Local banks test new national system for more real-time transactions


The Federal Reserve has launched a two-year pilot program, called FedNow, designed to make the clearing and settlements process faster, cheaper and more convenient for individuals and businesses by speeding payments to recipient.

Five regional banks are among those participating in the program.

When fully Implemented in 2023, FedNow will also enable individuals and companies to transfer funds between accounts, pay bills and send or receive money to and from friends and family in near real time any time of day and any day of the year.

Immediacy is what differentiates instant payments from traditional payment methods – including those that appear to occur within seconds but can take many days before funds become available to the receiver.

On Jan. 25, the Federal Reserve announced that more than 110 participating financial institutions (including savings banks, commercial banks, saving and loan associations and credit unions) have signed on to support the development, testing and adoption of the FedNow Service during a pilot period.

In Northern California, the list of pilot participants includes First Republic Bank, Tri Counties Bank, Silicon Valley Bank, Pacific Coast Bankers’ Bank and First Foundation Bank. Participating California credit unions include Excite Credit Union, Farmers Insurance Federal Credit Union, and Star One Credit Union.

The FedNow Service will be released in phases. The first release will include fraud prevention tools, the ability to join initially as a receive only participant, request for payment capability, and tools to support participants in their handling of payment inquiries.

In addition, Reserve Banks will offer a liquidity management tool alongside the FedNow Service.

As with current Federal Reserve Bank services, FedNow will be available to depository institutions eligible to hold accounts at its 12 Reserve Banks and 24 branches across the nation under applicable statutes and Federal Reserve rules, policies and procedures. The Federal Reserve’s goal is to extend equitable access to the instant payment system to more than 10,000 depository institutions or their agents in the U.S.

“We’re gratified by the industry’s tremendous interest and willingness to devote time and energy to help us develop FedNow,” said Esther George, president and CEO of the Federal Reserve Bank of Kansas City and executive sponsor of the Federal Reserve’s payments improvement initiatives. “As a result, we’ve adjusted to accommodate more participants than we originally planned.”

Here’s how JPMorgan Chase is approaching this project.

“As the largest real-time payment provider in the U.S., JPMorgan Chase will complement its existing payment offerings with FedNow, helping to provide our consumer and commercial clients with enhanced solutions for vendor and bill payments, payroll, account transfers, and more,” said spokeswoman Christina Dello Buono.

Allen Sztukowski, senior vice president for operations with Pacific Coast Banker’s Bank, said the demand for instant payments already exists, and it is only going to grow dramatically once viable solutions are available for community financial institutions (CFI) to offer their customers.

“Some PCBB concerns focused on interoperability with other payment platforms, the need for it to be affordable for CFIs, and structured in a manner so it does not take too much of a CFI’s resource commitment — both financially and due to the amount of effort required to support the platform,” Sztukowski said. “Participating in the pilot lets us play a key role in the formation of the product, making sure it fits the business model and use cases for CFIs.”

Sztukowski said one of Pacific Coast’s objectives is to help CFIs compete against larger banks and other providers.

“By enabling them to offer their clients real-time payment, we’re helping to ensure their success,” he said.

Automated Clearing House (ACH) items settle in batches at a point of time in the future, according to Sztukowski. Wire transfers provide settlements between banks in real time, but are usually processed in batches, with entries to end account holders generally processed later in the day.

“FedNow speeds up the time it takes from when the item is initiated until the item is settled and the recipient has access to the funds to less than 30 seconds. Not only is this a significant change for the experiences the payee and payer have today, but straight-through processing achieves a substantial efficiency gain for the CFI,” he said.

Sztukowski observed that PCBB’s vision is to provide a product to the CFIs that will be easy, cost effective to implement, and eliminate much of the burden associated with launching and supporting a new payment product.


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