Despite the expeditious nature of applications like Venmo, Cash App, and Zelle, there remains a significant time lag when it comes to transferring funds or making payments directly from one's bank account. This delay is attributed to the absence of a real-time digital payment system under federal government ownership, which the entire banking sector presently lacks. However, this state of affairs is poised to undergo a transformative shift in the near future.
Projected to experience a Compound Annual Growth Rate (CAGR) of 27.3%, real-time transaction in North America are anticipated to surge from 3.9 billion in 2022 to 13 billion by 2027. However, despite this significant growth, North America is projected to fall behind other global regions. By 2027, Real-Time Payments (RTPs) are expected to account for a mere 5% of all electronic payments in North America, contrasting with Europe (13%), Asia Pacific (APAC) (12%), the Middle East, Africa, and South Asia (MEASA) (79%), and Latin America (LATAM) (56%), as per ACI Worldwide's report.
In the upcoming summer, the Federal Reserve plans to introduce its own real-time payments platform called the FedNow Service (FedNow). Despite trailing behind tech-oriented private sector competitors by several years, FedNow is poised to bring about fundamental changes in transactional practices within the United States. As the first and only government-backed digital instant payments system, it is anticipated to be embraced by many banks as a larger and more secure platform, capable of facilitating faster money transfers for both customers and businesses alike. Any bank in the United States, not just the major ones, will be able to offer instantaneously available cash in real-time payments to its customers thanks to FedNow.
What Is Fed Now?
The government's inaugural solution for facilitating rapid virtual money transfers between financial institutions is known as FedNow. In an ideal scenario, FedNow aims to eliminate the need for waiting several business days or enduring delays during weekends and holidays when it comes to accessing funds.
With FedNow, the vision is to enable prompt payment processing, even for significant obligations such as mortgage payments. Rather than having to schedule payments days in advance or endure lengthy processing times for checks, individuals would have the flexibility to initiate money transfers on the due date itself. This transformative capability also extends to enhancing the efficiency of business operations. For example, business owners will have the ability to send and receive real-time payments for invoices through online channels, ensuring faster and more streamlined transactional processes.
How Fed Now Works?
To enable financial institutions to provide consumers with swift end-to-end payment solutions, FedNow operates as the designated clearing service for their transactions. The key differentiating factor of this service compared to the existing platform offered by the Federal Reserve is that FedNow operates continuously, 24/7, and facilitates real-time transaction processing.
FedNow is available to over 10,000 financial institutions within the Federal Reserve's network, allowing them to leverage the benefits of this service. However, it is important to note that private money-transfer applications like Venmo and Cash App are not included in this method. The delay in transferring funds from such applications to bank accounts occurs because the bank needs to "clear" the funds, which contributes to the time lag.
Financial institutions participating in FedNow have access to a range of services tailored to their needs. These include seamless movement of funds between institutions, receipt of funds, and the option to engage in high-limit credit transactions such as liquidity management transfers and settlement service transfers.
When Will Fed Now Launch?
After recognizing that the private sector has already implemented faster payment systems, the Federal Reserve (Fed) decided to extend the deadline for the launch of FedNow. Originally slated for 2024, the Fed realized the considerable time gap between its central banking system and the speedier private payment systems adopted by several major banks. The new timeline allows the launch to occur anytime between May and July of this year. The decision was driven by the Fed's awareness of the strong consumer demand for instantaneous online transactions.
The development of FedNow has been underway for nearly a decade. The Fed's exploration of a network for rapid payments began in 2013, and in 2015, the establishment of the Faster Payments Task Force (FPTF) was initiated to devise a strategic plan. In August 2019, the Fed officially announced the introduction of FedNow and has since been conducting pilot projects in collaboration with financial institutions. This milestone follows years of extensive discussions, publication of numerous research findings, and active solicitation of public feedback.
How Important is Fed Now?
Describing FedNow as a mere game-changer would be an understatement given its potential significance. Financial institutions participating in the Federal Reserve's extensive network have long awaited a real-time system supported by the government, especially considering the vast banking landscape operating under the current, slower payments infrastructure.
