The future of US real-time payments ahead of FedNow launch

While the US is a global finance and technology leader, it is arguable that the country has fallen behind when it comes to innovation in payments. Compared with Europe, Africa and Asia, the world’s largest economy lags behind while others have been busy innovating and embracing digital payments. Rather than forging ahead with contactless and real-time developments, the US is a nation where cash, checks and chip-and-signature cards are still commonly used.  

While advancements in the US payments landscape have emerged, they have mostly addressed the front-end of the payments experience. The foundational infrastructure is still in need of an upgrade, especially when it comes to the core banking rails.

But, the tide seems to be turning with promising initiatives, like FedNow, finally coming to fruition. Let’s explore what payments in the US look like today, and in particular, how the real-time bank-based movement is evolving.  

State of the payments nation

According to Statista figures from 2022, payments using credit, debit and prepaid cards account for more than 70% of consumer spend in the US, while digital/e-wallets and cash each represent 12% of the market.

Looking at how money moves in the US, the Automated Clearing House (ACH) network remains a dominant feature of the US payments ecosystem—some 50 years after it was established in the 1970s. The ACH network moves money electronically between bank accounts and although it has seen developments over the years to increase the speed and efficiency of payments—like same-day banking transactions—it still falls short of the latest payments frontier: namely, real-time or instant payments, settled 24/7.

Instant, cross-border payments already exist? Another key area of development for real-time payments includes cross-border settlement. Although real-time payment initiatives like FedNow in the US, or UPI in India, intend to integrate with various systems to eventually enable cross-border payments, there’s still a lot of work to be done before it can materialize at scale.

But, blockchain-based stablecoins like USDC unlock faster (and cheaper) payment rails, which are inherently global and which already support instant cross-border settlements. So, businesses can already settle payments 24/7/365 anywhere in the world.

Learn more about Checkout.com’s Stablecoin solution.

Getting real: the future of payments

The real-time payments movement has been gathering pace worldwide with India arguably leading the charge. Its Unified Payments Interface (UPI) reached an estimated 74 billion transactions worth over US$1.53 trillion in 2022, up from over US$872 billion in 2021, according to NPCI data.

Real-time payments is a generic term for any transaction that completes instantly, or almost instantly, unlike the same-day window for ACH payments. The benefits for consumers and businesses include:

• Transactions can be initiated, cleared and settled in just seconds, with 24/7/365 availability
• Instant clearing and settlement can improve cash flow and liquidity management
• Consumers avoid late fees associated with lengthy payment processing
• Payers can only send money that’s in their account, meaning businesses avoid bounce backs and chargebacks
• Real-time payments can be far lower cost than card rails

Despite these benefits, there hasn’t been a ubiquitous uptake in the US so far. This is primarily due to the nascent state of The Clearing House’s privately run RTP network and the almost-but-not-quite-yet launch of FedNow slated for July. Even then, it will be interesting to see how and in what cases both businesses and consumers change behavior, the latter group being especially wedded to Cards both in terms of providing an established, trusted UX, and incentivising use through generous rewards programs.

This said, real-time payments for consumers (and businesses) is definitely an area of opportunity worth exploring further, especially as more people demand "instant” payments on both sides of the transaction.

Real-time payment players in the US: RTP vs. FedNow RTP: The Clearing House (TCH) runs RTP, a real-time payments system launched in 2017 to address certain deficiencies of the ACH system. Unlike ACH payments, which are sent in batches only at certain intervals, RTP enables real-time transactions. The system is owned by a consortium of large banks.

FedNow (coming soon): FedNow is a real-time payments system that will be entirely run by the Federal Reserve. Because it will run on the FedLine infrastructure, the expectation is that every financial institution will adopt FedNow. One of the main criticisms of FedNow is that it won't be interoperable with other systems as interoperability is easier to achieve with batch processing than with real-time systems.

Why is real-time adoption slower in the US?

Although real-time payments provide many benefits and the speed of adoption has been relatively solid as more citizens demand this service, the US continues to face adoption challenges common for any new payment method, including:

• Coverage: A significant headwind to adoption has been the coverage of bank accounts, particularly among the thousands of small banks and credit unions that constitute a large portion of US bank accounts. For these institutions, the cost of implementation must be justified by a sufficient business use case, and the adoption of new technology can be time-consuming and costly.
• Lack of business process: Businesses and banks also need to adapt their liquidity and risk management practices (and tools) to adapt to real-time money movement.
• Cost: Real-time payments tend to be more expensive than ACH, which has a very low cost. The upcoming launch of FedNow is expected to provide a cost-efficient option, making it more attractive for small banks and businesses to adopt.
• Lack of interoperability: The challenge of achieving compatibility and communication between different payment systems is one of the biggest challenges for real-time payments to take off in the US, but it is not a novel problem. New technology and developments like stablecoin settlement solutions look to establish a unified global system with universal standards.
• Security concerns: Given that real-time payments settle immediately and irrevocably, it gives fraudsters an edge with no time to react between initiation and settlement.  
• Brand recognition: typically consumers and businesses need a clear reason to change behaviour, so both brand awareness of the offerings and aligned incentives to adopt will be key.

The countdown to FedNow

The existing real-time system—RTP® network—will shortly be joined by a third, FedNow, which is due to launch in July 2023. Developed by the Federal Reserve Bank and using its FedLine payments infrastructure, FedNow is a 24/7 real-time payment service for individuals and businesses. Rapid and widespread adoption is planned for the US, and the new system will complement rather than replace ACH, at least initially.

FedNow will enable financial service providers to improve the customer experience and increase revenue, and develop new payment products and services on the back of real-time capabilities. Fintechs will play an important role in developing the potential of the FedNow ecosystem and maximizing its value.

Real-time payments via FedNow have a wide range of use cases and beneficiaries. To illustrate, here are a few examples:

• An SME may struggle with working capital and need to receive funds as fast as possible to stay afloat. Instant payments would place the business in a much stronger trading position.
• Investors that need more speed than a traditional ACH or wire transfer will look for real-time transfer options to close an investment round instantly.
• Remittance companies and their customers would also welcome more speed with cross-border payments, as money transfers are often a lifeline and needed immediately by the recipients in the destination countries.  The challenge today is the liquidity gap inherent to asynchronous payment initiation and settlement.
• Expedited payroll, especially for gig economy workers, helping to manage basic needs and provide access to earned wages at the consumers’ demand vs on a banking schedule.
• FedNow’s open architecture will enable banks and other financial institutions to develop APIs to integrate with FedNow. This will stimulate the creation of new payment services and applications and encourage the use of technologies such as artificial intelligence, machine learning and potentially, blockchain applications.

FedNow will also become a useful resource for B2B payments, especially because of its use of ISO 20022 messaging standard that will include more contextual data about each payment previously unavailable to business owners. Companies will be able to quickly make and receive payments, as well as reconcile and analyze transactions. With FedNow setting the foundation for a standard payments messaging framework, the future of seamless communication between open banking applications and real-time systems becomes more feasible.

Get ready for real-time

Although the US is still focused on card-based payments, real-time money movement is catching up. The arrival of FedNow has been a long time coming and a major step forward for the payments landscape in the US.  Banks, financial institutions, payment processors, fintechs and other stakeholders must all play a part in the rollout—a collective commitment to make FedNow succeed will bring big gains in efficiency and open up new opportunities for the US payments industry and consumers.