A deep-dive into FedNow: The big push to real-time

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With an anticipated industry launch in 2023, The Federal Reserve’s real-time payments service — FedNow — is set to be the first new payments rail to be introduced by the Federal Reserve to the United States since the 1970s. It promises to enable immediate payments for financial institutions of any size, in any community, at any time. As a result, FedNow stands to be the next big, and possibly largest yet, push into real-time payments for the U.S.

Currently, a FedNow pilot consisting of around 100 financial institutions, as well as a select group of solution providers (including ACI Worldwide) has already begun and will continue throughout the year. But this didn’t happen overnight. Let’s take a look at the evolution and growth that has led up this point as we look forward to, and beyond, next year’s launch.

Almost 50 years in the making

In the late 1960s, banking and payment experts began raising concerns about the increasing volume of paper checks used to pay bills. From there, talks around a more advanced system commenced and, within the next decade, the Automated Clearing House (ACH) came on to the scene. Throughout the years, the system that was designed to replace an antiquated one became ubiquitous with payments. In fact, it was widely-unchallenged for nearly four decades — until now.

In an age when speed is a virtue, it became clear that the current systems, such as ACH, couldn’t keep up with the increasing consumer demands for and expectations of everything to happen instantly. In a sense, there needed to be a new payments system to take the next steps. Meanwhile, the digital and real-time transformation in payments has been widespread, fast and strong. And even though the U.S. has been a few steps behind other countries such as India, the U.K. and the Asian countries, the pull of the real-time rip current is felt just the same because, at the end of the day, it’s a solution to the largest growing need: a need for speed.

Primed for real time
Driven largely by an accelerated growth in B2C and P2P payments through popular payment channels such as Zelle®, real-time has simultaneously quenched a growing thirst for instant transactions, creating greater expectations for similar speed in all payment matters.

This shift in consumer behaviors and expectations in years leading up to the 2019 announcement of FedNow made the jump to real-time make sense. But the major tipping point came in 2020 with the pandemic, as COVID-19 provided an ultimate business motivation to look at modernizing payment processes and services. Furthermore, it became clear that the behaviors we saw increase during the pandemic (the ones that begged for payments innovation) were unlikely to change post-pandemic.

Looking ahead to 2023, and beyond

The FedNow network is expected to significantly advance real-time payment schemes in the U.S., with more than 40 percent of financial institutions sending and receiving transactions directly with the federal reserve to support their ACH services, and thus the new network offering strong ubiquity and reach.

By implementing FedNow, banks can be better stewards. For users, they can offer higher levels of transparency by being able to provide real-time, up-to-date account information and reporting. Meanwhile, billers can offer their customers the ease of paying bills immediately, which in turn means that payment is also received instantly. And that’s just the beginning. With the incorporation of QR payment technology, payers can feel safer and more secure through easy, touch-free payments, which are also known to instill customer loyalty. Request to pay technology is also becoming more popular because, while being safe and secure, it is also cheaper and offers more control and visibility for end consumers and businesses.

Because of these benefits and more, financial institutions, regardless of their previous level of experience with real-time payments, will find themselves under pressure to act. 2022 will be a critical year for financial institutions to ensure they are well-positioned to implement the FedNow service and the digital 24x7 ecosystem that the service will need. Even those not participating in the pilot program will need to prepare for industry launch and develop their roadmap to real-time and the products and services that their customers will demand. Failure to do so will result in customers turning to other institutions that can offer these services.

There are still challenges in the path ahead. As the U.S., in comparison with other countries, is still in its infancy as far as real-time payment use, interoperability continues to be a challenge. In addition, different ways to pay will also bring new scams. Fraudsters are creative in their deception and real-time payments present a significant weakness: there is no time to stop a payment once it is sent. With that being said, widespread implementation of the technology will naturally solve interoperability and through community data sharing methods, help prepare banks for fighting off threats.

Overall, even with a few speed bumps, real-time is the way forward. As it stands, customers are set to adopt real-time technology faster than we could have ever expected and in order to keep up, banks must implement.

Real-time is the future of payments and FedNow will help us reach that future state. Soon, more U.S. businesses and consumers than ever before will be able to experience the benefits of real-time payments, including improved financial inclusion, reduced fees, improved cash flow and increased access to capital.

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Partner Insights by ACI Worldwide - Real Time Payments
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