The Federal Reserve (Fed) has finalised a rule for payment transfers over its forthcoming FedNow service, discussing fraud prevention and what “immediate” payments mean.
In preparation for the upcoming launch of FedNow, last week (May 19) the US central bank issued a final rule that governs fund transfers in the new instant payment service.
The service is expected to launch in 2023 and will enable a wider range of financial institutions to offer real-time payments to their customers.
To support interoperability with its private counterpart, The Clearing House’s RTP network, the Fed said it is working towards compatible standards and operating procedures.
As part of this effort, the new service will adopt the data-rich ISO 20022 messaging standard, which will also facilitate interoperability with international partners.
The Fed published a notice of proposed rulemaking last June and it received 31 substantive comments from a variety of commenters, such as small, midsize and large banks, consumer organisations, processors, trade organisations and other interested parties.
The final rule is largely similar to the proposal from last year, but it includes a few clarifications in response to the comments received.
Payments can be delayed over fraud
In the draft rule, the Fed originally proposed to allow the beneficiary’s bank to delay payments if it has reasonable cause to believe that the beneficiary is not entitled or permitted to receive payment.
The proposed rule gave potential sanctions violations as an example of such a delay.
Some commenters asked the Fed to extend this feature to allow banks to use it under a broader range of circumstances, such as fraud prevention or cybersecurity incidents.
Others suggested that banks should be allowed to delay payments if they have “reasonable suspicion”, rather than “reasonable cause”, to believe the beneficiary is not entitled to receive the payment.
Meanwhile, others cautioned against defining finite circumstances where a beneficiary’s bank can delay a payment order. They argued this may be overly limiting and banks should have full discretion on when to delay funds availability to the beneficiary.
The Fed, however, refused this argument, noting that limiting the circumstances is critical to preserving the speed of the end-to-end process for an instant payment service.
It adopted the rule as proposed but, in the commentary, it added fraud as an additional example of the circumstances that can justify a delay.
Fraud prevention tools to come over time
In the submissions to the proposed rule, some commenters urged the Fed to “give greater consideration” to authentication and the potential for fraud, including instances where a third party tricks a consumer into sending an instant payment.
This issue has recently received increased attention from members of Congress after the New York Times revealed that Zelle had become a preferred tool for fraudsters.
Zelle, which is owned by seven of the US’ largest banks, offers low-value instant payments and the irrevocable nature of these payments makes it particularly attractive for fraudsters.
Although US federal laws establish consumer protections when “unauthorised” electronic fund transfers are made, consumers who are tricked into making “authorised” payments to a scammer cannot get a refund.
In its final rule, the Fed says it recognises that the irrevocable, real-time nature of instant payments can pose a challenge to the industry as a whole and that strengthening consumer protections is a desirable goal, but advises the industry to examine existing regulations as a potential tool.
It also notes that FedNow will have fraud prevention tools and, over time, the reserve banks “will augment fraud prevention tools as the FedNow Service matures”.
‘Immediate’ means intent of real-time completion
As part of the consultation, the Fed asked the public whether it should set out specific time parameters to clarify the meaning of “immediately” and, if so, what timeframe would be reasonable.
Although some commenters suggested specifying the time period to be within ten seconds, other commenters sought to describe “immediately” as the general intent of a real-time, end-to-end completion.
The Fed agreed with this recommendation, noting that there is no need to add specific time parameters in the definition “at this time”. Instead, it established that it is sufficient “to convey the need to make funds available in real time”.
“As the instant payment industry evolves, the time period of what is considered immediate may continue to evolve and not specifying a particular time frame in the regulation will allow necessary flexibility in the future.”
In the UK, direct participants of the Faster Payments scheme typically make funds available within five seconds, although they can take up to two hours in exceptional cases.
The SCT Inst scheme requires euro payments within the eurozone to be made within ten seconds, which can go up to 20 seconds in exceptional circumstances.