Spotlight on the US’ FedNow

The FedNow Service is the newest instant payments system, launched in the United States in July 2023. The FedNow Service is operated by the Federal Reserve and will be available to all US financial institutions (10,000+).

The FedNow Service launched with shared tools at the scheme level to enable financial institutions of all sizes to raise the bar on fraud risk management, with a focus on fraud reporting and transaction screening. The Federal Reserve has signaled that these tools will be enhanced and additional tools will be added over time.

What’s Notable Related to Fraud Mitigation?

The scheme rules require a participating DFSP to report to the FedNow Service and to the other DFSP if after investigation, it believes a transaction was fraudulent. The FedNow Service provides a non-value message to DFSPs to support the reporting. The rules specify that participating DFSPs may only use this information for purpose of remediating, investigating, and preventing fraudulent activity.

Fraudulent payment reporting does not stop or reject the transaction as it occurs and instead, it is designed to enable DFSPs and the scheme to over time gain more insights into fraud patterns and enhance transaction screening.

The FedNow Service also supports DFSPs by providing controls to supplement their risk mitigation practices. While not exclusively intended to prevent fraudulent transactions, DFSPs have the option to turn on a functionality in the FedNow that screens transfers against a Negative List (provided by the DFSPs, the list contains the combination of a DFSP identifier and end user account number); a transfer that matches the combination on the list will be rejected.

The screening capabilities tool provided at the scheme level allow DFSPs to prevent potentially fraudulent transactions.

Next Topic in this Section: Spotlight on UK’s FPS