FedNow is finally live in the US
The U.S. government’s instant payment system, FedNow Service, went live this week.
Here’s a quick refresher on what that is: FedNow is an instant payment infrastructure for transferring money that promises to be a faster payment rail for financial institutions, offering immediate access to funds no matter the day or time. As you know, this is huge because banks aren’t traditionally open 24/7 or let you receive money and use it on the same day.
It’s also something that the U.S. has been considered “behind” on in light of the fact that other countries have been live with similar services for some time, including Brazil, India, the United Kingdom and the European Union.
The Federal Reserve said banks and credit unions of all sizes can sign up and use the tool. There are about 35 such financial institutions on the list already. In addition, 16 service providers are on board to support payment processing for banks and credit unions.
As TX Zhuo, managing partner of Fika Ventures, noted in a June guest column, contract employees can now get paid immediately and by other means than cash, and smaller financial institutions can now offer the same level of service that large institutions and fintechs can. The ability to get paid quicker through FedNow may also reduce the need for people to take out payday loans.
Future FedNow features coming down the pipeline include bank and credit union customers being able to send instant payments “quickly and securely” via their financial institution’s mobile app or website.
If the success of Pix in Brazil is any indication, the potential for FedNow to be a game-changer in the U.S. is massive. Payments company Matera reviewed data from the Central Bank of Brazil and found that Pix transactions for Q1 2023 totaled 8.1 billion versus 4.2 billion credit card and 3.8 billion debit card transactions. Noted Matera: “This is the first quarter where the number of Pix transactions were more than credit and debit combined.”
Industry reaction
FedNow might be immediate, but some in the financial industry, like Airbase CEO Thejo Kote, believe it will take some time for this to catch on.
“Banks on both the receiving end and the sending end have to be able to support these new protocols and this new kind of rails, and that’s a slow process,” Kote previously said in an interview. “I’m optimistic that over the next few years, the coverage will continue to get much better. However, in the here-and-now, the vast majority of dollars are still flowing through the Automated Clearing House network, and that has a whole host of challenges that you have to work [with].”
Nacha, the organization that governs the ACH network in the U.S., issued a statement noting that “instant payment systems (such as FedNow and RTP) and ACH, including Same Day ACH, will together meet the evolving needs of the marketplace,” and that “large volumes of scheduled and recurring payments between known counterparties on known due dates–payroll and benefit Direct Deposits, bill payments, B2B payments and account transfers–will continue to be served well by ACH.”
There is already a bit of drama surrounding the launch. Caitlin Long, founder and CEO of Custodia Bank, tweeted about why Adyen, a public European fintech company, was able to get on the list of participants offering FedNow, when, in her words, “isn’t the Fed keeping #fintechs out???”
In a statement, Adyen confirmed that it had obtained a U.S. banking branch license in 2021 and was “among the first to complete testing and receive certification to utilize the FedNow(R) Service.”
For its part, the Financial Technology Association released a statement on July 20, welcoming the new instant payments system in the U.S. FTA President and CEO Penny Lee said in a statement:
“FedNow means more consumers and businesses can send and receive payments in seconds instead of days through their financial institutions. Instant payments will provide additional options for consumers to pay bills on time, access their paychecks more quickly, and avoid overdraft fees and predatory lenders. It will also help businesses better manage expenses, decrease errors, and reduce costs.”
Some fintech leaders too seem enthusiastic.
Stephany Kirkpatrick, Orum CEO and co-founder, believes that FedNow presents a massive opportunity for fintechs to build bridges between the different payment rails. She added: “Financial institutions and fintechs will need to figure out how to integrate FedNow across the broader payment network and this challenge of interoperability creates a great opportunity for innovation geared towards orchestrating payments across these different systems for the benefit of so many.”
Dimitri Dadiomov, CEO of fintech startup Modern Treasury, applauded FedNow’s launch, saying: “Greater access to instant payments in the U.S. marks a sea change in the speed of money movement, which will enable businesses and consumers to transact faster and with more confidence and ease than ever…Everyone benefits when economies are more efficient and instant payments are a pillar of a more efficient money movement ecosystem.”
Still, as one Twitter user points out, there is one group of people that may not yet be on board: the American consumer. A startlingly larger-than-expected number of the population still prefer paper payments. But with the government’s very public endorsement of digital payments with the launch of FedNow, that may be changing.
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