By Patti Murphy
Federal Reserve Chairman Jerome Powell told lawmakers, "We will have real-time payments in this country very soon. That's a good thing." This was in his semi-annual report to Congress on March 8, 2023. Then on March 15, the Fed made it official, disclosing that its FedNow service will be open for business beginning in July.
FedNow is a new set of payment rails operated by the Federal Reserve banks and available to any financial institution with access to the Fed. It is designed to complete payments nearly instantaneously.
"With the launch drawing near, we urge financial institutions (FIs) and their industry partners to move full steam ahead with preparations to join the FedNow service," said Ken Montgomery, the Boston Fed first vice president who has been spearheading the FedNow project.
"The launch reflects an important milestone in the journey to help financial institutions serve customer needs for instant payments to better support nearly every aspect of our economy," added Tom Barkin, president of the Richmond Fed.
FedNow is joining RTP, a real-time payment network developed by The Clearing House back in 2017. Both only enable credit payments, for now. Both also impose transaction caps. RTP won't handle transactions above $1 million. The Fed has set a lower transaction limit of $500,000 for FedNow.
Another difference is that FedNow will be available to any of the 10,000-plus FIs that already access the Fed through its FedLine network. "FIs can leverage the connectivity they're already using," said Keith Riddle, CEO of the Americas at banking solutions provider BankFI. Industry insiders expect it will be years before all 10,000 FIs are using FedNow, but they insist that interest is strong.
"We're seeing tremendous demand from our clients to join FedNow," said Parag Rohan Jain, vice president and general manager for real-time payments at Fiserv. Many already link to RTP, he added.
Even though TCH is not exclusive to its 26 owner banks (all among the largest in the world), many smaller FIs are expected to opt for FedNow.
"A lot of banks are just a lot more confident with integrating with the Fed," said Tede Forman, president of payment solutions at Jack Henry. They already have master accounts at the Fed, which makes settlement easier than it would be on RTP, which would require establishing some kind of settlement account with TCH.
At last count, 312 FIs were active on RTP. All of those FIs are receiving payments; far fewer are sending payments across the network. "Sending is a lot more complex," Riddle said. While 312 may seem a small number compared to potential FedNow users, those FIs account for 65 percent of demand deposit (checking) accounts in the United States, according to TCH.
"Any bank or credit union that wants to can join RTP," said Russ Waterhouse, executive vice president for product development and strategy at TCH. Most do so through third-party service providers; only about 20 banks have direct connections to RTP, he said.
In the fourth quarter of 2022, FIs used RTP to move 49 million payments valued at $22.7 billion, a TCH spokesman said. He added that both the volume and value of payments sent through RTP are growing in excess of 10 percent, quarter-over-quarter.
Think of FedNow as Venmo meets the automated clearing house (ACH) network, except there's no lag between the transfer request and posting of a transaction as the money moves from bank account to bank account in real time.
Some experts expect real-time payments to undercut the need for the ACH, which is a store-and-forward network with transactions settled at different times during the day.
"The traditional ACH will be dead once RTP and FedNow are fully operational," Tim Astanov, vice president, product, at TabaPay predicted. In 2022, the ACH network carried 30 billion transactions valued at $76.6 trillion, according to Nacha, which manages the ACH.
Wire transfer volume could dissipate, too, Astanov suggested, given the ease and speed with which transactions will be completed using RTP and FedNow.
Forman offered a similar assessment. "Over the next three to five years you're going to see a lot of [the] displacement of other types of payments," he said. "We really think this [real-time payments] will bolster deposit acquisition, payment orchestration, and competition in the payments industry at large."
A small army of financial technology firms has brought to market solutions that make it easy for FIs to link to real-time payment networks. "The biggest challenges to financial institutions involve the technological and operational complexities of setting up connections and maintaining settlement accounts," Jain said. That's where the core processors and other technology providers come in.
