FedNow Interview: A deep dive into liquidity, interoperability, fraud and much much more

Blog· 5min August 16, 2022

With all eyes firmly fixed on the launch of FedNow in 2023 there still remain a number of areas where questions remain. Recently we sat down with Miriam Sheril who joined Form3 from her previous role as core product lead for FedNow at The Fed to hear from her on some of these key areas such as interoperability, liquidity management, and fraud. Below is an excerpt from this recent interview where we touch on two of the most talked about aspects 'interoperability' and 'liquidity management'.

One of the things we hear coming up more and more is the question of interoperability. How do you see these two schemes working together? What will drive the usage of one versus the other?

Miriam Sheril

"Maybe I'll spend a couple of minutes just giving a quick overview of interoperability, so I can then properly answer the question. In the US, we have 2 types of interoperability.

The first is how FedACH and EPN at The Clearing House work. With this you can initiate a payment service, and the receiving financial institution doesn't need to be on the same service. We call this 'message exchange interoperability', which means you don't have to be on both networks, although you'll see that many banks are from a resiliency perspective.

You then have Fedwire and TCH’s CHIPS system, and that's an example of 'message routing interoperability', which means participants do have to be on the same scheme. But the two schemes themselves will be very aligned with message specs and rules. So banks can make the best choice of how they want their payment to go through, should it go via the TCH network, because the receiver is there, and there's other benefits such as netting, or should they send it over Fedwire.

When FedNow began and engaged in conversations with TCH, they ended up with the second option of a message routing, alignment interoperability. So if you initiate a payment on FedNow, the receiving customer must be on FedNow, this is the same for RTP with The Clearing House, if you initiate it there, the receiver has to be there.

Primarily, I think the reason was due to the nature of the scheme.  It's very hard in a real time gross settlement service to successfully implement the other approach. With ACH it's a little different, with payments clearing in real time, but settlements happening a few times a day or overnight. However with Wire and then FedNow and RTP, these are real time payments that settle instantly and so that gets really complicated.

The flip side of all of this is that the message specs will look to align where possible. They both will use ISO20022 and there's a lot of collaboration going on there.

 However there are differences there that are going to make it potentially hard for a bank to really be able to support both services. Both teams have always said that they will continue to evaluate their schemes approach for interoperability."

How do you see banks dealing with the liquidity management problem in a real time payment environment?

Miriam Sheril

"Liquidity management is a really interesting topic, and where it started and where it is, right now is a little bit different. When The Clearing House started RTP, their model is a funding defunding model. So the funds are all held in a joint account very similar to their CHIPS model. And then they've got kind of the books within RTP, it's still real time, it's still settled in real time. But those institutions need to manage their funding And so to do that, they can wire in and out of the joint account. However, wire is closed on the weekends and for a period at night. Which raises a complication that if a financial institution needs more funds during those times they have no way of getting that liquidity into the RTP system.

RTP service solved this in a really interesting way, where they provided the ability for those financial institutions to move money within the RTP books during that weekend time period.

FedNow solves this differently where they are providing a liquidity management transfer option. it allows payments to be sent between the financial institution's master accounts, so financial institutions, can use a correspondent bank or an agreement that they have, and so be able to receive liquidity that way when Fedwire is not available.

It will also support the movement into and out of the Joint account, support RTP needs as well. One of the interesting things there is the availability of that transfer. And if it's going to be only available when Fedwire is not available which adds complexities for FI’s having to manage between two services or is it going to be available all the time."