FedNow system: how does it work and what are its benefits?

FedNow system

Last modified on December 6th, 2023

After 5 years of development by the Federal Reserve, the FedNow system was rolled out in July 2023. With it, the US Central Bank wants to accelerate the development of instant payment services and catch up with other countries. How does the FedNow service work? What threats and opportunities does it present to businesses? How to stay protected against fraudulent payments? Keep reading to find out!

Trustpair provides international and ongoing account validation to ensure your complete financial protection, including for instant payments. Request a demo to learn more!

New call-to-action

How does FedNow work?

In July 2023, the Federal Reserve (the US Central Bank) launched its own instant payment service: FedNow.

FedNow is the first real-time bank transfer platform created by the government in the United States. Just like Venmo, Zelle, and other private companies, it allows businesses and consumers to send and receive money instantly on their bank account.

When it launched, it worked with 35 banks and 16 credit unions. A month later, this number increased to 44 banks and 18 credit unions. More financial institutions are forecasted to join them, enabling more customers to access faster payments.

While Fed Now payment service initially focused on account-to-account and consumer-to-businesses payments, it will progressively broaden its scope to include other types of payment:

  • B2B invoicing,
  • Tax payment,
  • Immediate payroll transfers,
  • Etc.

Unlike ACH payments (also controlled by the Federal Reserve Bank), the FedNow system processes a transaction quickly: clearing and settlement happen within ten seconds. It offers many benefits to consumers and businesses alike and doesn’t require a specific set-up to transfer funds (both to receive or send cash). Fees are also lower, but more on that later on.

 

What are the benefits of FedNow for businesses?

The advantages of the FedNow system are clear:

  • Real-time payment (RTP) services mean funds are cleared instantly between accounts. Both the sending and receiving financial institutions have to adhere to the FedNow network for it to work, but increased adoption means this won’t stand in the way of most users.
  • Fees are also lower than the ones charged by credit card networks, making it a smart banking choice for day to day operations.
  • 24/7 availability means payment services are operational around the clock, year-round. It’s ideal for retail and international businesses that operate in different time zones. It guarantees business continuity for organizations relying on financial services too.

This translates into real-time cash flow management for both parties. It also makes it easier for businesses to enable a pay-on-reception option, which might suit their customers better. Instant payment methods add trust to customer relationships.

With the Fed’s support, transferring payments between accounts in real time will be easier than ever. This financial service will make payments easier for everyone, enabling a faster distribution of resources between parties.

But while FedNow payment services offer undeniable advantages, they also come with their own set of risks.

 

What are the threats that come from using FedNow in businesses?

Instant payment enables instant fraud

A new payment market means a new fraud market. Scammers from around the world have already seized the opportunity this means for their business.
In India, a country pioneer in its adoption of instant payment, and real-time payment systems fraud has seen a 23% rise in 2022.

Fraudsters have learned that instant payment methods mean instant fraud. When conducting schemes, they will leverage faster payment services to get money and disappear as quickly. The downside of business continuity mentioned above is that can also happen 24/7. The same goes for FedNow: it presents risks for businesses.

In CFO fraud, scammers contact an employee impersonating your CFO. They’ll make an “urgent request” for funds to be transferred. Using urgency and social engineering techniques, there are good chances the employee complies — after all, who’d risk contradicting their boss?

For companies, this opens a doorway to even more fraud. Traditional wire transfers and “long” ACH payments are already irretrievable, and they take 1-2 business days to process.

With instant payment, your window to realize:

  1. It was a scam and
  2. React with your contingency plan

Is shortened to about ten seconds. In other words, instant payment services also mean instant fraud.

If you want to use the FedNow (and other immediate payment options) in your business, you therefore need an adequate anti-fraud strategy to counteract its risks.

Anti-fraud software, a comprehensive protection against payment fraud

So, should you stick to ACH transfers or wire transfers as your payment options? Absolutely not! There is a way to harness instant payment’s benefits while being protected: it’s anti-fraud software.

Trustpair is a solution that offers complete protection against payment fraud. Our SaaS automatically checks your third party’s credentials in real-time before sending any transactions.

We use AI and pattern recognition to accurately predict and detect fraudulent attempts. Any suspicious activity is flagged, or blocked, and needs to be reviewed manually before being approved.

All of this happens in real-time, ensuring no fraudster has been able to change your supplier’s credentials since they were last checked. That means your business is fully protected against the most dangerous examples of fraud.

Using Trustpair, you can use the FedNow system while trusting you’re 100% protected against fraud.

 

Key Takeaways:

  • FedNow is an instant payment method rolled out by the US government and banking institutions. It presents many advantages to businesses but also comes with risks.
  • You can make the most of instant payment methods while being protected against fraud by using anti-fraud software like Trustpair. Our services include extensive customer support, automated and instant account validation as well as fraud analytics.

FAQ

Banks, credit unions, and financial institutions can decide if they want to join the Federal Reserve system. While it’s by no means mandatory, there is a definitive move towards faster payment methods in the United States. Especially as these transactions present so many advantages for businesses and consumers alike: they’re faster and more efficient than regular payments.

Yes and no. They’re as safe as other payment services, but they also leave you with a shorter reaction time in case of fraud. Funds are sent and cleared from the bank account in about ten seconds, and once they’re gone, they’re gone for good. This makes it very enticing for fraudsters.

Manage the risks related to corporate treasury.

Receive our latest news

Subscribe to the Trustpair Newsletter and receive advice every week…
Thanks ! Your subscription to the Trustpair newsletter has been taken into account.

        By clicking on “Subscribe”, you agree to receive the Trustpair newsletter to be informed of news or important information about our services. By subscribing, you agree to our Privacy Policy.

newsletter-icone

Related Articles