The FedNow Instant Payment

The FedNow Service

With the FedNow Service, funds will settle between participating financial institutions (FIs) in real time, which means there’s no buildup of interbank obligations or short-term credit risk. And end users should have access to their money immediately. When the FedNow Service launches in 2023, initial features will include:

??Service level

·??????Instant payments, 24x7x365 availability

·??????Core clearing and settlement capabilities with credit transfers completing in seconds

·??????A FedNow interface via FedLine? Solutions for participating FIs or their service providers to support reports and queries, and manage configurations

·??????Access to balance information around the clock, activity reports available on demand or end of day

??Flexibility

·??????FIs will be able to settle using their own master account or a correspondent’s master account

·??????Adjustable participation options including support for the use of service providers and correspondents

·??????Configurable features for each routing transit number (RTN) enabled, such as the ability to receive customer transfers, send and receive customer transfers, receive requests for payments, support FI liquidity management transfers, support settlement services for other FIs

·??????An FI can connect to the FedNow Service through a FedLine Solution directly or through an FI’s service provider as its agent

·??????Support for a variety of credit transfer use cases (initial demand is expected to be strongest with account-to-account transfers and consumer bill payment)

??Security and risk mitigation

·??????Encryption of all data flows

·??????Features to support message integrity and data security

·??????Tools to help FIs combat fraud, such as a transaction value limit and the ability to reject transactions for specific accounts

·??????Network-level maximum transaction value limits, which may be adjusted over time (FIs may configure transaction limits that are equal to or below the network limit)

???Efficiency and transparency

·??????Rich data supported within ISO? 20022 messages (for example, the option to include remittance information in payment messages and request for payment messages)

·??????FI-to-FI liquidity management transfers in support of instant payments

·??????Use of the widely accepted ISO 20022 standard and other industry best practices to support interoperability

·??????Broadcast messages notifying of changes to participant availability to receive credit transfers, as well as a list of participating RTNs

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Customer Payment flow in FEDNOW

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The Sender FI or Receiver FI may either send and receive messages to and from the service or designate a service provider to act as its agent (e.g., a processor, core solution or other payment hub) to perform those functions on its behalf. A participating FI may settle using its own Federal Reserve Bank master account or it may designate a correspondent for that purpose.

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1.???The sender (Individual or Business) initiates a payment through their FI, through an end user interface outside of FEDNOW services.?The FI is responsible for validating the payment to its internal process and control.?

2.???Sender FI will initiate pacs.008 message to the FEDNOW services

3.????FEDNOW will validate the payment.

4.???The FedNow Service sends the contents of the payment message to the recipient’s FI to seek confirmation that the Receiver FI intends to accept the payment message.

????????????????????????????????????i.????The Receiver FI will determine how it will handle the message (accept, reject or accept without posting (ACWP)).

??????????????????????????????????ii.?????The Receiver FI should ascertain whether it maintains an account for the recipient identified in the contents of the payment message.

5.???Receiver FI sends a positive response of “accept” to the FedNow Service, confirming it intends to accept the payment message.

6.???The FedNow Service settles the payment, debiting and crediting the designated master accounts of the Sender FI and Receiver FI (or of their correspondents), respectively.

7.???The FedNow Service sends an advice to the Receiver FI and an acknowledgement to the Sender FI, executing the payment order and notifying each that the Federal Reserve Banks settled the payment message. Correspondents enabled within a FedNow profile may choose to receive a notification of debit/credit entries (ISO message camt.054).

8.???Federal Reserve Banks anticipate requiring the Receiver FI to make funds available to the recipient immediately.

9.???The Receiver FI has the option of sending a message through the FedNow Service to the Sender FI indicating that the payment has been posted to the recipient’s account.

10.?????????If the Receiver FI sends a confirmation of posting message through the service, the Sender FI should notify its customer that the funds have been made available to the recipient.

An Overview of How the Payment Timeout Clock Will Operate

The timeout clock will apply to credit transfers — customer payments (ISO? message pacs.008), customer return of funds (ISO message pacs.004) — and FI liquidity management transfers (ISO message pacs.009). The timeout clock is expected to have two main features:

? First, the timeout clock is expected to be 20 seconds in length. It will be configurable within the FedNow Service by the Federal Reserve Banks and will stop counting down just before settlement takes place.

