April 1, 2024—In late March, the Federal Reserve hosted their first FedNow® Service Town Hall webinar of the year with an industry panel on instant payments fraud and risk management and several updates by the Fed on their own initiatives to support adoption and use of the FedNow® Service. The Fed announced that participation has grown to over 600 certified financial institutions ranging from small community banks to credit unions to some of the largest banks in the nation. The geographic reach of the service now spans coast to coast with participating financial institutions in 46 states and Washington, D.C. A poll taken during the session clocked over 1,200 attendees, primarily from financial institutions, logged on, a testament to the growing interest in, and ongoing belief in the potential of, this new service rail.
The webinar began with a look at fraud mitigation from the perspectives of two participating financial institutions and a discussion of their strategies to manage risks specific to the irrevocability and immediacy of instant payments. Ryan McNaughton, VP of Information Technology, North American Banking Company, said that his bank applies existing risk mitigation tools currently in use for other payment rails—such as velocity and transaction value limits and similar controls—to this new payment type. He emphasized the need to focus on educating a segment of users, in his case, the consumer, on the service and its risks. Jim Hunt, VP and Division Head, 1st Source Bank, spoke of their different approach, rolling out the service first to the bank’s business customers and relying on the many, robust internal KYC controls applied to business accounts. Hunt noted they replicate processes and controls in place for wire transfer processing such as OFAC checks. Although it is a new service, neither institution has yet seen fraudulent activity. Both participants expressed their confidence in the existing risk management capabilities and noted that solving for any gaps moving forward will be key.
When the Fed launched its service in July 2023, a number of initial controls and capabilities were in place to assist participating financial institutions in protecting against instant payment fraud, and more tools are anticipated for release this year. In this session and in prior press, the Fed alluded to some potential enhancements, including value limits customizable by use case, aggregate value or volume limits for specific periods, or centralized monitoring aimed at identifying patterns of fraud.
The Fed anticipates that 2024 will be a year of rapid adoption and service innovation, and they are themselves taking steps to advance both goals and to transition from service launch to standard operations. Revisions to Operating Circular No. 8 (Funds transfer through the FedNow® Service, consisting of primarily non-substantive edits and clarification to definitions,will go into effect on April 22, 2024, and the Fed has now released new tech-centric developer tools for FedNow® solutions providers or those financial institutions building their own direct integrations. The new online resource center will allow customers and solutions providers to access code and message samples to assist with service implementation and is part of a larger initiative of the Federal Reserve to encourage advances in the payments ecosystem by delivering services efficiently via APIs. Finally, in this webinar, the Fed discussed the March 14 introduction of a Federal Reserve Financial Services (FRFS) FedNow® User Group to promote collaboration and engagement among the participating financial institutions and their service providers on the FedNow® Service network.
As early adopters of the FedNow® Service and active participants in the FedNow® Service community, we will share information and news related to the instant payments rail as it becomes available. We encourage you and your teams to participate in these industry conversations and to continue to educate yourselves on this service.