Catalyst News

The FedNow Service and What it Means for You

by Catalyst Corporate | Sep 20, 2022

At Catalyst Corporate’s recent 2022 Economic & Payments Forum, one session, in particular, generated a lot of buzz.

Dan Gonzalez, Vice President and Director, National Accounts for Federal Reserve Financial Services, delivered an impactful presentation on the forthcoming FedNowSM Service, which will help shape the faster payments landscape as we know it.

Gonzalez’s talk addressed in greater detail how this service works, but here are some key takeaways:

The FedNow Service defined

The FedNow Service is a safe and efficient instant payment service that will provide financial institutions the ability to send and receive credit transfers for their businesses and consumers in real time.

The FedNow Service will be available 24/7/365. This is a “credit push” system, where transactions are initiated by businesses or consumers through their financial institution, and the funds are instantly posted and settled between the sending and receiving institutions. The FedNow Service will offer request for pay functionality to notify a sender of a request for payment.

Funds sent are instantly settled, so as soon as payment is received, funds become available to the receiver. The FedNow Service is a new instant payments rail, not associated with legacy payment rails, such as ACH, wires, cards or checks. This service creates the back-office plumbing to facilitate instant payments and settlement.

The FedNow Service is the mechanism that enables sending, receiving and settling instant payments; however, financial institutions will need to work with their service providers for the front-end solutions that facilitate these transactions for their members and customers.

Of course, mitigating fraud is a priority for all payment systems. The Federal Reserve is working to address this challenge through the FedNow Service and through collaboration with financial institutions and third party service providers. The service is real time and payments are irrevocable, however Gonzalez said there is a theoretical “oops button” - the ability to submit a return request through the system after the transaction and settlement occurs. Financial institutions will have the ability to block certain accounts from the service and to set thresholds with transaction minimums.

Use cases

There are numerous use cases where instant payments provide a more efficient means of delivering funds for both businesses and consumers. Among the prominent use cases are:

  • Bill pay
  • Same day or emergency payroll
  • Governmental payments – tax refunds, social security payments
  • Insurance claims and rebates
  • Brokerage account transfers

Getting ready for the FedNow Service

The pilot program has begun its testing phase for third party service providers and financial institutions. Full rollout is expected in the May-July 2023 timeframe. Just last week, the first successful test message transaction was sent between two financial institutions.

The U.S. Treasury also officially joined the pilot program, positioning federal government payments for participation in the FedNow Service.

Gonzalez said the most important step a credit union can take now is to start the conversation internally and with their trusted service providers, such as Catalyst Corporate. With the pace at which the FedNow Service is moving forward, having a plan and educating your members and stakeholders is incredibly important. Gonzalez concluded, “When the market moves into launching the FedNow Service, having a plan in place is imperative.”

Catalyst Corporate will provide additional recaps of its Economic & Payments Forum sessions over the weeks to come.