Blog· min March 8, 2023
FedNow, the Fed’s highly anticipated instant payment service, will launch between May and July of 2023. It’s set to deliver significant changes to fintech companies and new players in the payments space, opening up access to the Federal Reserve’s network of more than 9,000 financial institutions and adding another real time payment service into the mix alongside The Clearing House's RTP. FedNow’s core objective is to facilitate faster access to funds for both merchants and consumers to better manage their cash flow, at a reduced cost, and lower payment risk.
This presents a massive opportunity for banks and financial institutions all over the country to bring their customer proposition up to speed with the other digital services people use daily. Today, consumers can instantly stream movies, get same-day delivery through Amazon, and even get groceries delivered within an hour. However, that’s not the case for getting your paycheck. With the exception of peer-to-peer services like Zelle or Venmo, most payments (like paychecks) take several days to be processed, which can be very frustrating. Being able to make and receive payments instantly has real customer appeal and with high adoption rates expected, any bank that doesn’t sign up to FedNow risks being left behind.
Another significant driver for adoption should be the fact that the Treasury will be using FedNow to make all kinds of payments, potentially including things like social security, assistance and tax credits. If banks can’t receive these payments, then they are going to have some seriously unhappy customers.
However, getting on board with FedNow isn’t just a case of signing a contract and adhering to a new ISO specification; there’s a lot of hard work that will be required. Issues around upgrading infrastructure, processing, reconciliation and more will cause a few headaches for banks. But before you reach for the Tylenol, we’re here to offer some relief.
When FedNow launches there will be two real time payment rails available to US financial institutions, vastly widening access to real time payments across the country. Just like every other payment scheme in the US – FedACH and EPN for ACH transactions, Fedwire and CHIPS for interbank transactions, for example – FedNow will have its pair in TCH’s RTP.
And a great deal of credit should be given to RTP, if you’ll pardon the pun. RTP set the US on the path to a real time future, and five years on is dealing with some serious volumes: 49 million transactions worth $22.7bn in Q4 2022. But FedNow will move us to the next level, with its connections to 9,000 plus institutions bound to significantly increase adoption of real time payments.
Even if adoption is initially slow, ultimately FedNow will help drive the real time payment ecosystem in the US to become more resilient, competitive, and fair for all. As it evolves, so will banks, financial institutions and fintechs as they adapt to the possibilities that FedNow's wide-reaching access and connections present. Mobile front end providers, payroll providers, bill pay providers and so on will create more solutions for FedNow – enabling more use cases, which will lead to an increase in uptake.
FedNow is built for the future. It's built for 24/7, and it's built for high volumes. New solutions designed to run on the FedNow rails will be built the same way. It will also force traditional institutions to change; we may even see some household names disappear over the next 10 years if they can't adapt to it. Banks trying to build on their legacy infrastructure won't be able to survive in a FedNow world, where cloud solutions, APIs and microservices power high performance, high availability, always-on payment services.
Just like ACH didn’t drive the check into extinction, FedNow isn’t intended as a like-for-like replacement for ACH or Fedwire, or any other payment rail for that matter. FedNow bears a passing resemblance to Fedwire, as it’s a real time, irrevocable credit push system; it also has some similarities to ACH as it’s focused on retail payments, peer-to-peer payments, and other lower value payments. It’s been referred to as the Frankenstein baby of Fedwire and ACH. But FedNow is no monster! Within a few years many – if not most – US banks will be using it, which will cause seismic changes in the payments landscape.
FedNow isn’t going to cover all bases – there are many specific use cases where it doesn’t make sense to switch from ACH or Fedwire to FedNow. However, it will provide additional options. For example, employers could offer their employees the choice of sticking with their current two-week pay cycle via ACH or getting paid at the end of every day through FedNow. With increased payment limits, house buyers could make a down payment through FedNow rather than Fedwire or a cashier’s check. Some institutions might consider making the change; others might not.
To see high volumes of real time payments in the US we first require high levels of adoption. While TCH RTP is accessible to financial institutions that hold 75% of US demand deposit accounts (DDAs), and reaches 61% of US DDAs, without getting the remaining banks and accounts onto a real-time system we won't ever hit the heights of the UK's Faster Payments network, for example. But given a little time, FedNow can address this issue. The Fed already has the connectivity, and with high levels of adoption it won’t be too long before the US has a faster payment infrastructure that reaches ubiquity.
There will need to be some catalysts to persuade all banks to make the necessary investment to get onto FedNow. They may be waiting to see what others do, so it may be the innovators and early adopters that drive FedNow along. What's important, though, is that financial institutions that do want to be involved don't simply opt for the easiest solution that meets the minimum requirements. They need to build for the future when they are going to have to handle high volumes of real time payments.
As previously mentioned, the fact that the Treasury is going to be using FedNow should have put US banks on high alert. Greater education about FedNow is needed, so industry-wide efforts such as the Faster Payment Council are invaluable. Everyone needs to be clear about the potential FedNow has to improve revenues and the customer experience, but also just how much investment it will require.
However – banks can’t wait. It’s not just as simple as making the connection to this new payment rail and following an ISO specification – it’s about how banks operate around FedNow, how they do their end of day processing around it, how they reconcile around it. This is not a mere upgrade; it’s a brand-new type of payment, and it will take time. To reap the benefits of real time payments, they must be ready for FedNow now.