Everything You Need To Know About FedNow Forbes Technology Council
Zareef Hamid
Forbes Councils Member
May 30, 2023, 09:15am EDT
Zareef Hamid, Founder of Velwire and Advisor to BCG.
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We are about to witness another turn in the evolution of U.S. payments with the launch of the FedNow Service in the U.S. This instant payment infrastructure will harness speed, data and communication to enable payments in seconds. That means immediate funds availability and settlement finality to add extreme simplicity to payments—from start (initiation) to finish (reconciliation).
The launch of the FedNow Service, which is slated for July of this year, could have monumental impacts on U.S. payments—and will pave the way for increased competition, greater innovation and enhanced payment services and products.
The Rush Toward Real-Time Payments
The U.S. lags behind many other developed and emerging economies when it comes to real-time payments, ranking 33rd for consumer adoption of real- time payments by 2027. And it’s not alone. Many leading economies are far behind in moving to real-time payments, including the U.K., Germany, Canada, France and Italy. These countries rank within the top 10 global economies by GDP but all rank below the top 15 economies for consumer adoption of real-time payments by 2027.
Comparatively, India’s unified instant payment system, Unified Payments Interface (UPI), catapulted real-time payment transactions in the country to 89.5 billion in 2022—representing 76.8% year-over-year (YoY) growth. The second biggest market globally is Brazil, where real-time transactions totaled 29.2 billion in 2022, equaling a whopping 228.9% YoY growth.
Developed countries have taken note of the enhanced financial inclusivity and economic growth experienced by leaders in interoperable real-time payments, and now the race is on to catch up.
How FedNow Works The FedNow Service will facilitate “faster payments” via instant, irrevocable transaction settlement, making funds available to the payee in near real time. Additionally, its core clearing and settlement features are available 24/7/365. As an open-loop, interbank system, payments will be routed and settled between financial institutions via a shared network.
This on-demand, real-time clearing and settlement between banks will open the door to additional value-added services as depository institutions and other service providers will be able to build on top of this capability. The FedNow Service will also provide optional fraud prevention tools, the ability to opt-in as a receive-only participant, tools to support payment inquiries and the ability to request payment capability.
The FedNow Service will be introduced in phases, with new features and enhancements released over time. It will utilize the ISO 20022 standard and only cover domestic payments to start.
FedNow Vs. The RTP Network
While FedNow and the RTP network operate similarly and both have a 4.5- cent cost per transaction, there are a few key differences.
• The RTP network, from The Clearing House, has been processing real- time payments since 2017 while FedNow is currently being piloted by roughly 100 participants before its official release in July.
• FedNow will have a transaction limit of $500,000 compared to RTP's $1 million.
• RTP operates under a consortium of large banks, while FedNow is operated by the Federal Reserve Bank.
Backed by the Federal Reserve Bank, FedNow will offer liquidity management: Participating banks can transfer funds between their FedNow account and their Federal Reserve master account (or source liquidity from another financial institution) to ensure they can continuously process real-time payments.
FedNow’s liquidity management capabilities and broad market reach will likely level the playing field and foster healthy competition in the space, promoting less expensive and more secure real-time payments.
Making The Case for Instant Payments The use cases for instant payments are broad, offering all parties within the U.S. payments ecosystem the convenience and efficiency of infrastructure for nationwide instant payments.
Real-Time Benefits For Consumers
Access to real-time payments enables consumers to enjoy faster and less expensive payments nationwide. Individuals can pay bills, receive refunds from businesses and receive insurance reimbursements instantly.
The FedNow Service will also spur innovation for new instant payment services, yielding greater efficiency and convenience from increased competition in the end-user instant payments market.
Real-Time Benefits For Businesses
With real-time B2B payments, organizations can maximize access to capital via e-invoices and requests for payments (RFPs). Businesses can bill customers directly and customers can instantly approve and send payment from their bank.
Business use cases for real-time payments include mobile pickup of products and services, just-in-time supply chain payments and operations- and contingency-related large disbursements, among many others. And many businesses (roughly 40%) are hopeful that instant payment options could reduce the cost of financial operations.
Real-Time Benefits For Government FedNow could have a groundbreaking impact on government payments to and from businesses and consumers. For example, the government could potentially receive tax return payments and issue tax refunds instantly.
Not only does this provide greater convenience for all parties, but it could have implications for the U.S.’s tax-to-GDP ratio. In 2021, the tax-to-GDP ratio in the U.S. was 26.6%. According to OECD data, the average tax-to-GDP ratio among OECD countries in 2021 was 34.1%. Real- time payments would help reduce cash usage, enabling the government to formalize more of the shadow economy and collect a larger proportion of taxes.
Real-Time Benefits For Financial Institutions
The ubiquity of FedNow will expand the accessibility of instant payments for financial institutions, reducing payment processing costs for financial institutions of all sizes and increasing access to the technology for smaller banks.
Financial institutions will be able to send and receive rich data that includes non-value and RFP messages. Conformity with the ISO 20022 standards along with industry standards, payments authentication and fraud protection best practices will ensure the security of instant payments.
Conclusion
While the U.S. may be a late bloomer in the world of instant payments, the upcoming launch of the FedNow Service could be monumental. This new instant payment rail backed by the U.S. central bank will shake up the current payments industry, enable new opportunities for innovation and serve as the foundation for new consumers and enterprise services that drive the digital economy.
Poster Comment:
Control the money and you control the people!