? Second, the timeout clock will expire prematurely if, based on a setting configured by the Receiver FI, there is insufficient time (i.e., “reserved” time) remaining for the Receiver FI to provide a response to a request for confirmation from the service.

A Receiver FI can reserve up to five seconds of the clock that will be guaranteed to them as part of the flow. FIs will be able to configure this reserved response time downward from five seconds in increments of one second, with one second being the lowest setting.

1.???The sender (an individual or business) initiates a payment with their FI.

2.???The Sender FI or their service provider submits the validated payment message (pacs.008) to the FedNow Service. The payment timeout clock starts based on the “creation date” timestamp included in the business application header of this message regardless of when the FedNow Service receives the message.

3.???The FedNow Service authenticates the payment message. If the elapsed time between the creation date timestamp and receipt timestamp by the FedNow Service exceeds the clock limit or does not allow sufficient reserved time for the Receiver FI, the message will be rejected. For example, given a timeout clock of 20 seconds and a default reserved time of five seconds, if 16 seconds have passed, the message would be rejected.

4.???If there is sufficient time, the FedNow Service sends the contents of the message to the Receiver FI to seek confirmation that the Receiver FI intends to accept the payment message. The Receiver FI sends an “accept” response to the FedNow Service, confirming it intends to accept the payment message. If the positive response is received by the FedNow Service before the clock has expired, the clock will stop when the FedNow Service receives this message and just before the service’s settlement processes begin. For customer credit transfers, if the FedNow Service receives a positive response — either accept or ACWP — from the Receiver FI before the timeout clock has expired, the clock will stop just before the service’s settlement processes begin.

5.???If the process outlined above exceeds the timeout clock’s time limit prior to settlement

a.?????— for example, if 20 seconds lapse without a response from the Receiver FI — the FedNow Service will reject the payment message with the applicable reason indicated. Below are essential points to know about payment rejection scenarios in connection with the timeout clock:

b.???If a payment is rejected, the FedNow Service will send a message (ISO? message pacs.002) to the Sender FI notifying it that the payment was rejected.

c.????If the Receiver FI has received the contents of a payment message in a request for confirmation but does not respond before the timeout clock expires, the Receiver FI will also receive a notice that the payment has been rejected.

d.???If the Sender FI resubmits a payment message that the FedNow Service already received, it will need to include a new unique message identification number. Otherwise, the service will reject the message based on the duplicate identification number.

e.????Where messages are rejected because they exceeded the timeout clock, participants will need to initiate a new payment request if they wish to complete the transfer of funds.

6.???Requesting a Status of Payment

a.?????If an FI does not receive an advice (pacs.002), an acknowledgement (pacs.002) or a rejection message (ISO message admi.002/pacs.002), it must submit a request for payment status (ISO message pacs.028).

b.???The Federal Reserve Banks recommend that each FI wait a few seconds longer than the stated timeout clock limit. For example, with a 20-second timeout clock limit, an FI should wait until 25 seconds have passed to submit a status request. This will provide time for the FedNow Service to finish processing and deliver the applicable messages.

c.????FIs that submit request for payment status messages (pacs.028) before resending a payment message through the service will be able to limit their risk of sending duplicate payments.

FedNow Liquidity Management Transfers

1.????The Sender FI initiates a liquidity transfer through a FedLine? Solutions channel and sends a payment message (ISO? message pacs.009) to the FedNow Service.

2.????The FedNow Service validates the payment message — for example, by verifying the message meets format specifications.

3.????The FedNow Service debits and credits the designated master accounts of the Sender and Receiver FIs. Note: The FedNow Service will not seek confirmation from the Receiver FI — as it will with customer credit transfers — before settling the liquidity management transfers and delivering an advice of credit to the Receiver FI. For FIs using a correspondent for settlement, the debit or credit will settle in the correspondent’s master account.

4.????The FedNow Service sends an advice of credit to the Receiver FI and sends an acknowledgement to notify the Sender FI that the settlement is complete

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Participation type.

