This week, the U.S. federal government’s immediate payment system, FedNow Service, went live.
Here is a brief review of what that is: FedNow is an instant payment infrastructure for transferring funds that pledge to be a faster payment rail for financial institutions, providing instant access to funds regardless of the time or day.
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As you are aware, banks are not typically open 24 hours a day or permit same-day deposits and withdrawals.
Other countries, including Brazil, India, the United Kingdom, and the European Union, have offered comparable services for some time, putting the United States “behind” in this regard.
According to the Federal Reserve, banks and credit unions of all sizes can register and utilize the instrument. There are already approximately 35 such financial institutions on the list. In addition, 16 service providers are on board to assist banks and credit unions with payment processing.
As noted in a June guest column by TX Zhuo, managing partner of Fika Ventures, contract employees can now be paid immediately and by means other than currency, and smaller financial institutions can now provide the same level of service as large institutions and fintech.
The ability to receive faster payments through FedNow may also reduce the demand for installment loans.
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Future FedNow features include the ability for bank and credit union customers to send immediate payments “quickly and securely” via the mobile app or website of their financial institution.
If Pix’s success in Brazil is any indication, FedNow has the potential to be a game-changer in the United States. Matera, a payments company, analyzed data from the Central Bank of Brazil and determined that Pix transactions for the first quarter of 2023 totaled $8.1 billion, compared to 4.2 billion credit card transactions and 3.8 billion debit card transactions. Matera noted, “This is the first quarter in which the number of Pix transactions exceeded the number of credit and debit transactions combined.”
Industry response
FedNow may be instantaneous, but some in the financial industry, such as Airbase CEO Thejo Kote, believe that it will take some time for this to gain widespread acceptance.
“Banks on both the receiving and sending ends must be able to support these new protocols and rails, and this is a lengthy process,” Kote stated in a previous interview. “I am sanguine that coverage will continue to vastly improve over the next few years.
However, in the present, the vast majority of dollars are still flowing through the Automated Clearing House network, which presents a plethora of obstacles with which you must contend.”
Nacha, the organization that governs the ACH network in the United States, issued a statement stating that “instant payment systems (such as FedNow and RTP) and ACH, including Same Day ACH, will together meet the evolving needs of the marketplace” and that “large volumes of scheduled and recurring payments between known counterparties on known due dates—payroll and benefit Direct Deposits, bill payments, B2B payments, and account transfers—will continue to be served well by ACH.”
Already, there is some drama surrounding the launch. Caitlin Long, founder and CEO of Custodia Bank, questioned on Twitter why Adyen, a public European fintech company, was able to join the list of FedNow participants when, in her words, “Isn’t the Fed keeping fintech out?”
Adyen verified in a statement that it had obtained a U.S. banking branch license in 2021 and that it was “among the first to complete testing and receive certification to utilize the FedNow (R) Service.”
The Financial Technology Association issued a statement on July 20 greeting the new instant payment system in the United States. FTA President and CEO Penny Lee issued the following statement:
“FedNow enables more consumers and businesses to send and receive payments through their financial institutions in seconds as opposed to days. Instant payments will provide consumers with additional options for timely bill payment, faster access to their paychecks, and the avoidance of overdraft fees and predatory lenders.
It will also help businesses improve their expense management, reduce errors, and cut costs.
Likewise, some fintech executives appear enthusiastic.
Orum CEO and co-founder Stephany Kirkpatrick believes that FedNow presents a tremendous opportunity for fintech to construct bridges between the various payment channels.
She added, “Financial institutions and fintech will need to figure out how to integrate FedNow across the broader payment network, and this interoperability challenge presents a great opportunity for innovation aimed at orchestrating payments across these different systems for the benefit of so many.”
Dimitri Dadiomov, CEO of fintech startup Modern Treasury, applauded FedNow’s introduction, stating, “Greater access to instant payments in the United States signifies a sea change in the speed of money movement, which will enable businesses and consumers to transact faster and with greater confidence and ease than ever before.
When economies are more efficient, everyone benefits, and immediate payments are a cornerstone of a more efficient money movement ecosystem.”
One Twitter user notes, however, that the American consumer may not be on board just yet. Surprisingly, more individuals than anticipated still prefer paper payments. With the advent of FedNow and the government’s very public endorsement of digital payments, this may change.
