With the introduction of the FedNow Service in the United States, we are about to see another turning point in the development of American payments. With the aid of this quick payment infrastructure, payments will be made in a matter of seconds. That means that payments will be extremely simple from beginning to end (reconciliation), with instant money availability and settlement finality.
The FedNow Service is set to be live in July of this year, and it has the potential to have a significant influence on U.S. payments by opening the door for more competition, innovation, and improved payment services and products.
How FedNow Works?
Through quick, irrevocable transaction settlement, the FedNow Service will enable "faster payments" by making money available to the payee almost immediately. Its primary clearing and settlement features are moreover accessible 24/7/365. Payments will be routed and settled between financial institutions via a common network in an open-loop, interbank system.
As depository institutions and other service providers may build on top of this capability, on-demand, real-time clearing and settlement between banks will pave the way for further value-added services. The FedNow Service will also give users the choice to request payment capabilities, opt in as a receiver-only participant, use tools to facilitate payment queries, and access optional fraud prevention features.
New features and improvements to the FedNow Service will be unveiled over time in segments. It will initially solely cover domestic payments and use the ISO 20022 standard.
Why FedNow Will Have a Positive Impact on US Payment Landscape?
In terms of real-time payments, the U.S. trails many other major and emerging nations, ranking 33rd for consumer adoption of real-time payments by 2027.
According to ACI Worldwide’s 2023 Prime Time for Real-Time report, the economies of the nations that have adopted real-time instant payments (also known as real-time payments or RTPs) have grown faster because of the increased availability of capital that would otherwise be constrained by ineffective payment systems.
Instant payments have numerous applications, providing the convenience and effectiveness of a nationwide instant payment infrastructure to all participants in the U.S. payments ecosystem. By enabling financial institutions, companies, and payment providers to provide quicker and more effective payment services, FedNow is anticipated to significantly expedite the global shift to RTPs. Smaller banks will now have access to RTP through FedNow, and new services like Request for Pay (RfP) will be available right away.
How FedNow will affect customers, businesses, the government, and financial institutions is as follows:
- How FedNow will Impact Consumers?
Consumers can benefit from quicker and less expensive payments countrywide thanks to real-time payment access. People now have fast access to bill payment, company returns, and insurance reimbursements.
Due to increasing competition in the end-user instant payments market, the FedNow Service will also encourage innovation for new instant payment services, resulting in better efficiency and convenience.
- How FedNow will Impact Businesses?
Organizations can increase their access to capital by using e-invoices and requests for payments (RFPs) with real-time B2B payments. Customers can promptly approve and make payment through their bank when businesses bill them directly.
Among many more business use cases for real-time payments, there are mobile product and service pickup, just-in-time supply chain payments, and big disbursements connected to operations and contingencies. And many businesses (roughly 40%) are hopeful that instant payment options could reduce the cost of financial operations.
- How FedNow will Impact Government?
The impact of FedNow on government payments to and from businesses and consumers might be revolutionary. For instance, the government might be able to accept tax refund payments and immediately provide tax refunds.
Not only does this increase convenience for all parties, but it may also have an impact on the tax-to-GDP ratio in the United States. In 2021, the tax-to-GDP ratio in the U.S. was 26.6%. According to OECD data, the average tax-to-GDP ratio among OECD countries in 2021 was 34.1%. Real-time payments would lessen the need for cash, allowing the government to formalize more of the black market and raise more revenue through taxation.
- How FedNow will Impact Financial Institutions?
With the introduction of FedNow, it is anticipated that more people and businesses will have fair access to fast payments technology, including smaller community banks. FedNow will stimulate more competition in the payments sector and innovation in the creation of new payment solutions by lowering overall payment processing fees for banks and other non-bank financial organizations.
The widespread use of FedNow will increase access to quick payments for financial institutions, lower the cost of payment processing for financial institutions of all sizes, and provide smaller banks more access to the technology.
The ability to send and receive rich data, including RFP and non-value messages, will be available to financial institutions. The security of instant payments will be guaranteed by compliance with ISO 20022 requirements, industry standards, payments authentication, and fraud protection best practices.
Ending Note
Although the United States may be a latecomer to the fast payment industry, the imminent introduction of the FedNow Service could be significant. The U.S. central bank-backed new fast payment rail will disrupt the existing payments sector, open new doors for innovation, and provide the groundwork for brand-new consumer and business services that will power the digital economy.