The launch of the Federal Reserve’s real-time payments system, known as FedNow, is expected to happen this month. However, experts predict that it may take several years for nationwide adoption by banks. Unlike other countries, the United States does not have regulations mandating the implementation of real-time payments for banks.
Erika Baumann, the director of the Datos Insights commercial banking and payments practice, spoke about the timeline for adoption. She expressed skepticism that it would happen as quickly as three to five years. With thousands of financial institutions in the country, transitioning from batch processing to real-time payments comes with significant risks and challenges. Developing an entirely new payment rail is no easy task, and many financial institutions have yet to make faster payments a priority on their roadmap. Even when they do, the process will not happen overnight.
In June, the Federal Reserve published a list of 57 early adopter organizations that had completed formal testing and certification for the FedNow Service. This list includes financial institutions, payment processing vendors, and the U.S. Department of the Treasury. However, Baumann urged caution in assuming these organizations are fully ready for implementation. Until a vendor successfully goes live with a bank, it cannot be considered a success.
The United States already processes a significant number of real-time payments through The Clearing House (TCH), which launched its real-time payments system, RTP, in November 2017. Larger banks quickly adopted RTP, with the system reaching 65% of demand deposit accounts (DDAs). However, smaller banks hesitated to join TCH, waiting instead for the launch of FedNow. While most banks that have gone live on RTP are expected to also adopt FedNow, some smaller banks may opt for FedNow exclusively.
There are concerns among smaller banks that the larger banks will leverage RTP to their advantage. However, Baumann believes that TCH’s goal is to achieve ubiquity and ensure as many payments as possible flow through their system. Pricing for both TCH and FedNow is nearly identical, but the costs associated with implementing a new system can be substantial. This, in turn, has become a catalyst for bank mergers as financial firms seek to keep up with the industry’s technology advancements and remain competitive against not only other banks but also fintech companies.
Baumann’s research showed that many corporations are bypassing banks and going directly to fintechs for their payment needs. These companies desire an efficient and automated process, and they want access to real-time payments. Businesses have various options beyond TCH’s RTP and FedNow, such as push-to-card services like Visa Direct and Mastercard Send, peer-to-peer payment platforms like Zelle, and digital wallets like PayPal. Baumann noted that no single payment type will dominate the market, as each serves different use cases.
Despite the advancements in real-time payments, traditional processes like checks still persist. The adoption of new technology in the banking industry tends to add to existing processes rather than replace them entirely. Baumann emphasized the importance for banks to keep up with evolving payment trends, as fintechs continue to gain market share. This has led to a growing need for banks to evaluate and enhance their payment systems to meet the expectations of their customers.
In conclusion, although the Federal Reserve is set to launch its real-time payments system, FedNow, this month, nationwide adoption by all banks may take several years. The absence of regulatory mandates in the United States means that banks have the discretion to decide when and how to implement real-time payments. The existing real-time payments system offered by The Clearing House has already seen success with larger banks, but smaller banks are waiting for the launch of FedNow. Overall, the future of real-time payments in the U.S. will be shaped by the decisions and priorities of financial institutions as they navigate the risks and challenges associated with adopting new payment rails.