Fiserv built a gateway, called NOW, that supports access to real-time payment networks. The company describes NOW as real-time money movement "beyond the point of sale." Initial applications have included bill payment, person-to-person and account-to-account (A2A) transfers.
Research shows consumers and small businesses alike are eager for real-time payments. Grand View Research estimated the global real-time payments market totaled $13.55 billion in 2021. Researchers there expect that total to grow at a combined annual rate of 34.9 percent through 2030.
A 2021 survey by the Fed found nearly three-quarters of micro businesses and 60 percent or more of larger businesses believe real-time payments will help them better manage cash and working capital. And 54 percent percent of small and midsize businesses surveyed by Ingo Money in 2021 said they would pay a fee to receive instant payments.
The Boston Fed published an analysis in February, suggesting lower-income households could save billions of dollars a year in overdraft fees if they received money (like paychecks) instantly and in turn paid billers instantly.
"I think that's where it's going to play well first," with consumers, said Russ Waterhouse, executive vice president for product development and strategy at TCH. "It gives consumers more control over their finances."
Also illustrating consumer demand for real-time payments, a 2020 survey by the consultancy Aite-Novarica found 88 percent preferred to make A2A payments in real time. Even more telling, 74 percent said they would switch accounts to a financial institution that offered real-time payments if their FI did not.
Bill payments are expected to dominate the migration of transactions to real-time networks. "Bill-pay is a significant use case for consumers and small businesses," Riddle said. But there are other obvious use cases. "The use cases we're seeing on RTP are pretty compelling," Waterhouse added.
The top four use cases on RTP are digital wallets, A2A transfers, instant payroll and earned wage access (where workers can access a portion of already earned wages), and gig economy pay (think Uber drivers and Grubhub payouts).
The card networks are doing something similar, Waterhouse noted. Both Mastercard and Visa offer push-to-card payments, known as Mastercard Send and Visa Direct, that are especially popular with gig workers. The two companies use their proprietary networks to move funds from one person's (or company's) bank or mobile wallet account to a payee's debit card account, usually in a matter of minutes or hours. While fast, the money does not move in real time.
Ron Herman, CEO at Sionic and a member of the Faster Payments Council, an industry group that has been guiding the transition to real-time payments, is betting POS transactions will also migrate to real-time networks. "We have built a POS integration platform that will be ready for testing in April," Herman said. In January, Sionic divulged an agreement with payments technology company SpacePointe creating a pay-by-bank service that will enable a merchant to accept payments that get instantly transferred from customers' bank accounts to merchants' bank accounts.
SpacePointe merchants will use Ekikart, a mobile POS system developed for small business and white labeled by SpacePoint. SpacePoint expects to enable the new payment capability across "at least forty thousand merchant locations in the next 18 to 24 months," said Sayu Abend, the company's CEO.
Business-to-business payments are the next frontier for real-time payments. It's taking more time because B2B payments are more complex, and there's a higher risk profile, stated Aparna Girish, vice president of product at TabaPay. TCH created a message format, known as request for payment (RfP), that could help move B2B payments into the real-time era, and the Fed is said to be working on a similar capability.
Because real-time networks are based on a credit-push model, a consumer (or business) cannot give a biller permission to debit their bank account, as they would when paying by card or ACH. It's a feature devised to protect account holders from fraud. TCH also uses tokenization to secure payments. "We think there's a lot of security we can bring to the ecosystem," Waterhouse said.
With RfP, a biller can send a request for payment directly to a customer's FI through the network, whereupon the customer gives the FI the okay to send a payment. Fiserv's Jain describes it as "a prompt for a credit," that can be sent to consumers as well as trading partners. "We think [real-time payments] is really going to gain a lot of traction with small businesses once RfP becomes more common," Jain said.
Patti Murphy is senior editor at the Green Sheet and self-described payments maven of the fourth estate. She also is co-host of the Merchant Sales Podcast.
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