USA introducing UPI-like platform: FedNow to go live soon

Many have been talking about FedNow for some time now - not only in the United States but also in India. If you are unaware of FedNow, today, we will discuss everything related to FedNow in this article.

The US central bank has confirmed that it will launch the first phase of FedNow soon - July 2023.

What is FedNow & why is the Fed launching it?

FedNow is envisioned as a 24*7*365 real-time gross settlement (RTGS) service. It would enable individuals and businesses in the United States to make instant payments directly from their bank accounts.

The aim is to provide faster and more efficient payment options, reducing the time and costs associated with traditional payment methods, such as checks or electronic transfers that can take several hours or even days to clear.

The Federal Reserve's decision to launch FedNow stems from several factors. The key motivation is to address the growing demand for faster payment services in response to technological advancements and changing consumer expectations. The emergence of alternative payment providers, such as fintech companies and digital wallets, have highlighted the need for the traditional banking system to offer real-time payment solutions to remain competitive.

By introducing FedNow, the Federal Reserve intends to promote financial inclusivity, enhance the overall efficiency of the payment system, and provide a safe and secure infrastructure for instant payments.

The system is designed to support a wide range of use cases, including person-to-person (P2P) payments, business-to-business (B2B) transactions, and even emergency disbursements.

Will FedNow replace the US dollar?

No, FedNow is not intended to replace the US dollar. Its purpose is to provide faster and more efficient payment processing, allowing individuals and businesses to send and receive funds instantly, 24/7.

FedNow aims to improve the overall payment infrastructure in the US and enhance the speed and accessibility of transactions. However, the US dollar will remain the official currency of the United States and will continue to be used for all transactions and financial obligations.

FedNow is a payment system that operates within the existing framework of the US dollar, facilitating faster and more convenient transactions, but it does not involve any changes to the currency itself.

What are the features of FedNow?

Below are some top features of FedNow:

Real-time Payments: FedNow aims to enable immediate clearing and settlement of payments between banks, allowing individuals and businesses to send and receive funds in real time. It is in contrast to the current system, which can involve delays due to batch processing and clearing cycles.
Payment Initiation: Payments through FedNow will be initiated by participants, such as banks or credit unions, on behalf of their customers. These participants will connect to the FedNow Service through secure connections.
Message Format: Participants will use ISO 20022, an international standard for financial messaging, to communicate payment instructions and related information. ISO 20022 provides a structured and standardized format for transmitting payment messages.
Settlement: The Federal Reserve will facilitate the settlement of transactions in FedNow by debiting the sender's account at the originating bank and crediting the recipient's account at the receiving bank in real time. The settlement will occur on a one-to-one basis for each transaction.
Availability and Accessibility: FedNow is intended to be available 24 hours a day, 7 days a week, and 365 days a year. It will provide participants with continuous access to the system and enable immediate payment processing, enhancing the speed and convenience of fund transfers.

How will FedNow manage risk?

The potential for fraud exists with instant payments like any other payment system. The Federal Reserve has said that it is essential for financial institutions and others in the ecosystem to work together to combat fraud.

As per Fed, financial institutions should act as the first line of defence against payment-related fraud. As they prepare for the FedNow service, participating institutions will want to evaluate their own fraud management approach and consider taking steps to help protect themselves and their customers.

To support and complement financial institutions’ own fraud mitigation efforts, the FedNow Service will offer fraud management capabilities.

and enable features to help protect against threats in the first release itself. Future releases of the service will add even more capabilities.

The below capabilities will be available to financial institutions at the launch of the FedNow:

Network-level transaction limits: The maximum amount per transaction a financial institution can send over the FedNow network – an amount set by the Federal Reserve.
Participant-level transaction limit: Participants can set a lower transaction limit for credit transfers they initiate based on their organization’s risk policies.
Participant-defined negative lists: Financial institutions may specify suspicious accounts their organizations cannot send to or receive from.

Is FedNow similar to UPI?

While both FedNow and UPI aim to facilitate real-time payments, they have distinct differences due to the variations in the underlying financial systems, infrastructure, and regulatory frameworks of the United States and India. Each system is tailored to the specific needs and requirements of its respective country's financial ecosystem.

Conclusion: Will it change the outlook of payment system in the US?

FedNow will be available to 10,000 financial institutions, but it will not be forced upon them. Banks will have the freedom to join or not join the platform. FedNow as a concept has a significant impact on the payments system in the US, but it will take years for the platform to be 100% tested and adopted by financial institutions.