1.???Customer credit transfers and requests for payments

a.?????Receive credit transfers

b.???Send and receive credit transfers

c.????Receive requests for payment (RFPs)

2.???FI credit transfers and settlement

a.????FI liquidity transfers

????????????????????????????????????????????????????i.?????Send and receive FI liquidity transfers

???????????????????????????????????????????????????ii.????Receive FI liquidity management transfers

b.???Settlement services for Fis

Settlement Through the FedNow Service

1.???The FedNow Service will settle payments to a participating FI’s Federal Reserve Bank master account — or the master account of its correspondent (including bankers’ banks and corporate credit unions). Settlement through the service will be final.

2.???This document includes information about settlement through the FedNow Service including:

3.???Designating routing transit numbers (RTNs) to send and receive messages and to settle transactions

a.????Mapping to a master account RTN for settlement

b.???Using primary/master account RTNs, subaccount RTNs or other secondary RTNs for FedNow activity

4.???Managing account balances and reconciling activity

a.????FedNow Service-specific reports that will be available

b.???The Federal Reserve Banks’ standard reports that will be updated to include FedNow activity

5.???Correspondent/respondent relationships

a.????Settlement configurations

b.???Reporting options for all parties

6.???Designating RTNs to Send and Receive Messages and to Settle Transactions

a.????During the FedNow Service onboarding process, FIs will be able to designate the specific RTN(s) enabled to send messages and the RTN(s) enabled to receive messages, including the master account RTN, primary RTN (for those who do not maintain a master account) or secondary RTNs (either subaccount RTN or other secondary RTN).

b.???Each FedNow-enabled RTN will be mapped to a single settlement point — the master account of either the participating FI or that of a correspondent — based on instructions from the participating FI (and agreement by its correspondent, if any) and using the Federal Reserve Banks’ accounting applications. FedNow Service participants will not need to fund a separate account to settle FedNow activity.

7.???Managing Account Balances and Reconciling FedNow Activity

a.????FedNow participants will be expected to manage their account in compliance with Federal Reserve policies, including the Payment System Risk (PSR) Policy on intra-day credit and avoiding negative balances at the close of the FedNow cycle date.

b.???Near real-time reconciliation may be accomplished using the advice/acknowledgement message (ISO message pacs.002) for participants, or the notification of debits/credits (ISO message camt.054) for correspondents who have enabled the feature within their FedNow profile.

c.????For tracking and reporting purposes, each transaction will be recorded using the RTNs included within the transaction message.

Reports and Statements

1.???The FedNow Service will provide reports of payments and non-value messages (such as request for payment, request for information, request for return of funds) sent or received by participating FIs.

2.????The Federal Reserve Banks’ standard accounting reports such as Daily Statement of Account, FIRD and SASF will be revised to include FedNow activity and will be provided seven days a week. Participating FIs will need to determine how frequently they will perform their reconcilement functions.

3.???While settlement only occurs within master accounts, any FedNow-enabled RTN may be identified within payment messages. The FedNow Service will provide reports containing information about service activities for all RTNs included within payment messages and non-value messages. These include transactions at the master/primary RTN, subaccount RTN and other secondary RTN levels. Correspondents can receive reports for their respondents’ RTNs. These reports are distinct from reports and statements that other Federal Reserve applications (e.g., AMI balance inquiries) will generate.

4.???Activity Totals and Details reports will be available on demand or will be automatically provided end of day if desired. The current approach allows detailed reports to be requested at any time for a previous cycle date. The Totals report can be requested for prior cycle dates as well as for current cycle date. For current cycle date reports, it will show current up to the last minute of processing. The FedNow reports will be accessible using ISO? messaging (request is camt.060 and returned report is camt.052) or the FedNow interface via FedLine? Solutions.

5.???The Activity Totals report contains the FedNow Service summary at the RTN level for payments and non-value messages. By default, this is automatically sent at the end of each cycle date via ISO messaging (camt.052).

6.????The Activity Details report lists individual FedNow Service transactions and non-value messages

7.???Below is a summary table of available reports and messages to support reconciliation for real-time payments

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ISO 20022 messages used for Customer Credit Transfers and Requests for Payment.

ISO 20022 messages used for Financial Institution Credit Transfers.

Source :https://www.frbservices.org/binaries/content/assets/crsocms/financial-services/fednow/prepare-for-fednow/fednow-service-readiness-guide.pdf