FedNow is Coming. What Does it Mean for Your Credit Union?

After nearly a decade of development, FedNow has finally arrived. Although there are several private-sector real-time payment options currently available, including the Real-Time Payments (RTP^®) network and Zelle^®, FedNow is the first U.S. instant payment service backed by the federal government. For that reason alone, it is worth a closer look.

What is FedNow?

FedNow is a new real-time payment service that will enable participants to send and receive money anytime and anywhere, virtually instantaneously. In contrast with most other payment rails currently available, FedNow users will have 24/7 access and be able to complete payments or transfers on weekends, holidays and after normal banking hours. For example, standard ACH transfers are processed in batches and may take up to three business days to complete.

Offered through the Federal Reserve Bank, FedNow will be available to all traditional banks and credit unions, but there’s no requirement for them to join. Consumers, businesses and non-bank payment providers (like neo-banks) aren’t eligible to use FedNow directly, but they can through a participating financial institution.

This new system will allow bill payments, paychecks, government disbursements and other types of transfers and payments to move faster and at lower expense than with current solutions. According to the Fed’s website, “financial institutions and their service providers can use the service to provide innovative instant payment services to customers, and recipients will have full access to funds immediately, allowing for greater financial flexibility when making time-sensitive payments.”

Advocates say that FedNow may be a particularly compelling solution for specific, unique use cases, such as facilitating large-scale emergency government payments. If the service was available early in the pandemic, millions of relief payments could have been credited to taxpayers’ accounts immediately, rather than in the days it took to reach most people. FedNow will compete directly with The Clearing House RTP^® network, which launched in November 2017. The two services are very similar—the main difference being the transaction limit, which is $1 million for RTP and $500,000 for FedNow.

What does FedNow mean for CUs?

FedNow—along with other real-time payment alternatives available now or in the future—represents a massive opportunity for credit unions to meet their members’ evolving payment needs. The launch of FedNow makes it clear that real-time payments aren’t simply a flash in the pan, and credit unions should seriously consider offering one or more of these solutions as part of a comprehensive payments strategy.

When considering whether to implement FedNow at your institution, Co-op Chief Strategy Officer Dean Michaels urges credit union leaders to take a strategic approach.

“The key for credit unions is to look at this through your lens. Think about your member base and what kind of experience you want them to have.”

Michaels does say that initially, FedNow may make sense in certain high-urgency member scenarios, where “actual speed versus perceived speed really matters.” Such potential scenarios include property and casualty insurance claim payments, payouts to members who work in the gig economy and payment settlements for low-margin retail businesses. But for most normal scenarios, instantaneous payments aren’t required.

“These words—‘rails,’ and ‘real time’ versus ‘same day’—are terms we in the industry understand, but the general consumer has no idea what they mean, nor do they care,” Michaels says. “They simply want to know that when they send someone money for dinner, that individual will get paid. When a member ‘Zelles’ a friend or family member, there is the appearance of the payment occurring in real time. But they aren’t concerned about the behind-the-scenes machinery or ‘sausage making’ that happens between institutions.”

One real-time solution, of many

The government is rolling out FedNow in phases beginning in July 2023. The first release of the FedNow Service will provide baseline functionality that will support market needs for a range of use cases, including those growing in demand such as account-to-account (A2A) transfers and bill pay. For those institutions already enrolled in the program, the Fed began offering training beginning in April 2023.

“It’s wonderful that the U.S. is taking real time payments seriously, and the government is even stepping in as a sponsoring entity,” Michaels says. “There are many rails today, and in terms of adoption, we think this will be a slow burn over time. We really don't believe that there's going to be one rail to rule them all.”

Michaels notes FedNow’s similarity to other payment solutions currently available —like Zelle^®. Because so many members already have access to Zelle^® P2P payments through their credit union, this new option won’t be incredibly disruptive to the status quo. And it may, in fact introduce new benefits, such as broadening the availability of real-time payments to the masses, and lowering prices across the board.

“FedNow is simply another option for consumers, and your members,” Michaels says. “Down the road, one benefit we anticipate is that more competition eventually leads to price compression. So, regardless of which real-time solution you decide to align with, the costs to the credit union may improve over time.”

To sign up for the FedNow service, credit unions may take a few different routes. They can connect through their own FedLine Solutions connection (either existing or new) or leverage a service provider’s connection. Specific use cases may require a combination of both approaches.

How Co-op can help

Co-op’s payment experts are always available to help guide your credit union’s strategy and can provide education and resources to share with your staff and members, along with guidance on the comparative benefits and risks of FedNow with other real-time payment options available today.

For credit unions looking for a real-time P2P payment solution to support an overall growth strategy, Co-op offers Zelle^®, fast, safe and easy way to send and receive money with friends. Now available with optional Advanced Authentication (one-time passcode) to reduce fraud, Zelle^® is a powerful branding and engagement tool that allows credit unions to be there for members during common everyday moments.

In the meantime, credit unions should continue to monitor the real-time landscape, and develop a plan for implementing such solutions as part of a comprehensive and long-term payments strategy.

“The question is: how important is true real-time to your member base?” Michaels asks. “Zelle^® solves this problem to an extent, and dampens the pressing urgency to immediately integrate with FedNow or The Clearinghouse’s RTP solution. But the competition for member attention is fierce, and our research has shown that today’s members are financially nomadic, so, for those members who do need true real-time settlement, if they can't get it from you, they’re going to get it somewhere else. To that extent, if you don’t have a plan to offer these solutions, it will start to erode your member share of wallet and your long-term relationships. This is a real threat that can’t be ignored.”

For more information, expert advice and educational resources pertaining to FedNow, real-time payments and your credit union’s overall payments strategy, contact your Co-op representative.