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Regardless of what payment system is being utilized – whether it’s check, card, ACH or RTP® – there are many interconnected pieces working together in operation. The FedNow^SM Service will be no different. Throughout the various phases of the FedNow^SM launch, there will be multiple interconnected, yet independent, roles and processes working together as a supportive “ecosystem.” Let’s look at them and how the ecosystem works!

The FedNow^SM Service Payment Flow – As you begin to get ready for instant payments with FedNow^SM, it’s important to understand how a payment will flow to understand the overall ecosystem. Here is a walk-through of the basic steps in a FedNow^SM payment. Keep in mind that this process will occur in a matter of seconds.

1. A sender accesses their mobile or online banking and initiates a credit push payment message.
2. The sender’s financial institution (or the financial institution’s service provider) completes validation processes and submits the credit transfer to the FedNow^SM Service.
3. The FedNow^SM Service validates the payment.
4. The FedNow^SM Service provides the receiver’s financial institution with the transaction message.
5. The receiving financial institution indicates they will accept the transaction.
6. The FedNow^SM Service receives the receiving financial institution’s response.
7. The payment settles in the applicable master accounts of both financial institutions. An advice of credit and acknowledgment is sent to each financial institution as well.
8. Each financial institution notifies the respective sender and receiver of payment status.
9. A final confirmation of posting is sent, indicating that funds were deposited in the recipient’s account. (Note: this step is optional to be offered to business account holders).

I know this looks like a lot of steps, but just remember that this payment flow overview is broken down into very simplistic progressions.

Participation Types

The service will offer three main participation types. Designed for flexibility, these will accommodate the needs of the wide variety of financial institutions in the United States. If you’re considering the FedNow^SM Service, it’s good to know you have some options and what role your financial institution can play in the ecosystem.

• Client credit transfers – This level of participation gives the financial institution the ability to initiate a credit push transfer from a sender to a receiver. There are two options in this participation type: send and receive or receive only.

• If opting for send and receive, financial institutions may initiate and receive customer credit transfers and initiate and receive a request for payment (RFP).
• If the participant chooses to act as a receive only financial institution, they may initiate returns and receive credit transfers or initiate an RFP. Most importantly, this classification of participation cannot initiate credit transfers or receive an RFP.

• Liquidity management transfers (LMTs) – This participation type supports instant payment liquidity needs. LMTs are transfers between master accounts or a master account and a joint account. These transfers can take place between the master accounts of two participants, or between a participant’s master account and a joint account that backs another instant payment service.
• Settlement only – This participation option is designed as a standalone participation type. Financial institutions participating at this level may not send or receive payments, but they may settle transactions to support respondent FedNow^SM participants. Settlement only will also allow access to FedNow^SM reports and real-time notices of respondents’ debit and credit activities.

Settlement through the FedNow^SM Service

FedNow^SM transactions will settle on a real-time gross basis, streamlining settlement to a much faster and more frequent process. This is different from other traditional payment rails such as ACH and checks that use a scheduled batch settlement process. FedNow^SM settlement will occur on an individual transaction-by-transaction basis, meaning each participating financial institution will settle the gross amount of each and every transaction as it occurs.

The FedNow^SM Service will settle transactions in a participating financial institution’s Federal Reserve Bank master account, or the master account of its correspondent (e.g., bankers’ banks and corporate credit unions). If settling through the Federal Reserve, there is no need to open a separate settlement account; financial institutions will be able to use their existing Federal Reserve accounts.

Want to learn more about faster payments? We’ve got you covered! EPCOR has partnered with The Payments Professor to help you bring everyone at your organization up-to-speed on RTP® and FedNow^SM with THREE new on-demand Faster Payments curriculums. Click here to learn more! Or consider joining us for our When The Dollar Goes Digital webinar on October 18^th.