With the imminent public launch of FedNow, the Federal Reserve‘s instant payment service, we sought insights from the fintech industry to gauge their sentiments and assess the service’s potential impact.
FedNow is described as the US equivalent of the UK’s Faster Payments Service, Brazil’s Pix, and Australia’s New Payment Platform. The instant payment service operates around the clock and does not impose restrictions on weekday transactions prior to a certain time. FedNow aims to provide a safe and efficient instant payment service for financial institutions across the US.
Two years following FedNow’s announcement in 2019, a pilot programme kicked off in 2021, onboarding over 110 organisations to test the service. A key objective in selecting participants for the pilot was to ensure diverse representation across financial institutions. This was in addition to service providers, connection types, settlement arrangements and experience levels.
On 15 March 2023, the Federal Reserve announced that the FedNow Service would finally launch in July 2023.
Should people be excited?
Smaller banks will now have access to real-time features only previously available to fintechs and larger banks. Services like Request for Pay will be available from day one.
The US recorded more than 1.8 billion real-time transactions in 2021. This resulted in cost savings of $648million for businesses and consumers, in turn, helping unlock $1.4billion of additional economic output. This number will only grow as more banks and organisations sign up for the FedNow service.
Delving into why this can be so beneficial, Sara Seguin, principal advisor on fraud and identity risk, Alloy, the fintech automation platform, says: “The launch of FedNow is the first major new payment capability delivered by the Fed in multiple decades, representing a major move toward payments modernisation.
“It may also allow more financial institutions, community banks and credit unions to take advantage of real-time payments, which larger banks have been utilising over the past few years.”
The ACH of instant payments
Sharing similar optimism to Seguin, Jessica Cheney, vice president – head of product management and digital banking solutions at Bottomline Technologies, the paytech, says: “The sheer jumps in volume of banks that will have access to a real-time or instant payments network will lead to game-changing growth in adoption.
“The launch of the FedNow service will also remove the ‘let’s wait and see’ excuse some banks have used when it comes to real-time payments. Many until this point have seen RTP has only in the purview of the largest banks in the US. (The Clearing House member banks were the initial drivers of RTP – those member banks are among the largest in the US).
“What the launch of FedNow does – is make real-time/instant payments mainstream in America. The Fed and Nacha launched ACH and the direct deposit campaign in the mid 1970s and that helped make that mainstream – today 94 per cent of Americans get paid this way. FedNow has the potential to do the same thing for real-time/ instant payments.”
There will be hurdles
The launch won’t be without its problems. Organisations will need to decide whether they want to switch to FedNow from their previous transaction providers. Nikolay Denisenko, co-founder and CTO at neobank Brighty App, explains: “The Federal Reserve might face some tough competition. RTP, another instant payment system by The Clearing House Payments Company, has been around since 2017 and already has a strong foothold in the market.
“It’s definitely going to be interesting to see how FedNow carves out its own space and proves itself as a better option.”
Another challenge in uptake will be because legacy technology is still in use. The US has historically lagged behind other countries when it comes to paytech innovation. Evidence of this is in the fact some smaller banks in the country are still using tech so old, that transferring to FedNow will take a lot of time and resources.
Joseph Camberato, CEO at NationalBusinessCapital.com explains: “One potential challenge will be ensuring the system’s ease of use for customers and its integration with banks. Many banks, especially smaller ones, have outdated systems and lag behind in technology. It may not be a simple task for them to integrate a new system into their existing infrastructure.”
Not all small banks will be facing this issue. Others, however, simply don’t see the benefits according to Marcia Klingensmith, the founder and CEO of fintech consulting firm FinTech Consulting LLC, as she shares: “What I’m finding by talking to small and mid-size banks, is that even though the Fed has done a great job of providing education, most smaller banks don’t have the capacity to pay attention to this as a trend. They don’t see the relevance, and don’t have people who are dedicated to figuring it out – no product managers or innovation managers.”
Started from the bottom now we’re here
Though it will have its challenges, many organisations are optimistic about the launch of the instant payment system. Organisations that took part in the pilot programme and/or completed testing and certification for the service explain why they can’t wait for July 2023.
Craig Ramsey, head of real-time payments at global paytech ACI Worldwide, said: “ACI Worldwide is among the first in the payments industry to complete testing and certification for the FedNow Service.
ACI Worldwide is proud to have been a pilot participant since the very beginning, collaborating closely with the Federal Reserve FedNow team to support development of the service.
“This includes being provided early access to the platform so our engineers can begin testing against the solution. As we look ahead to July, we are delighted to help financial institutions onboard to the service. Our pre-tested solutions are ready to deploy for customers. Whether they are looking for on-premise software or a SaaS platform, we’re ready.”
Barry Rodrigues, EVP of Finastra’s Payments Business Unit said: “It has always been important to Finastra that we empower financial institutions to stay ahead of market developments as consumers and businesses now expect instant payments to the norm.
“The FedNow Service enables new avenues for elevated customer experiences and unlocks revenue-generating opportunities that are critical to the success of institutions across the country.”