In July 2023, the U.S. Federal Reserve launched a new instant-payments rail called “FedNow” in an effort to modernize the country’s payment system. Originally launched with 41 banks and 15 certified service providers, FedNow payments will settle directly in central bank accounts.

Instant payments (or real-time payments) have increased in popularity driven by consumer and merchant demands for quicker, more efficient, secure, and cost-effective payment solutions. Yet what

will the FedNow instant payment scheme mean for the likes of other payment rails, such as credit cards, and payment networks, including Visa and Mastercard?

Use Cases of Card Rails in Instant Payments

The underlying network infrastructure supporting card-based payments, commonly referred to as card rails, are a cornerstone of the modern financial system. These rails, powered by payment networks like Visa and Mastercard, enable the seamless flow of funds between buyers and sellers, providing the foundation for various payment use cases, including instant payments.

There are a number of important use cases around the use of card rails in instant payments, including:

●      Infrastructure and Interoperability: Card rails have a well-established infrastructure that connects financial institutions, payment processors, and merchants worldwide. This extensive network allows for interoperability, enabling instant payments across borders, currencies, and platforms. By leveraging the existing card infrastructure, businesses can tap into a vast ecosystem of payment providers, expanding their reach and customer base.

●      Speed and Convenience: Card rails offer exceptional speed and convenience, making them ideal for instant payment use cases. When a customer initiates a card-based payment, the transaction is processed and authorized within seconds, ensuring a seamless experience. Whether it's in-store, online, or through mobile devices, the ubiquity of card acceptance allows consumers to make instant payments effortlessly, anytime and anywhere.

●      Security and Fraud Prevention: One of the key advantages of card rails is their robust security features. Payment networks employ advanced fraud detection mechanisms, such as tokenization and encryption, to safeguard sensitive customer data and prevent unauthorized access. The inclusion of real-time transaction monitoring and authentication protocols ensures a secure environment for instant payments, instilling confidence in both consumers and businesses.

●      Integration with Emerging Technologies: Card rails are adaptable to emerging technologies, further enhancing the capabilities of instant payments. For instance, the integration of contactless payments with near field communication (NFC) technology allows users to make instant payments by simply tapping their cards or mobile devices. Moreover, the rise of digital wallets and mobile payment apps has leveraged card rails to enable instant peer-to-peer transfers, making splitting bills or reimbursing friends effortless and instantaneous.

●      Innovation and Future Possibilities: The continuous evolution of card rails fuels innovation in the instant payments landscape. With advancements like real-time payment networks and open banking initiatives, card rails are expanding their capabilities to offer instant payment solutions beyond traditional card-based transactions. This opens up possibilities for use cases such as person-to-person transfers, instant merchant settlements, and real-time bill payments, transforming how individuals and businesses transact.

Predominant infrastructure

Cards have been the dominant payment system for many years and with good reason. Cards have a loyal customer base and commonly accepted liability framework, backed up by a huge, well-established network infrastructure. Nevertheless, instant payment schemes like FedNow have been predicted by some to put competitive pressure on card payment networks.

Card networks and processors have started to reposition themselves as a result. According to leading international consultancy EY, MasterCard is actively building on core real-time payment rails, while Visa is focusing on building overlay services through fintech acquisitions.

Any switch away from card payments is not going to happen overnight due to the prevailing infrastructure of credit cards; especially if the likes of MasterCard and Visa are intent on joining the innovation of fintech together with the power of its predominant network.

HPS provides the technology behind Instant Payments and Cards Rails and has developed several proven use cases. To learn more about HPS successful instant payments stories, please contact sales@hps-worldwide.com.