In the Know with Expedited Payments in the US (FedNow, RTP)
When it comes to instant payments, the US has fallen behind other regions and countries.
The UK processed over 375M transactions worth over $400B in June. Brazil is processing $250B+ monthly through Pix and estimates that nearly 75% of its population has used its services. Other countries are not far behind due to new regulation and supportive policies — Singapore, Australia, China, and India.
The US now has two options for expedited payments — FedNow (launched at the end of July) and RTP (Real Time Payments) which debuted in 2017. In this overview, we take a closer look at (TL; DR) —>
Instant payments in the US as a WIN-WIN for merchants & consumers;
Revisiting RTP and comparisons to FedNow;
Why US banks should act now on instant payments;
Adoption of expedited payments and what can come next;
The WHY behind instant payments
When we looked at instant payments from a global perspective last week, our deep dive focused on the demand for faster money movement.
For the US in particular, this demand is coming from merchants looking for cheaper and rapid alternatives to card networks. Cash and paper checks lack security and require manual processing. ACH as an electronic transfer method is low cost, but slow (2-4 business days).
A modernized, low-cost option for instant payments allows merchants to pass savings to their customers.
Merchants and their customers do have much to gain with instant payments in the US, but so do financial institutions. This is a new opportunity for banks to reinsert themselves as an integral part of critical transactions — examples include insurance payouts, loan & bill repayments, payroll, and benefits disbursements. For the business clients of banks, there’s a chance to consolidate all cash inflows & outflows within a single banking relationship that delivers an upgraded experience. This aggregated activity produces new data to deeply understand customer dynamics and personalize future product offerings.
Quick refresher on RTP (Real-Time Payments)
RTP’s vision was to provide immediate access to funds, confirmation for the payer & payee, and more control for the sender of a payment — on a 24/7 basis that included holidays.
In providing modern functionality, multiple use cases could now be tackled. The most prominent area being with payments to gig workers. Earned wage access (EWA) — in which individuals can get paid same day for their completed shift — now has a low cost (non-card) option. Instead of contractors relying on expensive payday loans to cover emergency expenses, EWA provides funds quickly and directly to a customer’s account.
Account-to-account (A2A) transfers can now also become more widespread. Zelle (a transfer service built & managed by a consortium of banks) already allows for disbursements between individuals with some type of relationship. RTP is able to take A2A further by opening this same dynamic to other consumers and retailers — less of a need to pay with a card, which leads to savings in processing fees for a merchant.
Lastly, other businesses with high volume payment needs are also taking advantage of RTP to alleviate concerns with cash flow. Government agencies, auto sales companies, mass transit providers, and utility providers now have a simpler method for payments that settles 24/7.
In total, 60M+ is processed quarterly through RTP.
HOW DOES FEDNOW compare to rtp?
The benefits from RTP can also be included with the newly launched FedNow: availability throughout the day (and year), instant payout and irrevocable settlement, access to financial institutions that joined the network, payment confirmation for payers and payees, and lower costs.
Both offer push payments in which the sender originates and authorizes the payment request to a beneficiary. There’s a better sense of controls & security with push payments over pull payments (made by the payee) — however, since the transfer is settled instantly, the funds are irrevocable (i.e. can’t be recovered by the sender).
A key difference is that the newer service (FedNow) is a government initiative focused on improving competition throughout the banking sector — specifically with banks connected to the Federal Reserve. Small & mid-size banks would have the same access & opportunity as large, megabanks (such as JPMorgan Chase, Bank of America, Wells Fargo). The Federal Reserve is doing a phased rollout of FedNow — the July release provides basic functionality for A2A transfers & bill pay; new functions should be introduced early 2024.
RTP (launched in 2017) is a network run by The Clearing House, which requires financial institutions to opt-in. For the banks leveraging RTP, there needs to be a separate, pooled account for liquidity at The Clearing House. The settlement between banks takes place immediately, before the receiving bank confirms recipient account details.
Both FedNow and RTP are also implementing ISO 20022 — a new data standard that provides clear details & tracking of a transaction. There is a slight difference: with RTP, The Clearing House is an intermediary between sending & receiving banks and is responsible for (i) clearing payments and (ii) sending settlement instructions to the Federal Reserve. For FedNow, there is no intermediary since the Fed handles clearing & settlement themselves. The end-user experience is essentially the same.
For customers making payments, the nuanced comparison between RTP & FedNow comes down to limits and access:
TRANSACTION LIMITS
RTP: up to $1M;
FedNow: default limit is $100K, but financial institutions can request up to $500K;
ACCESS
RTP: available to financial institutions that maintain 90% of US checking accounts (based on an estimate from The Clearing House), but the usage rate is closer to 60% since not all banks have opted in — notably local community banks;
FedNow: since its integration is with the Federal Reserve’s network, the number of smaller banks (and total volume) of participants is expected to be higher than RTP; however, it’s still early days to gain a sense of adoption & usage;
A minor note on fees — both RTP & FedNow charge $0.045 per transaction, but only FedNow charges a monthly fee of $25 for participating institutions.
US Banks SHOULD be proactive in deploying instant payments
This is a chance for credit unions and regional banks to compete with larger players in the space that have the budget and technology in delivering modern services.
The special sauce for these smaller, community-based institutions is their trusted, personal relationship with clients. Being able to offer the latest payment services ensures that customers are segmenting some of their banking business to competitors.
RTP and FedNow also give all financial institutions two drivers for revenue — acquiring new clients interested in leveraging instant payments; and, deepening relationships with existing clients who may increase payment + deposit activity from these new rails.
Additionally, there’s an ecosystem effect that’s achievable with banks deploying instant payments. For an account-to-account transfer to be possible, the payer and payee need to have accounts at financial institutions participating in RTP or FedNow. The simplest approach would be for both parties to bank at the same company. A similar mechanism played out successfully in branch banking with employers & employees having accounts in the same bank, which removed delays in funds settlement and availability.
For this closed-loop play to gain traction, financial institutions would need to be aggressive now in acquiring new banking relationships and encouraging intrabank transfers as a value-added benefit.
Fueling adoption of instant payments further in the us
Historically, friction in moving money isn’t a bad thing. It shouldn’t be easy to move a lump sum from one bank to another due to concerns of fraud or incorrect payment details. The common way to do so was in-person through wire transfers from a bank branch — filling out a form, verifying a customer’s signature and identification; and for amounts over a certain threshold, a second person at the bank was needed for verification.
It’s in this backdrop that online and mobile technology started to replace in-person banking and payment requests about 20 years ago. RTP and FedNow is now here as the next level for tech — allowing small to large dollar transfers to move instantly.
It may sound counterintuitive, but a conservative approach is what’s needed for expedited payments in the US to start taking off. Financial institutions, businesses, and customers with large balances want to make sure that proper fraud controls and checkpoints are in place before actively engaging. If there’s an issue with a payment, what recourse does a sender have?
As FedNow rolls out more features in the next months, expect to see more consumers and businesses slowly try instant payments and increase their comfort level with higher amounts. The US Treasury and other government agencies leveraging FedNow effectively should also be a strong proofpoint in the market — tax refunds in Q1 2024 would be a great opportunity.
Once traction is in place across the US, financial institutions will start to build out newer use cases that go beyond bill payments and account transfers. Small dollar cash advances, microloans for businesses, and cross-border payments in FX can come next.
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