FedNow Real Time Payments

Are you and your financial institution ready for FedNow real time payments? This U.S. service is being launched in late July 2023, but how will it impact you and your payment options? A lot depends on if you look at the payment stream through the lens of a consumer or the lens of a business. While the Federal Reserve (Fed) is promoting FedNow as both a consumer and business real time payment platform, the use cases clearly point to more business-to-business applications.

What is FedNow and how will it impact me?

The Fed’s new instant payment service, FedNow, offers uninterrupted 24/7/365 processing. It features integrated clearing and settlement functionalities that allows for the immediate availability of funds to the beneficiary of the transaction. Payment services like Zelle, PayPal and Venmo are already revolutionizing person-to-person (P2P) payments, while FedNow aims to increase accessibility, efficiency and widespread adoption from regional and smaller community banks to engage with the real time payment market.

In a survey conducted by the Fed, several faster or instant payment use cases saw the greatest growth in interest by U.S. businesses: 67% for mobile order pickup in store or delivery, 30% just-in-time supply chain payments, 24% large disbursements related to ongoing operations or contingency scenarios, and 14% in digital wallets. As an individual consumer, FedNow may not replace pre-existing payment services used for person-to-person transactions and the impact may be low. But as a business, there are several new use cases outlined below that institutions should consider as part of their strategy.

Some of the emerging use cases for FedNow are as follows:

Account-to-Account (A2A)	Me-to-Me transfers, transfer funds between accounts held by the same consumer, reloading prepaid cards, transfer funds to and from digital wallets, and direct debt payments like utility bill Corporate cash pooling: Consolidate funds into a single account for payroll or other purposes
Person-to-Person (P2P)	Real-time payments or remittances to family members or friends and instant payments for a variety of on-demand services
Consumer-to-Business (C2B)	Pay bills such as utilities, loans, subscriptions and membership dues, medical co-pays, etc. E-Invoicing, billers can send request for payment to customers who can initiate a credit transfer via a user interface offered by their financial institution Pay instantly for home services or online purchases POS (point of sale) transaction by using a QR code at merchant stores
Business-to-Consumer (B2C)	Immediate payroll, insurance payouts or rebate claims Bill payments using request for payment (RFP), refunds Employee reimbursements, providing incentive pay or corrections Disbursing 401(k) loans or investments
Business-to-Business (B2B)	Businesses can make on-demand payments instantly to suppliers, freeing up working capital E-Invoicing, businesses can send an e-invoice via RFP to their customers directly and the customer can approve and send payment from their banking app Refunds, adjustments
Consumer-to-Government (C2G) or Business-to-Government (B2G)	Tax payments to government or municipal entities Loan repayments, registration fees, donations
Government-to-Consumer (G2C) or Government-to-Business (G2B)	Tax refunds, rebates, subsidies, pensions, stimulus payments and social benefits payments Other time-sensitive payments to individuals and businesses

Source: The Federal Reserve, 2023

Benefits of instant payments for financial institutions:

• Use FedNow as a springboard to foster innovative payment services, while meeting the evolving needs of the consumer
• Keep pace with the evolving market for real-time payments
• Attract and retain businesses and customers, especially the newer demographics like Gen Z and younger generations, by offering faster payment services
• Potential to grow revenue through transaction fees and fees for new service or product offerings
• Reduced costs through increased efficiency
• Real-time settlement in central bank funds
• Reduced interbank settlement risk

An additional variable in the acceptability and use of FedNow is the cost of the service. The Federal Reserve has announced the anticipated pricing for its FedNow service for instant payments. The service will include a $25 monthly participation fee for every routing transit number enrolling in the service. Then there will be a $0.045 per credit transfer and one cent for an RFP message to be paid by the requestor.

The drawbacks of instant payments:

While this pricing scenario will be seen as a cost-effective alternative to Fed Wire payments for business, the reality of the pricing is that few consumers will see this as a viable option for direct consumer payments. This is because private sector solutions like PayPal and Zelle are no-charge options for person-to-person payments, making the FedNow’s $25 monthly charge not in line with that market. Additionally, for predictable payments like bill payment and payroll services, the FedNow service will not be viewed as a low-cost alternative to the automated clearing house (ACH) payments commonly adopted in the marketplace today.

FedNow will not eliminate wire transfers, as the new real time payments will have a cap on transaction size. The default limit will be $100,000, but financial institutions will have the ability to increase that limit to $500,000 as the service evolves. FedNow will represent a low-cost alternative to wires for payments below these transaction limits, which further reinforces the business use cases.

Specific use cases that should gain marketplace attention are stock exchange trade settlement below the $100,000 cap to meet the T+1 settlement initiative, international trade settlement below the cap, daily corporate netting and pooling settlement activity.

Early adoption of the FedNow payment system

On June 29, 2023, the Federal Reserve announced that 57 early adopter organizations, including financial institutions and service providers, had completed formal testing and certification on the FedNow Service in advance of its launch in late July. The group represents a broad segment of banks, credit unions and non-bank financial institutions (non-bank FI).

The early adopters include 41 financial institutions participating as senders, receivers and/or correspondents supporting settlement, 15 service providers processing on behalf of participants, and the U.S. Department of the Treasury. This pilot group will enable the FedNow service to support down market activity and accessibility for smaller regional banks.

How the marketplace embraces the service remains to be seen. There seems to be a secondary market developing for the non-bank FIs to create a clearing service for banks not directly participating in the program. The parameters of this secondary market are still evolving, but it represents a significant expansion of real time payments across the broad spectrum of large, small, community banks and credit unions.

I am excited to see how the market embraces FedNow and how the real time payments evolve. ISG advises banks and financial institutions on strategy, partner ecosystems, transformation and value realization related to the payment services market. Contact us to learn more.