By Pete Major, Vice President, FinTech Services
I vividly recall the first time I made a debit card purchase at a Chevron gas pump (yes, I’m that old). Finally, someone combined the flexibility of paying at the pump with a credit card and the purchase magically deducting from your checking account. I feel like FedNow has the potential to bring a similar magical experience to your membership.
What is FedNow?
FedNow is a new instant payments network from the Federal Reserve. It launched in July 2023 with 35 banks and credit unions, 11 settlement agents and liquidity providers, and 16 technology service providers. It provides push payments in near real time and operates in a 24x7x365 mode. It’s a bit of a combination of ACH and wires but it’s faster, supports only push payments, operates round the clock, and transactions are final and irrevocable. Funds settle between financial institutions instantaneously and transaction limits max out at $500,000, but most credit unions will start out at $100,000.
Why should credit unions care?
The world is moving faster. Okay maybe not the world, but certainly the technology world. Younger generations expect an instant experience. Not just faster payments, but instant payments. This is why when someone is transferring money from their Apple Pay or Venmo account to their checking account, it says, “do you want to pay a certain percentage to get that now?”, versus waiting one to three business days. How many of your members would say yes to that prompt?
FedNow gives you the ability to deliver instant payments to your members. It allows you to compete with the larger regional and mega banks that have already connected to these networks. It shows your members that your credit union is available whenever and wherever they need you and more importantly, that your members will receive and have access to their funds when and where they need them.
Will everything move over to FedNow right away?
Most likely not. FedNow will likely have limited transaction volume in the first few years. But, if businesses consider the cost and features to be reasonable and comparable, why wouldn’t they use FedNow versus FedACH?
Do they want to pay their vendors or workers instantly? No problem. Do they want to pay these same groups after hours, on the weekend, or on a holiday? Done. FedNow keeps businesses’ vendors and employees happy, it’s another selling point for their business, and it’s a great retention tool. The same concept applies to your credit union and your members.
What’s likely to move over to FedNow first?
Financial institutions will likely start out as FedNow receivers. So, you’ll be receiving transactions such as payroll, account-to-account transfers, time-sensitive payments, and vendor payments. Over time, we expect more FedACH and FedWire transactions will move over to this new system as it gains additional traction and features and the transaction limits are raised. Financial institutions will become FedNow senders as the send technology and fraud tools mature and are more widely available.
Is FedNow the only game in town?
FedNow isn’t the only instant payments network between financial institutions. The Clearing House (TCH), owned by a consortium of large banks, also operates the Real Time Payments (RTP) network. Launched in 2017, RTP has over 280 banks and credit unions participating in the network.
Each instant payments network has differentiating features, and service providers point out the differences on their websites. But with the U.S. Department of the Treasury’s Bureau of Fiscal Service participating in the FedNow network, you can be sure the Fed is hoping to have treasury payments (i.e. social security and veterans payments) sent over these new rails. That will certainly speed the adoption of FedNow. Even a few TCH owners are early adopters of the new FedNow system.
What is MDT’s plan for instant payments?
Through our JHA PayCenter service, we already offer credit unions the ability to receive RTP payments and send/receive Zelle P2P payments. We’re launching a beta for FedNow through Jack Henry’s PayCenter at the end of this year and plan to offer that service to our clients in 2024. If you’re interested in learning more about JHA PayCenter, please don’t hesitate to reach out to us. As always, we’re committed to keeping you and your credit union connected to the latest payment offerings.