FedNowSM features: Settlement, reporting and liquidity management
Financial institutions can leverage the Federal Reserve’s upcoming FedNow Service to create and offer instant payment solutions that can help them increase customer satisfaction, generate new revenue streams and gain a competitive edge. Yet, as with any new product or service offering, there are considerations financial institutions should think about as they prepare for the FedNow Service, which is set to launch in 2023.
Treasury operations is one main area your financial institution will need to review and potentially adjust to get ready for a 24x7x365 instant payments environment. This includes taking a look at back-office processes and assessing how the Federal Reserve Banks’ reporting can be used within current information flows.
Your organization will also need to evaluate the impact around-the-clock settlement will have on your liquidity needs and understand the liquidity and reconciliation tools that will be available through the FedNow Service.
Settlement through the FedNow Service
One of the benefits of the FedNow Service is that payments will clear and settle between financial institutions in real time 24x7x365 in a Federal Reserve Bank master account with no prefunding required. This always-on process reduces interbank credit risk, but also means financial institutions may need to upgrade systems to be able to process payments on an ongoing basis. Things to consider include:
- Whether your financial institution will settle payments in its own Federal Reserve Bank master account or designate a correspondent such as a bankers’ bank or corporate credit union. If designating a correspondent, payments will settle in the correspondent’s master account.
- Which routing transit numbers (RTNs) your financial institution will enable to send and receive payments and which ones will be enabled to only receive payments as well as whether you will support requests for payments.
- How your financial institution will manage its account in compliance with Federal Reserve policies, including the Payment System Risk (PSR) Policy on intraday credit and avoiding negative balances at the close of the FedNow cycle date.
- If your financial institution will leverage any subaccounts to support reporting and reconcilement activities. Note: Settlement still occurs at the master account level even if subaccounts are used.
Reporting and reconcilement
Because the FedNow Service will process payments around the clock, every day of the year, careful consideration has been given to the timing of end-of-cycle activities for accounting and reporting purposes.
The FedNow Service’s cycle date will generally be 7 p.m. to 7 p.m. ET the next day, seven days a week. As a result, the FedNow cycle date will differ from the calendar date for a period of time each day (from close until midnight). More specifically, the cycle date aligns with the settlement date as it corresponds with the Fedwire® Funds Service business day, which generally has a closing time of 7:00:59 p.m. ET. If a payment is received on June 1 at 7:00:55 p.m. and settles on June 1 at 7:01:00 p.m. ET, for example, it will have a cycle date of June 2. See example below.
The FedNow Service will assign the applicable cycle date to the transaction and include it in the advice of settlement message and notifications. The FedNow Service will also send a daily broadcast message to participants advising them of the change in cycle date.
The Federal Reserve Banks will provide a variety of reports and tools to help financial institutions manage their account balances and reconcile FedNow activity.
FedNow-specific reports will include:
- Activity totals – FedNow summary totals of value and nonvalue messages (RFP, cancellation of RFP, additional information and return request) at the RTN level per cycle date
- Activity details – Lists individual FedNow Service value and nonvalue messages per cycle date
- Master account balance – Available on demand
Standard Federal Reserve Banks’ reports that will be updated to include FedNow information include:
- Daily Statement of Account – FedNow Service summary totals by RTN will be included
- Financial Institution Reconcilement Date (FIRD) – Individual transactions will be provided in the report for master and subaccounts
- Statement of Account in Spreadsheet Format (SASF) – Available for master accounts
As part of onboarding, your financial institution will need to determine how frequently it will perform reconcilement functions and choose initial settings for reports.
Financial institutions participating in the FedNow Service or their correspondents will need adequate funds or available credit (liquidity) in their master accounts at all times to enable continuous processing of instant payments. This may involve making internal adjustments, or sourcing liquidity from another financial institution or a correspondent.
To support financial institutions’ liquidity needs, the FedNow Service will allow financial institutions to transfer funds to each other within the service. A few things to keep in mind:
- Financial institutions set up to send and/or receive customer payments will automatically be enabled to send and receive liquidity management transfers, which are transfers between financial institutions in support of liquidity needs. Financial institutions can disable this feature if they prefer.
- Financial institutions that use a correspondent to settle FedNow activity will be allowed to receive liquidity transfers, which will be posted to the correspondent’s master account.
- Financial institutions can choose to participate in the FedNow Service for the sole purpose of supporting liquidity management transfers for FedNow participants, without needing to enable other capabilities within the FedNow Service.
- Financial institutions that participate in a private sector instant payments service backed by a joint account maintained by the Federal Reserve Banks will be able to use the FedNow Service for sending and receiving transfers to and from a master account and the joint account.
Start preparing today
The FedNow Service will be here before you know it. Now is a great time to start assessing your financial institution’s internal and third-party systems to help ensure a more seamless transition.