FedNow is live: Now the real work begins

The Fed’s next order of business will be to build out its network reach.

August 2, 2023

The Federal Reserve officially launched its FedNow real-time payment rails on July 20. By all accounts the sun still rose on schedule and life proceeded as normal on July 21.

The lack of drama is precisely how the Fed hoped things would play out.

The Fed is walking an interesting tightrope on this matter. On the one hand it needs to build awareness for an important new payment mechanism to generate demand and adoption. It also deserves to take a bow for achieving this key milestone on schedule after four years of development.

On the other hand, FedNow is designed to function as a back-office utility. The Fed presumably would be happy to stay out of the spotlight and let the free market work its magic.

Since FedNow’s launch received a surprising amount of mainstream media coverage, it’s even more important for leaders to understand what to expect both in the near term and further down the road.

Seven credit unions, plus four additional corporate credit unions, are among the 35 financial institutions the Fed lists as enabled by launch date. Familiar credit union service providers have also been certified, and will likely serve as the FedNow “on ramp” for most credit unions.

The idea of an instant payment network enabling immediate transmission of funds isn’t new. Many countries are ahead of the U.S. in this regard.

Brazil and India are notable examples, where real-time payment networks have successfully migrated a significant share of cash use to digital channels. Although instant payments are more often associated with low-value consumer payments in cash-intensive economies, early U.S. adoption is expected to be concentrated on the business-to-business side.

The Clearing House, a consortium owned by 22 of the nation's largest banks, introduced its own real-time payment system (branded RTP) in late 2017. RTP is available to all financial institutions. According to The Clearing House, the list of credit union RTP participants is "75 and growing."

RTP announced two significant milestones during July: It now has 360 financial institutions in its network and has processed 500 million real-time transactions since its inception five-plus years ago.

Although RTP volume remains less than 1% of other major payment vehicles (debit/credit cards, ACH, checks), its momentum is building and the number of endpoints growing.

FedNow versus RTP is not an either/or choice. Four of The Clearing House’s owner banks have signed on for FedNow as well. 

Recognition of the need for instant payment solutions, for both liquidity-strapped consumers and businesses, has grown since RTP’s launch. Expect to see a faster (albeit gradual) growth curve for FedNow. 

I believe a rising tide will lift both boats. The Fed’s next order of business will be to build out its network reach. 

Participating financial institutions skew to the smaller side than RTP’s, and some early adopters of both services have launched in “receive only” mode. That means a smaller number of payor banks are equipped to initiate transactions. 

The Fed is working with more than 100 service providers developing customer-facing solutions leveraging the new network’s capabilities. Many of these will likely emerge as “middleware” capable of routing payments to both FedNow and RTP. It’s through these providers that credit unions are likely to identify use cases aligned with their member base and product portfolio. 

It’s advisable to remain open to such conversations as fact-gathering opportunities.

These players may well be building atop FedNow and RTP rails to power the next wave of innovation–and inflection point in adoption.

GLEN SARVADY is managing principal at 154 Advisors.