FedNow could usher in a new U.S. payments era

The FedNow℠ Service’s 2023 launch holds the potential to significantly expand real-time payments in the U.S.

The Federal Reserve created the FedNow payments infrastructure to enable people and businesses to send real-time payments through their financial institutions. The goals are for clearing and settlements to happen in near real time and for people to immediately see the transfer in their accounts.

“The FedNow Service will transform the way everyday payments are made throughout the economy,” Fed Vice Chair Lael Brainard said during an August 2022 speech, “bringing substantial gains to households and businesses through the ability to send instant payments at any time on any day, and the funds being immediately available to recipients to make other payments or manage cash flow efficiently.”

U.S. real-time payments overview

As of 2020, there were more than 70 billion real-time transactions globally, with more than 30% growth projected by 2024. India and China lead the way with more than 70% of the transaction volume.

There are other U.S. real-time payment systems, but, as of 2021, they accounted for only 0.9% of U.S. transaction volume. Part of the reason has been a lack of broad coverage across the country.

Still, real-time payments have clear economic benefits. They can improve efficiency, reduce costs, accelerate cash flow and liquidity, and provide payment flexibility.

FedNow will be available to all financial institutions, so it removes concerns about banks and credit unions using competing networks and increases the potential for large-scale adoption.

FedNow use cases

FedNow could cover payment use cases such as:

• Account-to-account transactions
• Bill payments
• One-time disbursements
• E-invoicing

Many digital payment use cases, such as the gig economy, are better suited for real-time payments. Instead of waiting for a pay cycle, gig contractors can immediately receive money, smoothing out their cash flow.

Immediate settlements also can help people with little or no savings. It can allow them to avoid late fees or overdraft charges when paying bills, send and receive emergency payments in real time, and better manage their money.

For businesses, real-time money management improves financial operations. They can automate payment reconciliation, improve tracking of funds and business-to-business payments, and more effectively coordinate invoices.

How will FedNow work?

Effective real-time payments systems depend on simplicity for users and robust security.

People who use FedNow might not notice a difference from other real-time payments systems. They still will log in to their bank account to initiate the payment. Financial institutions still will provide security, screen the payments, and handle account changes and reconciliation.

The payment transfer between financial institutions is how FedNow fundamentally differs. Under the system, FedNow acts as the go-between for the sender’s and receiver’s financial institutions, validating payment messages and debiting and crediting the appropriate accounts, all within seconds.

Credit: FedNow

FedNow is intended to work alongside other real-time payment systems. It will use the ISO 20022 standard and, initially, cover only domestic payments.

The future of payments

Speed, transparency and payment flexibility are positioning real-time payments for success.

“The journey to real time for payments is an inextricable one and the obvious destination for all payments irrespective of whatever rail they travel on,“ Peter Hazou, Director, Business Development, Financial Services, Microsoft, told ACI Worldwide for its “Prime Time for Real-Time Global Payments Report.”

Real-time payments enable new business models, services and applications. Embedding those services can expand customer relationships and increase profitability.

As people and businesses expand the services they use, Know Your Customer (KYC) will become even more important. Real-time transactions can lead to real-time fraud without proper controls. The FedNow Service Readiness Guide offers insight into how compliance and risk teams can prepare for the new system.

Now is the time to consider how to integrate FedNow and what the longer-term real-time payments road map looks like. Building a plan to innovate as real-time payments take hold in the U.S. can position organizations for growth.