Four years after its initial announcement, FedNow, the Federal Reserve‘s instant payment service in the US, has launched.
The United States is often associated with innovation, but when it comes to the payments sphere, the country is playing catch up to other regions. For the last five years, many financial institutions have had to rely on The Clearing House (TCH) Real-Time Payment Network (RTP) rails for their payment transactions, or the Automated Clearing House. FedNow provides them with a competitive alternative.
While the RTP has seen use, evident from the $25billion in transactions in Q1’23 alone, many organisations have been hesitant to sign on due to the fact TCH was run by big banks.
Until now, banks and financial institutions in the US have been caught in a catch-22 situation. Although they appreciate the idea and theory behind instant payments, the implementation of an instant payment service into their platform is both costly and time-consuming. Both organisations taking part in the transaction can only realise the benefits of an instant payment service when they have the same technology in place. Consequently, with so many organisations reluctant to make the first move, the industry has stagnated.
It is not a case of FedNow OR RTP
Some organisations that previously offered RTP or Automated Clearing House (ACH) (another payments service) are seeing FedNow as another way in which the payments market can be evolved. One example is ACI Worldwide, the global paytech. The organisation supports connectivity to both The Clearing House’s Real-Time Payments network and the FedNow Service.
“As a service provider of the FedNow Service, ACI Worldwide demonstrates dedication to innovation,” said Ken Montgomery, Federal Reserve Bank of Boston first vice president and FedNow Service program executive. “Financial institutions benefit from the ability to offer instant payments through the seamless experience offered by service providers. These critical organisations expand the reach of instant payments and pave the way for industrywide progress.”
Playing catch up
Countries like India and Brazil, have already seen large-scale adoption with their respective instant payment services, and the US looks to replicate this success to scale its payments market.
Nacha’s, the organisation managing the development, administration, and governance of the ACH Network, president and CEO, Jane Larimer said: “Nacha congratulates the Federal Reserve on the launch of FedNow. It is a significant achievement. Nacha believes that instant payment systems (such as FedNow and RTP) and ACH, including Same Day ACH, will together meet the evolving needs of the marketplace.
“Large volumes of scheduled and recurring payments between known counterparties on known due dates–payroll and benefit Direct Deposits, bill payments, B2B payments and account transfers –will continue to be served well by ACH.
“Nacha encourages the Federal Reserve to continue to expand the operating hours of the National Settlement Service to enable other payments systems, including ACH, to settle payments at new times and days, increasing competition and reducing risk.”
A necessary update for consumers
Making comparisons to Brazil’s instant payment service, Pix, Sergio Fogel, co-president and chief strategy officer of paytech dLocal, says bringing instant payments to the US is a necessary technological update for consumers, first pioneered in the emerging markets.
“I think some Americans are naturally skeptical of a federally run instant payments system. As a result, they have voiced concerns of potential effects on the US banking system. However, many instant payment systems are already successfully up and running in several countries around the world.
“The US would in effect be following in the footsteps of other successful systems. By aligning its payments infrastructure with the latest technology and innovations that simplify cross-border payments, the US can ensure that it maintains its global commercial position.
“Instant payments were first pioneered in countries like Brazil and India to expand financial services to individuals who lacked access to traditional banking services. And, we have seen a major uptake from both merchants and consumers alike. Systems such as Pix in Brazil, have been greatly valued for their convenience, speed, and ease of accessibility. dLocal’s payment processing infrastructure has facilitated the use of Pix for both consumers and merchants, ranging from the largest tech companies to small e-retailers.”
You can’t have too many options
In the modern day, a variety of payment options is an absolute necessity for an organisation’s success. Financial Technology Association (FTA), the trade association representing finance leaders, president and chief executive officer, Penny Lee explains how FedNow can help both consumers and financial institutions: “FedNow means more consumers and businesses can send and receive payments in seconds instead of days through their financial institutions.
“Instant payments will provide additional options for consumers to pay bills on time, access their paychecks more quickly, and avoid overdraft fees and predatory lenders. It will also help businesses better manage expenses, decrease errors, and reduce costs.
“We congratulate the Federal Reserve for launching this service and support the wide adoption of FedNow by financial institutions. Looking ahead, the inclusion of leading payments companies with an attending regulatory framework will help maximise the potential of FedNow for American consumers and businesses. We looking forward to building on today’s milestone towards a broadly accessible infrastructure that meets the needs of all end users.”
The impact on cross-border payments
Marcus Treacher, executive chairman of RTGS.global, the cross-border payments solution provider, explains how the FedNow Service might influence the global financial ecosystem. He highlights its potential impact on cross-border payments and liquidity management.
“The introduction of FedNow creates exciting prospects for domestic payments, but will also offer opportunities to improve cross-border payments. This is because of the prominent role of the US dollar in cross-border payments around the world between hundreds of countries. Ensuring fluid interoperability is a challenge that many in the industry are wrestling with and FedNow will need to achieve this to harness its full potential.
“While FedNow’s primary remit is domestic, the system’s introduction is likely to create a ripple effect of benefits. It’s not just a story of improved efficiency within the US, but also one of increased influence and interoperability within the global financial ecosystem. This holds exciting potential for international commerce and international entities that interfaces with the American financial system.”