FedNow is coming. Is this real-time payments’ moment?

Next summer’s payments blockbuster

Get ready for a 2023 summer blockbuster for payments tech: The FedNow system will launch between May and July next year, the Federal Reserve announced Monday. The new system promises to modernize the way thousands of institutions move money and allow for greater use of instant payments, a category where the U.S. lags behind much of the world.

The shift to real-time payments is "inevitable," Fed vice chair Lael Brainard said Monday. Brainard's speech to a group of FedNow early adopters gave the most specific timeline yet from the Federal Reserve on FedNow’s launch.

• "The FedNow Service will transform the way everyday payments are made throughout the economy, bringing substantial gains to households and businesses through the ability to send instant payments at any time on any day," Brainard said.
• The Fed has already started a pilot program for the service. But how quickly consumers see the value of rapid payments isn’t totally in the central bank’s control.
• "Ultimately the number of American businesses and households that are able to access instant payments will depend on financial services providers making the necessary investments to upgrade our payments infrastructure," Brainard said.

The system could mark the biggest upgrade to U.S. payments tech in decades. Payments company Modern Treasury noted it's the "first new payment rail in the United States since the introduction of the Automated Clearing House (ACH) in the early 1970s."

• The ACH network handled more than 29 billion payments in 2021, valued at close to $73 trillion, according to its operator.
• The FedNow system will allow paychecks, bill payments and other transfers of money to happen instantly and at all times, whereas existing wire services shut down on weekends.
• While Cash App and Venmo facilitate peer-to-peer instant transfers, FedNow will move money between depository institutions. The Fed recently released new rules for companies, such as fintech and crypto providers, that wish to access its payment rails.

The U.S. is way behind on rapid payments. Less than 1% of payments in the country were settled in real time last year, according to a report from payments processor ACI Worldwide.

• About 1.8 billion U.S. payment transactions were settled in real time last year, according to the report, compared to 49 billion for global leader India, helped by the country's United Payments Interface.
• A group of big banks that includes Citigroup and JPMorgan Chase launched a real-time payments network in 2017 that is operated by The Clearing House. Called the RTP Network, the network processed about 41 million transactions worth $18 billion in the second quarter of 2022.
• The big banks lobbied against the Fed launching a competitor to their service, but FedNow could serve smaller institutions hesitant to sign up for the RTP system. A big question is how and when the FedNow network will connect to RTP and other systems. An FAQ on FedNow said its goal is to reach across networks: "The Federal Reserve, however, cannot accomplish interoperability for instant payments alone."
• There will also be a “last-mile” challenge in ensuring that consumers have access to the FedNow system, said James Angel, a finance professor at Georgetown University’s McDonough School of Business. ”In order to achieve the ability for all-to-all, real-time payments, there needs to be a common interface, like India's UPI, that everyone can use, or some other mechanism to ensure interoperability of the various systems already in place,” said Angel, adding that FedNow still represents a big step in the right direction

FedNow's launch could also influence the debate around a central bank digital currency. Fed Gov. Michelle Bowman said recently that FedNow could address many of the same issues as a digital dollar, and Neel Kashkari, the president of the Minneapolis Fed, has been a loud critic of CBDCs. Brainard avoided that topic in her remarks Monday, focusing instead on the ability of rapid payments to help families avoid costly fees for late bill payments or overdrawn accounts. "During the pandemic, we witnessed how essential rapid access to funds can be," Brainard said, "as many households started spending emergency relief payments on the day they were received."

— Ryan Deffenbaugh (email | twitter)

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