The FedNow Service is launching in early 2023, giving community banks about a year to plan. Here’s how community bankers, payments experts and fintech vendors suggest using the time to prepare.
By Colleen Morrison
The clock is ticking. With less than a year until the scheduled launch of the FedNow Service, community banks are still awaiting updates on specifics. The Federal Reserve has been forthcoming in communicating details and capabilities, but the exact date of product availability remains undetermined.
“In 2022, we’ve got some critical milestones around integration testing with all of our Fed systems, as well as pilot testing,” said Connie Theien, senior vice president and director, payments industry relations with the Federal Reserve System, to ICBA members during a November 2021 webinar (see sidebar below). “And so when we hit some of those, we’re hoping not too far into 2022, we’ll be able to give you a more specific implementation window.”
Yet, even without a target date on the calendar, work efforts from the Fed and community bankers are signaling the flurry of activity that has been set in motion.
“2022 will be a big year as we move from development to pilot testing and begin to engage more with financial institutions in active planning,” says Nick Stanescu, senior vice president, FedNow business executive, the Federal Reserve Bank of Boston. “We remain on track to go live with the FedNow Service in 2023, beginning a new era for the U.S. payment system.”
The pilot experience
In January 2021, the Federal Reserve convened the FedNow Pilot Program, which consists of more than 110 organizations to support development, testing and adoption of the FedNow Service. The first year of activity centered on information sharing and input collection, but now, pilot participants are transitioning from institutional planning to execution.
“We expect to begin extensive pilot testing in fall 2022, in parallel with finalizing our development of release one, to ensure the FedNow Service is ready for general availability in 2023,” Stanescu says.
“This operating model—iterative and parallel testing and development—ensures an agile approach and strong collaboration as the Federal Reserve and pilot organizations jointly prepare our solutions for launch.”
As part of preparatory efforts, pilot participants have been encouraged to assess their existing platforms, products and functionality. In some cases, FedNow specifications may require upgrades to ensure community bank systems can integrate appropriately.
“We actually, as a result of COVID, had bumped up our adoption of a new online banking platform. That was a necessary step to help get us ready for FedNow,” says Sherri Reagin, chief financial officer at $540 million-asset North Salem State Bank in North Salem, Ind., and a FedNow Pilot Program participant.
“Our older platform would not have talked to FedNow through our core provider, so it is a multilayer process to be able to use the FedNow technology,” she adds. “Fortunately, we had made that move. Had we not, we would have been further down in the [FedNow] queue with our core provider.”
“[With FedNow,] community banks have an opportunity to seize the moment.”
—Tina Giorgio, iCBA
Beyond assessing operational functionality, experts recommend that community banks take a step back to evaluate the FedNow opportunity in light of business plans. Doing so will help community banks align goals and resources to determine the best partners, approaches and use cases to emphasize in their FedNow release.
“FedNow offers a broader strategy play, and community banks have an opportunity to seize the moment,” says ICBA Bancard president and CEO Tina Giorgio. “This is a major change that’s coming. How that fits into everything else you’re doing is the most important part. It’s not about bolting on another solution; it’s about taking stock of how you’re doing things.”
To that point, community banks should consider how FedNow interacts or affects other products, services and initiatives and assess the value it may provide in support of those efforts.
“Instant payments will deliver benefits beyond speed,” says Deborah Matthews Phillips, ICBA’s senior vice president of payments and technology policy. “When banks see the value of these benefits, such as ‘good funds,’ eliminating or mitigating exception processing for their business customers and more, they will be inspired to prioritize their readiness.”
As community banks plan to take the solution to market, how they structure the customer-facing product will be central to the user experience and ongoing adoption.
“The FedNow Service is a payments platform … There’s not going to be an app that a customer can use that is put out by the Fed,” says Blayne Furey, management information systems officer at $138 million-asset Freedom Bank in Columbia Falls, Mont., and another pilot bank. “The Federal Reserve is creating this FedNow Service that applications can connect to or utilize for that instant send-receive-settle action for payments.”
The Federal Reserve is hoping to spur market development of customer-facing solutions through its Ecosystem Accelerator Group. This group has been established to help encourage futher development with the FedNow Service as it evolves. The Fed also will offer a service provider showcase, featuring entries from members of the accelerator group, which will include video and narrative profiles of service providers who intend to use the FedNow Service.
“We intend to cut our teeth on the business side to ensure we get a good grasp on how to support customers and how to control risk before we start offering a solution for consumers.”
—Blayne Furey, Freedom Bank
Finding the right technology partner may be a central part of community bank planning. Far beyond basic connection links, banks can utilize vendor partners who can provide necessary applications for a safe on-ramp for participation, particularly in this first phase when expansive fraud mitigation tools may not be available from the Fed.
“Our institution has taken a strong focus on fraud as we prepare for FedNow,” Furey says. “We’ve formed a fraud team, and we’re working on incorporating things like the Fraud Classifier Model to help us spot trends early, as well as identify similarities or differences between cases we encounter. [Fraud mitigation] will be a crucial element in our selection of who we partner with to offer FedNow.”
Placing parameters around the initial product rollout will also enable community banks to limit exposures and test the waters before making FedNow more widely available. “We are looking at solutions we can offer to our business clients first,” Furey says. “Reason being, we can mitigate and control risk much more easily with our business clients. We intend to cut our teeth on the business side to ensure we get a good grasp on how to support customers and how to control risk before we start offering a solution for consumers.”
Easy does it
Reagin also plans to introduce FedNow via a phased implementation. “Initially, we will roll it out to our employees and certain customers who have shown interest,” she says. “Then, I foresee a broader rollout to other customers. My thought is once we get started on it, it’s just going to really take off and grow at a very quick pace.”
So, what can community banks do today? Experts recommend speaking to core providers, industry partners and Federal Reserve account representatives in the near term. Not only will these conversations reiterate interest in the service, they also will spark dialogue around the steps to be service ready and encourage faster third-party product development. In short, they will help community banks be ready to go when the Fed is.
As Stanescu says, “Now is the time to engage with the Federal Reserve and other partners to prepare for the FedNow Service.”
FedNow planning resources
The Federal Reserve
The Federal Reserve has made numerous resources available through its FedNow Explorer website, including:
- FedNow Service Readiness Guide
- Product Capability and Planning Information Sheet
- Technology Planning Information Sheet
- Treasury Operations Planning Information Sheet
- FedNow Service Product Sheet
Visit explore.fednow.org for these and other tools to support your payments planning.
ICBA & ICBA Bancard
In addition, ICBA and ICBA Bancard have developed informational pieces to help with the FedNow implementation process, including:
- Next steps on your instant payments journey: Updates on FedNow (recorded webinar)
- Value of the FedNow Service for Community Banks
- Faster Payments Resource Page
- ICBA Bancard Digital Payments Strategy Guide
Additional resources will be developed and shared directly with ICBA members as the service launch date nears. Visit icba.org for more information.
Colleen Morrison is a writer in Maryland.