions? 

KSEPKA: Even highly secure payment systems can be used to carry out fraud, and financial institutions always serve as the first line of defense. Financial institutions own the relationship with customers and maintain account opening procedures, user authentication processes for online banking, and other security practices that help prevent fraud. Many financial institutions have sophisticated fraud solutions in place that will detect anomalous activity and alert them to suspicious activity.  

With that being said, the Fed offers another layer of protection. The FedNow Service has features that help financial institutions with fraud risk management and mitigation of fraud losses, such as transaction limits and participant-defined negative lists, as well as a requirement that financial institutions report instances of suspected fraud. 

RMA JOURNAL: With the rise of fintechs and alternative payment providers, how does the FedNow Service position community banks to compete effectively in the evolving payments landscape? What advantages does it offer in terms of retaining and attracting customers? 

KSEPKA: The FedNow Service can help banks stay competitive because it levels the playing field for all eligible financial institutions, regardless of size or type, wanting to offer instant payment services. We know that modern banking customers expect faster and more convenient options, and banks can fulfill these expectations with the FedNow Service to retain and attract customers. 

RMA JOURNAL: How customizable is the FedNow Service platform to accommodate the unique needs and preferences of individual community banks, particularly in terms of user interface and customer experience? 

KSEPKA: From a customer experience perspective, the FedNow Service operates behind the scenes. Sending money through the FedNow Service is a matter of using a mobile app or online portal provided by a financial institution to initiate payments. This gives community banks and other financial institutions flexibility in offering the FedNow Service to meet the needs of their customers. 

Aside from having choice in customer interface, community banks have flexibility in enabling the service in a way that best fits their needs. For example, organizations can choose whether to participate in a receive-only capacity if they are not fully ready to send instant payments. Participants can also set their own lower transaction limits and have the ability to adopt other controls, such as negative lists at the routing transaction number (RTN) and account number levels, as a way of supplementing their existing fraud programs. 

RMA JOURNAL: What educational resources and training opportunities does the Fed provide to ensure staff at community banks can fully leverage the capabilities of the FedNow Service and educate their customers about the benefits of instant payments? 

KSEPKA: The Fed continues to engage the broader payments industry in a variety of ways: we host webinars such as our quarterly FedNow Service Town Hall; provide educational resources; listen to the market through polls and surveys; and promote new content and announcements in our biweekly newsletter.  

Banks can also take advantage of the extensive educational resources on the FedNow Explorer site to learn more about instant payments and use cases, build awareness among stakeholders and staff, and inform customers about the benefits of instant payments. 

RMA JOURNAL: Given that community banks often serve niche markets, how does the FedNow Service cater to specific industries or regional requirements, and what efforts are in place to ensure inclusivity across diverse financial landscapes? 

KSEPKA: Industry engagement is and has been a major focus area for the Fed and one that we see as key in a competitive marketplace and supportive of our policy goal of nationwide access to instant payments. We developed the FedNow Service with strong engagement from a diverse set of institutions across the industry to ensure it would serve the needs of all types of organizations. The Fed is well-positioned to offer instant payments because it already has established relationships with the vast ecosystem of U.S. financial institutions, credit unions, service providers, and payment providers. 

RMA JOURNAL: Are there any collaborative initiatives or partnerships between the Fed and industry stakeholders aimed at enhancing the functionality and accessibility of the FedNow Service for smaller banks? 

KSEPKA: The Fed is a founding sponsor and member of the U.S. Faster Payments Council, an industry-led membership organization established so Americans can safely and securely pay anyone, anywhere, at any time, and with near-immediate funds availability. 

The Fed also solicits in-depth input and feedback where needed. For example, it established the Request for Payment (RFP) Customer Experience Work Group for payments industry volunteers to provide insights on desired RFP customer experience market practices for consumer-to-business (C2B) bill pay. Diversity of participants, including small financial institutions, is one of the most important aspects of these work groups. 

RMA JOURNAL: Looking ahead, what is the roadmap for further developments and updates to the FedNow Service, and how can community banks actively contribute to shaping its features and capabilities? 

KSEPKA: We are focused on prioritizing enhancements to the service with new features and functionality. We plan to introduce a tech-centric developer resource in the coming months allowing financial institution participants to access documentation such as technical specifications and code and message samples to assist with service implementation. Our specialized work groups offer a way for community banks to continue providing feedback on the future of the FedNow Service.