FedNow could usher in growth of instant payments in the US

Merchants will have a new payment method to introduce later this year. Notably, a new startup isn't behind this fintech feature. Rather, it's the Federal Reserve.

FedNow is a new service that allows for instant payments, which transfer money directly between accounts. Set to launch in July, FedNow could usher in more U.S. adoption of instant payments, which allow people to send payments in seconds, at any time of day. It's a move by the Federal Reserve to provide a new form of infrastructure for payments that move at the pace of an increasingly mobile and real-time economy.

According to a new report from ACI Worldwide, global real-time payments grew 63.2% year-over-year in 2022 to 195 billion. India, Brazil and China are the leaders in this area.

“Most countries are recognizing that a true digital economy requires a true digital payment method and FedNow is the Federal Reserve’s answer to that, very much in keeping with models that have been seen across the world,” said Craig Ramsey, global head of real-time payments and banking at ACI Worldwide, which was a pilot partner for the FedNow service.

Ramsey was speaking to The Current from the spring meeting of the Faster Payments Council, which has retail members including Walmart and Kroger. It underscores how merchants and retailers have a stake in instant payments. It will add a payment method that allows money to be transferred directly, and provide another option to a consumer that is increasingly seeking choice and flexibility in not just what they buy, but how they shop and pay for items. Following a transaction, retailers won’t have to wait to receive money until it is cleared by the bank, as is the case with many payments now.

For retailers, it opens up potential not only to offer a more direct payment method, but also to reduce interchange fees and other payment processing costs.

“It's not just about speed of payment for them. It's about ease of payment,” Ramsey said. “How easy can they make the checkout process? And as more and more people are used to transacting on their phones and using their phone for everything, then this gives them a chance to offer instant payment methods in store and online as well,” Ramsey said.

It points to how the infrastructure of payments is changing the way that consumers transact. When a payment is made, most banks use Automated Clearing House, or ACH, to settle the payment. While a person paying at a register may think that’s the final point in a transaction, the transfer of funds actually takes hours or even days to actually settle.

Peer-to-peer services such as Venmo or mobile wallets introduce convenience. However, when payments are sent, there is still a third-party or intermediary that is facilitating that transaction, meaning the exchange of money isn’t settled right away.

With the FedNow service, the payments will be transferred directly between accounts. Digital wallets aren’t necessary. Rather, users can pay directly from their bank account. In turn, when receiving money, the funds go directly into a bank account.

“When I get a message back that says ‘payment sent,’ I know that the money is in your account already because the network has done the necessary messaging between the two banks and the money is already in your account,” Ramsey said.

For consumers, transacting directly between accounts provides an accurate picture of a bank account in real time. FedNow will be accessible 24/7, so transactions can be made at any point.

“It enables you as a bank account holder to control your money more easily,” said Ramsey.

Going forward, ACI projects that real-time payments will quadruple in the U.S. by 2027 to about 11.5 billion transactions. Rather than replacing currently used transaction methods such as ACH and wire services, Ramsay said these are likely to be “net new” transactions.

The fact that the Federal Reserve is backing this new payment method figures to help add trust.

“Think about the construction of the railroads back in the 19th century,” Ramsay said. “That's exactly what the Fed are doing. They're laying down the tracks that can then enable banks and fintechs to offer the services on those tracks.”

In a digital economy where there are many payment methods, the Fed is also mindful of presentation. The central bank wants FedNow to be recognizable as a payment method, right alongside the likes of PayPal and Zelle or even Mastercard. Along with legitimacy, brand recognition is key to gaining more adoption among consumers and merchants.

“They want the FedNow service to become as easily recognizable as a Visa card logo on the side of the checkout,” Ramsey said. “Just like with Venmo, we say ‘I’ll Venmo you the money,’ the Fed very much want to see, ‘I’ll FedNow you the money.”