By Glenn Wheeler, Catalyst Corporate VP of Payments Products & Innovations

The payments industry is ever-changing. There is a growing need for faster, seamless payments as new technology and competitors emerge. Compared to current fintech solutions, a funds transfer on existing payment rails may take hours or up to a couple days to settle and post to a customer’s account. Until recent years, however, there had been no united payments industry effort to provide additional alternatives for instant transactions. All of that is now on the cusp of change.

The Federal Reserve plans to launch its highly anticipated real-time payments system, the FedNow℠ Service, in July 2023 – a step that will modernize the current infrastructure and ensure that instant payments become widely available to all. As the first, and only, digital instant payments system created, developed, and backed by, the Federal Reserve, this new service will be a “game changer.” With the launch of the FedNow Service, credit unions and banks will have access to a secure, neutral platform to efficiently transfer money to consumers and other businesses. 

The wait is over

FedNow Service payment transactions will occur immediately, alleviating wait times and boosting satisfaction for members with time-sensitive needs.

From a back-end perspective, this means financial institutions will need to develop a strategy to support both existing and instant payment transactions. The FedNow Service will provide 24x7x365 processing with features to support payment integrity and data security. Different than existing legacy payment rails – such as ACH, wires, cards and share drafts – financial institutions should identify holistic payment solutions to support both legacy and instant payment transactions. The FedNow Service will expand payment capabilities, giving financial institutions additional ways to serve their customer base.

The FedNow Service is open to all financial institutions in the United States, Catalyst Corporate included, that operate within the Fed’s network. Private money-transfer apps have been limited to using legacy payment rails to facilitate transactions. One reason is current payment networks were not built to instantly send and receive these transactions. Functionality and technology have been key drivers of the FedNow Service design to meet the demands of modern society.

Supplying the demand

According to a 2021 study from Mercator Advisory Group, “45% of consumers conducted or received an instant payment,” indicating heavy consumer demand – a notion not lost on the Fed. Although their initial rollout was set for 2023 or 2024, the Fed accelerated its launch date based its prioritization within an instant payments solution for domestic transactions.

The Fed made its initial announcement of the FedNow Service in August 2019 and began conducting pilot testing with financial institutions in the fourth quarter of 2022. The pilot phase has over 120 organizations, including Catalyst Corporate and the U.S Treasury, contributing to the development, testing and adoption of the FedNow Service.

Use cases

Instant payments provide an efficient means of delivering funds for both businesses and consumers. The initial release of the FedNow Service will provide baseline functionality that will support market demand for a range of use cases, including those gaining traction, like account-to-account (A2A) transfers and bill pay. Subsequent releases of the FedNow Service will implement additional features to support even more instant payment use cases. Among the prominent use cases for instant payments are:

• Same day or emergency payroll
• Insurance claims and rebates
• Brokerage account transfers
• Government-issued payments, such as tax refunds and social security payments

Given the increasing demand, the FedNow Service will enable thousands of financial institutions nationwide to send, receive and settle instant transactions for consumers and businesses. At a minimum, many financial institutions are expected to onboard to receive transactions following the launch of the FedNow Service and the implications are sure to be widespread.

Catalyst Corporate aims to keep you, and your credit union, informed of the latest faster payments developments. For more need-to-know information, join us at one of our in-person or virtual workshops this year.  Register today to reserve your spot.