Dive Brief:
- The Federal Reserve plans to let financial institutions signed up for sending capabilities on its FedNow real-time payments system start dispatching transactions of up to $1 million this summer, according to a Fed website post Wednesday. That’s double the $500,000 limit now.
- Banks and credit unions that use the young instant payments system will also get access to a new function at that time that will let them designate amounts and speeds at which defined customer segments can use the system, the Fed said in the post.
- “The combination of account activity threshold functionality with the increased transaction limit gives participants powerful tools to customize risk parameters across customer segments, from established businesses to retail clients,” Federal Reserve Financial Services Chief Payments Executive Mark Gould said in the release.
Dive Insight:
The Federal Reserve is trying to increase the usefulness of the FedNow real-time payments system, launched in July 2023, while also delivering more risk mitigation features.
The changes come as the central bank seeks to increase bank adoption of the new system, which so far has attracted only about 1,100 of the nation’s approximately 9,000 financial institutions as of the end of last year. The financial institutions can sign up for ‘receive-only’ functionality, or have receive and send functionality. Most are sticking with the safer receive-only option for now, given concerns about faster fraud.
“The dollar limit on individual transactions is necessary, but a secondary consideration in creating volume for FedNow,” industry consultant Peter Tapling said in an email in reaction to the FedNow limit increase. “The primary consideration is getting more banks actively SENDING transactions on the network. Not only signing up to be a ‘send’ participant, but actually offering products to their consumer, business and fintech customers to enable sending over FedNow.”
The Federal Reserve’s speedy FedNow payments system cost about $246 million to operate last year, and required about $100 million for development in 2023, according to a report from the central bank.
While payments in the U.S. often take days to settle, FedNow can complete a transaction in seconds.
The higher $1 million transaction limit being deployed later this year might be useful for big payments, such as corporate supplier payments, consumer real estate payments or payroll funding, the Fed said. The central bank also suggested that the transaction limit could change in the future.
“Federal Reserve Financial Services will continue working closely with the industry to support its needs, which could result in updates to the transaction limit over time,” the Fed’s post said.
The Fed underscored how tailoring the system to specific users could help reduce risks. The new feature delineating usage by customer “will allow participants to define value and velocity thresholds by customer segment to fit their unique business needs and risk tolerance,” the Fed noted.
FedNow’s private rival, the RTP network operated by The Clearing House, raised its transaction limit to $10 million this month.
While financial institutions might seemingly be eager to join the faster systems, FedNow and RTP could be costly propositions for some financial institutions that will need to upgrade their IT systems to participate. That could be partly because the FedNow system operates with an international standard, ISO 20022, that not all banks have adopted yet.
About 60% of banks and credit unions cited the upfront cost of adoption as the biggest barrier to signing up for any faster payments system, according to survey results published this month by the Faster Payments Council organization and its corporate partner Volante Technologies.
Still, most U.S. financial institutions and businesses believe faster payments are ultimately a crucial “must have” service, according to the survey results. They see it as useful for payments related to e-commerce, bill payments, treasury management and account-to account payments, among other possible uses.
“We anticipate continued updates to the transaction limits over time across both domestic real-time payments rails, helping financial institutions meet increasing demand for real-time payments facilitation from their customers,” Bridget Hall, who leads real-time payments for FedNow participant ACI Worldwide in the Americas, said in an emailed comment. “New, emerging use cases around B2B and C2B transactions can often include higher value transactions.”
