By Roy Urrico
This past March, The Federal Reserve announced that its FedNow Service, the long-awaited instant payment system, will be available for all participating financial institutions to use starting in July 2023. The system will allow bill payments, money transfers such as paychecks and government disbursements, as well as other consumer activities, to move more rapidly and at lower cost, according to the program’s goals.
The Federal Reserve plans to provide access to the service through its FedLine network, which presently serves more than 10,000 financial institutions. In addition to preparing early adopters for the July launch, the Federal Reserve said in the March announcement it continues to engage a range of financial institutions and service providers to complete the testing and certification program and implement the service throughout 2023 and beyond.
During the first week of April, 2023, the Federal Reserve began the formal certification of participants for launch of the service. Early adopters of FedNow Service (in July) will need to complete a customer testing and certification program to prepare for sending live transactions through the system.
Certification encompasses a comprehensive testing curriculum with defined expectations for operational readiness and network experience. In June, the Federal Reserve and certified participants will conduct production validation activities to confirm readiness for the July launch.
"We couldn't be more excited about the forthcoming FedNow launch, which will enable every participating financial institution, the smallest to the largest and from all corners of the country, to offer a modern instant payment solution," said Ken Montgomery, first vice president of the Federal Reserve Bank of Boston and FedNow Service program executive. "With the launch drawing near, we urge financial institutions and their industry partners to move full steam ahead with preparations to join the FedNow Service."
Montgomery noted that availability of FedNow Service is just the beginning, and growing the network of participating financial institutions increase the availability of instant payments for consumers and businesses across the country.
In January 2021, the Federal Reserve announced that some 120 organizations began participating in the FedNow Service Pilot Program. The program supported development, testing and adoption of the FedNow Service, as well as encouraged development of services and use cases that leverage FedNow functionality.
Kirsten Lemke, managing director, payments - Americas, for financial technology company Finastra, one of the organizations participating in the FedNow Service Pilot Program, provided Finopotamus with what FedNow Service could mean for financial institutions in general and credit unions specifically.
Getting Real about Real-Time Payments
“Finastra has to make alterations from a technology perspective so that we're prepared to support 365 days a year transactions that will be moving and settling within seconds,” said Lemke.
Lemke explained not all credit unions currently utilize real-time payments (RTP) from The Clearing House, a RTP platform that launched in November 2017 that all federally insured U.S. depository institutions are eligible to use. At last count, less than 60 credit unions are participating in the RTP network.
“I think most smaller institutions, including credit unions, have really been holding off. Because when you look at the RTP solution, there is a different funding model that is required,” explained Lemke. RTP entails a pre-funding of any transactions sent through the network.
“Whereas if you look at what the Fed is building, they are really allowing these smaller organizations, smaller credit unions, to leverage whatever relationship they already have with the Fed for funding,” said Lemke. According to the Federal Reserve, at the most fundamental level, the FedNow Service will provide interbank clearing and settlement that enables funds to be transferred from the account of a sender to the account of a receiver in near real-time, and at any time, any day of the year.
Lemke, noting eight of the 120 organizations going through the FedNow Service pilot process were credit unions, thinks all credit unions should consider the benefits. “If you think about the younger generations today that are really focused on immediate payments, there is an expectation that both businesses and individuals want to receive their money as quickly as they possibly can.”
Latching on to members’ needs and expectations could determine future accountholders, suggested Lemke. “Credit unions really need to continue to keep in mind what members are going to be expecting and what they want from the credit union. They do need to be focused on (FedNow) right now. They may not need to be one of the early adopters, but come July we are going to see a lot of transactions flowing. They need to be considering making decisions in the next probably six to 12 month timeline.”
Reaching All Financial Institutions
Lemke pointed out Finastra has payment solutions for the credit union market to allow them “easy plug and play” options to accept FedNow transactions. “We really look at it as two pieces here. We have the receive side, I would recommend that all credit unions move forward from a receive perspective. This allows any of your membership to then receive those (FedNow Service) transactions that are coming from other institutions.”
Then of course is the second component, the send side, which becomes a little bit more complicated, according to Lemke. “More issues that you need to focus on surrounding potential fraud. Transactions are instantaneous and they are irrevocable. When you send and it is irrevocable, that creates other potential concerns.”
Lemke added, “Financial institutions that come onto FedNow [Service] have the ability to transact with any other (financial institution) that is within the FedNow ecosystem. We will see a point in time in the not terribly distant future when all institutions will be connected through FedNow. They might not all decide to do send, but I think that we will see almost all institutions decide that they need to be receiving those transactions.”
According to The Clearing House (TCH), the RTP network currently reaches 65% of U.S. demand deposit accounts (DDAs), pointed out Lemke. “But the anticipation is that a 100% will be reached through the use of FedNow. So, I think it is important for credit unions to start to focus on allowing their membership to have access to their funds immediately from all of these other institutions that will join the (FedNow) network.”
Overcoming Real-Time Hesitancy
“Credit unions have been more reluctant to put their toe in the water for (real-time payments),” suggested Lemke. “In general, credit unions have taken a more wait-and-see approach. We are having conversations with credit unions. There's excitement among credit unions, but I think their risk tolerance in general tends to be a little bit lower than some of the commercial, and smaller community banks, for example, that they would potentially compete against.”
Lemke recalled a client that initially turned on real-time payments through TCH. “They were anticipating five to 10 transactions. They had more than a thousand transactions from RTP the first week they turned it on in just a receive-only capacity. That is what happens when you are on the network, and anyone can be sending you those (real-time) transactions.”
Therefore, Lemke advises if credit unions if they do nothing else, they need to prepare to receive FedNow Service transactions. “Because their members are going to want to get their money as quickly as possible. If their credit union member needs real-time payment access, (credit unions) should be providing that, or they are going to lose that member to some other entity that can provide them with real-time payments.”