On the FedNow service: what to expect from the first version
Inspired by the Brazilian PIX, in my previous article, Five Lessons From Brazil For Implementing FedNow, I mentioned some preparations that technology companies may have. I will now provide more detailed information on key resources, stakeholders and technical information about the service.
Unlike other instant payment methods, such as PayPal, FedNow is being developed and operated by the Federal Reserve rather than a private company. This means that it will be supervised directly by the institution and will be subject to the same regulations and supervision as other payment systems that are operated by it.
FedNow Services
The initial version of the FedNow service is expected to include 28 different services. These services are designed to provide a wide range of capabilities to financial institutions, businesses and individuals who use the service. The Federal Reserve has not yet released a complete list of the services that will be included in the initial version of the FedNow service, but some of the main possible business flows and features that might be available include:
Real-time payments:
The service will allow individuals and businesses to make and receive real-time payments, which means that the funds will be transferred immediately, and the recipients will be able to access them right away.
Interbank transfers:
Financial institutions will be able to use FedNow to make interbank transfers, which means that they will be able to transfer funds between different banks in real time.
Multi-channel access:
Financial institutions, businesses and individuals will be able to access the service through multiple channels, such as online banking portals, mobile apps and ATMs.
Access to real-time account information:
Financial institutions and businesses will be able to access real-time account information through the FedNow service, which means that they will be able to check account balances and view transaction history in real time.
Authentication and security:
FedNow will include robust authentication and security features to protect against fraud and unauthorized access. This will include multifactor authentication, encryption and digital signature to ensure the authenticity of the transaction.
Payee validation and notification:
The service will offer the possibility to validate the identity of the payee, so the payer can confirm they are sending the money to the right person and notify the payee of the incoming payment.
Batch payments and bulk payments:
Financial institutions and businesses will be able to make batch payments, which means that they will be able to send multiple payments at once, and bulk payments, which means that they will be able to send many payments in a short period of time.
International payments:
The FedNow service will enable institutions to make international payments in real time, creating a more efficient way for businesses to make payments to foreign countries.
Potential users
The potential users of the FedNow service are individuals, businesses and government entities that make payments to citizens and financial institutions for interbank transfers. The FedNow service is expected to benefit the overall economy by increasing the speed and efficiency of payments, which should help promote economic growth and stability. Each of them will benefit from the service:
Individuals:
benefit from the ability to make and receive real-time payments. Individuals may be able to use the service to make payments to friends and family in real-time or to pay bills more quickly.
Businesses:
improve their cash flow and financial stability. Businesses would be able to pay suppliers more quickly, which could help them to maintain a good relationship with their suppliers and improve their ability to get the goods they need to run their business. Additionally, businesses would be able to pay employees more quickly, which could improve employee satisfaction and retention.
Government entities:
improve the overall efficiency and effectiveness of government services. Government entities would be able to make payments to citizens more quickly, which could help to reduce poverty and increase financial stability for those citizens.
Financial institutions:
improve their cash management, reduce their need for liquidity, increase their ability to provide real-time transactions and allow them to offer a more competitive and efficient service to their customers.
Technologies & Cybersecurity
Regarding technical expectations for the FedNow service: the service will be built on modern, open-source technologies and will comply with industry standards and best practices.
The key development patterns are microservices and RESTful API-based architecture, providing scalability and availability, as well as enabling third-party developers to create custom integrations and use the service in a wide range of applications.
In terms of security, the service will comply with industry standards such as PCI DSS, SOC2 and other relevant regulations for the financial industry. It will use multifactor authentication, encryption and digital signature to ensure the authenticity of the transactions and monitoring and logging mechanisms to detect and respond to security incidents.
As for the technical standards that will be used, it has stated that it plans to use the ISO 20022 standard for messaging and data format in the FedNow service, an international standard for financial services messaging, which provides a common language for financial institutions to communicate and exchange financial information, such as account information, transaction data and payment instructions.
ISO 20022 is widely adopted in several countries and regions. It is used by SWIFT, Fedwire, CHIPS and Target2, among other payment systems and payment infrastructures. This means that the service will be able to communicate with other systems that use the same standard, as well as be able to provide data in a consistent format.
Overall, the use of the ISO 20022 messaging standard is an important aspect that would help to achieve interoperability and consistency with other payment systems, which will make it easier for the service to be integrated with existing systems and allow the financial institutions to process the data in a more streamlined and automated way.
*Article from Forbes
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