# Federal Reserve System

<mark style="color:purple;">PROBLEM</mark>

Payment delays and ability to reverse ACH payments. Counterparty risk. Amplified identity and credit risk from faster payments. Float reduction. Fragmented rail use.&#x20;

<mark style="color:red;">FEDNOW PROBLEM</mark>

Counterparty risk from liquidity mismatches between payment legs. Cybersecurity. <mark style="color:red;">Irrevocable</mark> payments. $500,000 max limit. Overdrafts. No way to link an individuals' accounts with routing information. Lack of ubiquity. Equitable access. Concentrated use, attention restricted to institutions with send
&#x20;capability. Need bank account to send or recieve FedNow payments.

<mark style="color:red;">FEDWIRE PROBLEM</mark>

$9,999,999,999.99 payment limit. 94 cents for the first 14,000 payments a month. Up to $40 for the sender and $15 for the receiver for domestic wire transfers.&#x20;

<mark style="color:purple;">RTP PROBLEM</mark>

Complexity via liquidity provision to account at FRBNY. More counterparties due to joint account held at FRBNY. banks are charged $2.00 per drawdown from this account. 4.5 cents per transfer.&#x20;

<mark style="color:orange;">This is like a hash time lock contract.</mark>&#x20;

<mark style="color:purple;">ACH PROBLEM</mark>

Batch processing. Only settles four times a day. Takes one to three days. Fee for same-day ACH. Payment transactions typically costs between $0.26 and $0.50

From the point of view of faster payments, an important limitation of ACH is its <mark style="color:red;">revocability</mark>. Both
\ <mark style="color:red;">insufficient funds</mark> and <mark style="color:red;">fraud</mark> contribute to the failure of payments to complete, and the <mark style="color:red;">time gap</mark> between
&#x20;payment and settlement is a factor in ACH returns. While Same Day ACH reduces the problem somewhat, it
&#x20;by no means eliminates it: Suppose, for example, access to a bank account has been attained fraudulently. <mark style="color:red;">A
&#x20;customer-initiated return of the payment can take sixty days to process; meanwhile the vendor has shipped
&#x20;the goods to the fraudster \[Sullivan, 2023].</mark>

<mark style="color:purple;">FEDACH PROBLEM</mark>

1/3 cent to originator
&#x20;and receiver, with a 1/10 cent surcharge for same day service, and with a minimum monthly fee of $50 for
&#x20;originations and $40 for receipts.

<mark style="color:purple;">FEDNOW FEES</mark>

Participating institutions are charged 4.5 cents per transfer (free in 2024 for the first 2500 transfers
\
per month) and 4.5 cents per return of transfer. Transfers for liquidity management are charged $1.
\
Participation fees are $25 per month (and nonexistent for 2024). Each request for payment is charged 1 cent.

***

<mark style="color:purple;">USER FLOW</mark>&#x20;

1. Alice sends a request to Bank A “Pay Bank B $5 for the benefit of Bob”
2. Bank A verifies Alice’s identity and adequacy of Alice’s funds
3. Bank A notifies Bank B of the payment
4. Bank B verifies Bob has an account
5. Bank B sends confirmation to Bank A
6. Both banks send confirmation to their respective customers.

<figure><img src="/files/8kVMtONEfKEFvJ5vQSBI" alt=""><figcaption></figcaption></figure>

<figure><img src="/files/xVpoRNIx3wBOhFy6PFQs" alt=""><figcaption></figcaption></figure>

<mark style="color:purple;">FEDNOW FLOW</mark>

1. A payer authorizes his bank to send a payment of a specified amount from his account. The payer provides the recipient’s bank and identifying information.
2. The payer’s bank confirms the payer has funds available.
3. The payer’s bank sends a notification via FedNow to the recipient’s bank. At this point the payer can no longer change the transaction.
4. The receiving bank receives the payment message, reviews transaction details and validates the recipient’s account.
5. The receiving bank sends an “accept response” to FedNow. The Federal Reserve moves funds from the paying bank’s master account to the receiving bank’s master account and notifies the paying bank. The receiving bank deposits funds into the receiver’s account.
6. Payer and receiver are notified by their banks that the funds have been sent.

STATE OF THE ART

Synthetic instant ACH via Plaid&#x20;

1. An instant verification product or an instant micropayment service to authenticate the payer’s
   &#x20;account.
2. A risk reduction product to score payment risks based on a large number of factors, giving the
   &#x20;business the option to assume the risk of the payment in low-risk cases, or to engage in deeper
   &#x20;examinations including verification of availability of funds in the buyer’s account.
3. A transfer product to facilitate the actual transmission of funds.

<details>

<summary>Programmability</summary>

automatic execution of payments once a pre-defined set of
&#x20;conditions are met.

</details>

<details>

<summary>Why Fedwire?</summary>

Wholesale payment activity

</details>

<details>

<summary>ACH</summary>

Batch processing. Settles four times a day.

* Bank account number
* ABA RTN
* Beneficiary name (name of recipient)

For example, when an <mark style="color:purple;">employer</mark> makes a <mark style="color:red;">direct deposit</mark> into an <mark style="color:purple;">employee’s</mark> bank account for a <mark style="color:red;">paycheck</mark>, those funds are deposited via ACH credit transfer.

</details>

RESOURCES

[Fednow and Faster Payments in the US](https://xft.finance/downloads/fednow_bostonfed_20241108.pdf)


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