What You Need to Know about the New Real-Time Payment Service
The FedNow Service, a new national real-time account-to-account payment service in the United States will be rolled out in July 2023. The central bank has been offering educational activities on the service through the FedNow Pilot Program since 2022, with engagement from more than 120 financial institutions and third parties.
The Fed had multiple reasons for developing its own real-time payment system. First, to increase competition in the banking industry by offering safe and efficient instant payment solutions to financial institutions regardless of their size. Second, to ensure the instant payment landscape is secure, resilient, and robust. And third, to promote interoperability on a global scale.
Features and use cases
While not all of the initial features of the FedNow Service have been released, a number of characteristics have been confirmed. The system will have core clearing and settlement capabilities and will use the ISO 20022 messaging standard. Third parties will have the option of joining as “receive only” participants to ease adoption, which will be enhanced with a request-for-payment value-added service (VAS). Other supporting features will include data security, fraud prevention, and liquidity management tools.
The new system will support numerous use cases. At the launch, only account-to-account – including personal transfers between one owner’s multiple accounts (checking, savings, brokerage, etc.), mobile wallet funding and corporate cash pooling payments – and C2B bill pay will be available. The service will be further developed to facilitate P2P, B2B, B2C, and C2B e-commerce use cases. The Fed and government agencies are considering using the new instant payment service for government and municipal payments, such as tax refunds.
The new service aims to transform the U.S. payment system. Both potential participants of FedNow and the stakeholders of other payment systems should be prepared for potential changes in market dynamics ahead of the mid-2023 launch.
Banks need to develop a comprehensive payments strategy and decide whether they want to join the Fed’s system. This decision can be influenced by their participation in the digital payments network Zelle or The Clearing House’s RTP (although the Fed indicated that the service would complement rather than replace other systems), and the services their target customers require them to offer. Second, while the fees for FedNow are relatively low, they do not include the infrastructure costs and modernization work needed to access and participate in the system. Financial institutions must decide whether to build and maintain this back-office infrastructure or to partner with a banking or core processor and participate indirectly.
How will FedNow’s launch impact current electronic payment methods?
Lipis Advisors’ research demonstrates that the effect of real-time payment adoption on other payment types will vary and depend on several factors. Banks need to consider how real-time will be used by their clients and affect their business. Some factors are beyond individual financial institutions’ control, such as whether there will be interoperability between FedNow and RTP, a key question when one considers competition between the two instant payment systems. Second, the implementation and use of request-for-payments (RfP) services: FedNow will enable RfP messaging at a relatively low cost, and if businesses see the value of using RfP, the pressure to participate in FedNow will increase. Lastly, the access models developed for non-banks to participate in FedNow are an important issue that has not yet been solved. If participation costs are high, third parties, such as merchants and payment service providers, will focus on offering card-based solutions instead of promoting real-time interbank payments.
All in all, Lipis Advisors’ payment advisors expect the launch of FedNow to have a limited effect on the migration from ACH transactions and checks to real-time payments, and essentially zero migration from card payments – at least in the short-to-medium term.
The introduction of FedNow is the most fundamental development from the Fed in the U.S. payments industry in decades, with countless opportunities for financial institutions. Whether they will be able to leverage the new service will depend on how well they prepare for the adoption of real-time payments and how costly it will be for them to participate.
R. Andrew Gómez
Andrew is a managing consultant at Lipis Advisors and leads custom consulting projects on topics such as payments fraud, ACH modernization and benchmarking, and mobile payment adoption. Andrew oversees Lipis Advisors’ database and the collection, collation, and analysis of statistics of more than 100 payment systems.