The official launch of the Federal Reserve’s FedNow platform on July 20 culminated a four-year undertaking by the central bank.
While the payments world didn’t change overnight, the launch has raised the potential for new use cases. I previously shared my thoughts on what financial institutions should consider in terms of real-time payments.
Now that the platform has moved beyond the pilot phase, here are more observations as FIs get a feel for FedNow and begin to identify creative ways to expedite payments in the near- and long-term.
A Slow Roll
FedNow officially opened its doors with 35 participants, though the list includes heavyweights such as Wells Fargo, U.S. Bank, and JPMorgan Chase. It has also certified large service providers including Fiserv, ACI, Jack Henry, and FIS, clearing the path for more FIs to establish connections.
Adoption of real-time payments has been a slow go historically. While The Clearing House’s RTP Network has 350 participants, it took more than five years for the platform to surpass 500 million real-time transactions. As a point of comparison, the ACH network handles 36 billion transactions annually.
It’s hard to say if FedNow will follow a similar trajectory. The real-time payments market has matured since 2017, and a wide array of infrastructure providers are building customer-facing solutions that leverage the capabilities of FedNow and the RTP network. The US Faster Payments Council has identified more than 100 potential use cases applicable to both services, with many opportunities tilted toward B2B settings.
Nonetheless, there is much work ahead to close the gap between the 35 FedNow and 350 RTP Network participants and the more than 9,000 U.S. banks and credit unions that exist. It will take time for RTP to achieve ubiquity. Some early adopters remain in “receive only” mode, compounding the challenge.
Education Matters
The FedNow message is a rather arcane one for mass-market consumption. Neither consumer nor business account holders are expected to engage directly with FedNow or the RTP Network. Rather, they will interface with service providers – typically partnered with a bank – that offer a user-friendly on-ramp to these new rails.
A recent wave of publicity (and misinformation connecting FedNow to the concept of a central bank digital currency or claims it will pave the way for government surveillance) may generate questions from customers. Banks and credit unions should equip front-line staff with sufficient information to dispel rumors and promote the opportunities tied to the platform.
Inquiries from business clients could double as sales leads, or at minimum informal market research to gauge customer demand. On the consumer side, education may serve to combat misinformation as outline how the platform is structured to monitor and deter fraud. Several FedNow participants are also updating their technology to mitigate fraud potential tied to shorter processing windows.
The Bottom Line
Regardless of the degree of immediate traction, instant payments belong on every financial institution’s strategic radar. The official launch of FedNow will give more FIs confidence to sign onto the platform and it will gain more traction over time.
The time is now to set a strategy and lay the groundwork for what is poised to become as critical a piece of payments infrastructure as ACH – even if many customers are unlikely to know it by name.
