Whether the average consumer knows it or not, the U.S. operates on an antiquated system for payments. The only standardized payment network is ACH, which can take several business days to transfer and receive payments. Even same-day ACH, which is processed in batches, is far from instantaneous. By contrast, the U.K. introduced instant payments in 2008 and in 2017 the SEPA network launched for instant payments across Europe.
The Federal Reserve announced FedNow, an instant payments service for the U.S., back in 2019. The service is prepared to fully launch in July 2023 and has generated a lot of buzz.
Even as FedNow promises to be the instant payments network for the U.S., there are a lot of hurdles. And as we look more closely, FedNow seems to fall short of its promise and will leave the U.S. without a real solution to the current limitations of instant payments.
FedNow isn’t offering anything new
Right now, the average U.S. consumer has a lot of options for payments: PayPal, Venmo, Zelle, Cash App. The problem is that the receiver has to be able to accept payments from any of those apps, usually by having an account with the same.
The crux of FedNow is that it will offer instant payments, directly from the consumer’s bank account. This makes it different from PayPal or Venmo, which have some processing time to and from the bank (even if the transfer within the app itself is instant). Payments made via FedNow will be similar to Zelle’s instant transfer offering.
But an institution has to join the FedNow network to make these instant payments available to their customers, which limits its reach.
FedNow implementation will take time and has limitations
Even financial institutions that join the FedNow network have some work ahead to make it available to their customers. They’ll need to create some type of user interface or partner with a fintech company to provide FedNow as an instant payments option.
Smaller banks rejoiced when FedNow was originally announced and were, in fact, a driving force behind FedNow. The RTP Network currently exists as an instant payments option for some of the largest banks in the U.S., but its network of 300 financial institutions is a far cry from the combined ten thousand banks and credit unions in the country.
Still, while FedNow may benefit smaller institutions, they’re also a lot slower to adopt technology, mostly due to cost and available resources. While some may have been planning for the FedNow rollout, others may take years to provide FedNow access to their customers, which will make FedNow far less effective as a national instant payments solution.
Eventually, FedNow plans to have interoperability with the ACH network and other existing payments systems, but “the model and timeline for achieving interoperability will depend on the level of commitment and engagement across the industry” according to the Federal Reserve.
Consumers need both push and pull payments
Perhaps the largest limitation of FedNow is that it only offers “push payments” and not “pull payments.” Consumers can “push” a payment to another person or a business, but a business could not “pull” a payment that has been authorized by a consumer, like a credit card. This is far different from ACH, which offers both push and pull transactions.
This leaves FedNow in the “close, but not quite” in solving the equation of instant payments in the U.S., especially for consumers that want to use their bank accounts directly for their payments instead of a credit card. And instant payments have obvious benefits for consumers trying to manage their finances versus a deposit or payment that doesn’t settle for several days.
Without clear differentiation from existing options for instant payments, it’s hard to know how widespread FedNow adoption will be. A pay by bank solution that meets the full spectrum of consumer and business needs would have both push and pull payments and offer instant transfer. For that, FedNow falls short.
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