Real-time payments are already possible, so why is the Federal Reserve’s FedNow real-time payment network such a big deal? What will FedNow provide that banks and fintech companies do not have access to now?
Simply put, FedNow will create a ubiquitous real-time payment network that will break down the barriers that have currently limited real-time payment solutions for consumers and businesses alike.
The key is that FedNow will provide speed, equal access and an infrastructure that enables the private sector to build cross-platform solutions. This will add fuel to the adoption speed of real-time payment solutions currently in the marketplace, such as real-time bill pay, peer-to-peer payments and business-to-business payment solutions.
Once it is live, FedNow is promising to process payments in seconds, 24 hours a day, seven days a week, 365 days a year. These are true real-time payments, too. Participating banks must make the funds available to their customers immediately after the transaction is settled by FedNow and all transactions will be final.
The availability of a government-backed real-time payment network will have three primary impacts on real-time payments: the ubiquity of real-time payments, true cross-platform real-time payments and the evolution of payments services for both retail and corporate banking customers.
While real-time payments solutions currently exist, adoption has been slow. RTP from The Clearing House (TCH) is the only private option that has gained any traction. However, since it is owned by the 25 largest banks, few community banks and credit unions have joined since its launch in 2017 out of fear of being controlled by the big banks.
Conversely, FedNow will likely be embraced by regional banks, community banks and credit unions. Like the rollout of the ACH Network in the 1970s and 1980s, being government-backed carries assurance of all banks having equal access and costs.
The framework of FedNow will also make it easier for fintech providers to develop real-time payment services that easily connect with any financial institution. Right now, fintech payment solutions offering real-time or same-day payment options must work across a patchwork of services — Nacha Same-Day ACH, overnight checks, RTP by TCH, and the Credit and Debit rails.
Many of the direct payment solutions, such as Venmo, rely on closed-loop systems. This works great if both parties are on the same system. However, payments into or out of the closed system are much slower — often two to three additional days.