At present, larger financial institutions utilize the Real-Time Payments (RTP®) network, a private service introduced in 2017 to facilitate immediate fund transfers. Among the more recent mobile-based money transfer applications, only Zelle leverages the RTP network, allowing some banks and credit unions to directly offer Zelle's services.
Financial institutions have the opportunity to embrace the FedNow system in addition to the existing RTP network, which is already adopted by over 100 financial institutions. There are differing perspectives on how FedNow will impact the private sector providing similar services, with some critics suggesting it will eventually compete with private businesses, while others believe it will act as a complementary or extended service. Regardless of the outcome, FedNow will enable thousands more financial institutions to offer their customers and businesses rapid transaction capabilities, potentially leaving a significant international impact.
Fed real-time payments will have wider reach
The nationwide availability of the Federal network will ensure that every bank and credit union in the country can access its services. Smaller banks and credit unions that previously opted not to join The Clearing House's Real Time Payments (RTP) network are expected to be attracted to the FedNow system. Regional and smaller banks have traditionally held reservations towards The Clearing House, which is owned by larger banks. As consumer and corporate demands for real-time payments increase, this competitive pressure will push banks to offer such services.
Banks will eventually recognize the potential profitability of real-time payments. While ACH and credit cards have their revenue streams, real-time payments offer a unique value proposition. Customers seek banking services that align with the requirements of the contemporary digital economy, and if banks fail to provide relevant services, customers may explore alternative options.
Fed Now will provide a quick, inexpensive payment rail for online platforms.
The legal guidelines established by the Federal Reserve for FedNow primarily focus on enabling banks to participate. However, e-commerce businesses and online marketplaces that hold accounts with participating banks can also reap the benefits as recipients of instant payments. These retailers and marketplaces would have a significantly cost-effective alternative to traditional credit and debit card payment channels if they incorporate an instant payment option for customers when making online purchases.
Digital wallet providers and payment platforms can also leverage instant payments to enhance their consumer offerings. Businesses and customers will have the ability to instantly and affordably fund and deplete wallet balances. For instance, users can swiftly transfer funds from a digital wallet to a wealth management or interest-bearing account to optimize their financial management. Similarly, they can promptly fund their digital wallets to facilitate in-store purchases without the need for a physical card.
A new central bank platform will be available for use by FinTech companies to offer cutting-edge consumer and business services.
The Federal Reserve is adopting a new approach in the development of FedNow, envisioning it as a dynamic and collaborative platform that encourages innovation and the creation of additional services, user interfaces, and back-end processing support by digital firms. This presents an early opportunity for various FinTech businesses and service providers, including payment processors, online and mobile banking platform providers, gateways and payment hubs, as well as bill pay service providers, to contribute to the growth and evolution of the Fed ecosystem. By engaging with FedNow, these entities can actively participate in shaping the future of real-time payments and expanding the range of services available to end-users.
Ending Note
Real-time payments are rapidly emerging as the future of modern digital economies. Governments and regulators worldwide are acknowledging their potential to promote financial inclusion and drive economic advancement.
This new approach represents a vital enhancement to the existing retail payment infrastructure in the country. Currently, this infrastructure faces limitations such as weekend shutdowns and occasional delays in making funds available, resulting in inconveniences for individuals and businesses. The Federal Reserve aims to address these issues by offering faster access to funds and greater flexibility in managing cash flow, all while maintaining low costs and minimizing payment risks. By introducing real-time payments, the Fed seeks to empower individuals and businesses with improved financial control and efficiency.
Call To Action
Payapt offers a comprehensive solution to facilitate your seamless adoption of the FedNow service. With Payapt's FedNow Simulator, a cloud-based subscription platform, you can experience a simulation of all the capabilities that FedNow will provide upon its launch.
By leveraging Payapt, you can enjoy the convenience of "one click payment" directly from your smartphone. This innovative platform offers a range of features that enable you to carry out daily transactions without the need for physical cash.
If you are interested in ensuring a smooth transition for your bank on this transformative journey, we encourage you to get in touch with us at Payapt. Our team is ready to assist you in exploring the possibilities and maximizing the benefits of the FedNow service. Contact us now to learn more and embark on this exciting financial endeavor.