FedNOW… in 2023? The Allure of Instant Payments

The Federal Reserve stirred the pot in 2018 when it requested comments on its offering a real-time payments network, since branded as FedNOW. Credit unions and community banks encouraged the Fed’s entry into the real-time market as a way to ensure widespread access to this important new capability. After an initial road show of regional town hall meetings, however, the Fed notably pulled back from the press release circuit, focusing instead on project planning and industry dialogue through groups like the Faster Payments Council.

Last week the Fed broke its silence with a 50-page Federal Register notice and an accompanying webinar outlining its progress. The information for the most part confirms the vision the Fed laid out in 2018- which is a valuable step forward in itself, particularly given some additional meat on the bones. Most notably, the Fed reaffirmed its 2023-24 timeline for release of a “minimum viable product”; going real-time takes time, apparently.

Kansas City Fed President Esther George emphasized the objective of serving the broad market, and alluded to the potential for reaching the unbanked through partnerships. She also stressed the need for FIs to begin thinking now about instant payment use cases and potential product strategies. We second this advice- the impacts of COVID-19 have made the argument for such banking services clearer than ever. They cannot be launched overnight, however, and credit unions cannot afford to fall far behind large bank (and non-bank!) competition by waiting until FedNOW’s launch before starting the process.

One key takeaway from the Fed’s webinar, unfortunately, was the absence of an important feature from the product roadmap- interoperability. The Clearing House’s instant payments solution, RTP, has been live for well over a year. Although TCH is jointly owned by 25 of the country’s largest banks, it has repeatedly signaled its desire to work with all institutions and has specifically courted credit unions. Still, the strong CU and community bank response to the Fed’s 2018 request for comments speaks to widespread discomfort with the idea of a small group of well-funded competitors owning a critical piece of industry infrastructure.

It’s worth noting that the Fed and TCH have long operated competing and interoperable sets of parallel ACH payment rails. Although the Fed didn’t mention TCH by name on the webinar, it did remark that “interoperability requires collaboration.” The current standoff sets up a game of chicken for thousands of FIs who must decide whether to align with RTP or wait for FedNOW.

Our real-time advice- subject to change, as the situation evolves- is to keep close tabs on instant payments developments, regarding market demand as well as industry infrastructure. Credit unions should be thinking ahead about how products and services leveraging instant payments could benefit their members- both consumers and small businesses. And of course we’d be happy to help you sort through these possibilities.