This post was written by David Kenitzer, Senior Product Manager at Dwolla.
Real-time payments deliver an experience to businesses and consumers that is quickly becoming an expectation, replacing traditional payment methods with instantaneous transactions. There’s no doubt about it: excitement around the FedNowSM Service is growing as we get closer to its launch in July 2023. It will be a great next step into real-time payments for the payments industry, especially once it gains widespread adoption among U.S. financial institutions.
In the meantime, businesses can start familiarizing themselves with the ins and outs of real-time payments through the already-established RTP® Network. This will help them think through the operational, security and fraud monitoring changes they need to make to effectively process payments in real time.
In this blog, we'll explore the fundamentals of real-time payments, what FedNow means for the industry and why businesses should consider adopting real-time payments now.
What are Real-Time Payments?
Real-Time Payments (RTP) are account-to-account transactions that clear and settle near instantaneously. RTP transactions are credit-only transfers, meaning that they can be used to send funds but not debit or pull funds from someone else’s account. The transactions also support extensive remittance data that can be used to easily reconcile funds, and since the transactions settle within seconds, all transfers are final.
Today, these real-time transfers are sent via The Clearing House’s RTP® Network. The network was launched in November 2017 and currently reaches 65% of U.S. demand deposit accounts. As RTP continues to gain adoption among U.S. financial institutions, businesses and consumers, it's poised to become the industry leader for instant and secure money transfers.
What is FedNow?
FedNow is an upcoming instant payment service offered by the Federal Reserve, the U.S.’s central banking service. This new service promises to “facilitate nationwide reach of instant payment services by financial institutions—regardless of size or geographic location—around the clock, every day of the year.”
FedNow is set to launch in July 2023, giving businesses and individuals the ability to send and receive instant payments through participating financial institutions. All financial institutions will have the opportunity to join the FedNow Service, which will help provide real-time payments ubiquity (its most exciting and promising feature). That being said, experts anticipate that financial institution participation will take some time, as FedNow adoption is expected to ramp up gradually after the official launch.
Who will participate in FedNow?
120 participants have been involved in the FedNow pilot program, but the full list of participants at launch has not been announced yet. In April 2023, these 120 pilot participants began formal certification, a rigorous process that tests each participant’s operational readiness for processing payments via FedNow, and some pilot participants may not be ready to officially join the FedNow Service when it launches.
What should we expect after the FedNow launch?
After the launch of FedNow, experts anticipate a gradual ramp-up in adoption, similar to RTP Network's trajectory. However, FedNow could see faster adoption than RTP. More than 100 financial institutions are already participating in FedNow's pilot, and according to a Volante survey, 13% of mid-tier banks and credit unions plan to join immediately upon launch, with an additional 16% planning to join within the first year. The core processors, such as FIS, Jack Henry, and Fiserv, are starting testing so they’re ready to assist their financial institutions from a technical standpoint. Financial institutions who have already implemented RTP should be able to fairly easily adopt FedNow as well, and since FedNow and RTP do not interoperate, many banks will decide to implement both.
Adoption will likely be more difficult for regional financial institutions who have not already implemented RTP and have more complicated tech stacks. All participating financial institutions will need to implement processes for handling 24/7 payment operations, including handling queued up transactions after nightly processes, communication failures, etc. Thinking through and building out these processes could take some time. While the road to full adoption may be slower than expected, we can anticipate a future where real-time payments become the new normal.
Should businesses wait for FedNow to launch to start reaping the benefits of real-time payments?
Businesses are increasingly demanding faster and more convenient payment options, with many already turning to RTP as a solution. According to a US Bank survey, 38% of companies are already using RTP in some way today, and 56% are expected to use it by 2024. In addition, a survey by 451 Research found that nearly half of respondents are likely to open a new account with a banking service provider that supports real-time payments.
With RTP already available, there is no need to wait for FedNow's launch to enjoy the benefits of real-time payments.
- Speed: Near-instantaneous transactions allow for funds to be transferred in real-time instead of taking several business days.
- Convenience: Make and receive payments at any time (even evenings, weekends and banking holidays).
- Security: Advanced security features, such as multi-factor authentication, encryption and fraud detection, help ensure that transactions are safer and more secure.
- Efficiency: Streamlined payment processes and reduced need for manual intervention can save time and reduce errors.
Overall, real-time payments, either through the RTP Network or the FedNow Service, offer faster, more secure and more convenient payment options. If you’re ready to explore what a real-time payments solution can look like for your use case, talk to one of our payments experts.