Today the Federal Reserve finally launched FedNow. After a decade of study and development. It will provide businesses and consumers the ability to have near instant access to payments (including paychecks) and money moved between financial accounts.
Back in 2017, The Clearing House, a consortium of the nation’s largest banks, including JPMorgan Chase and Bank of America, rolled out its own high speed money transfer system, the Real Time Payments Network (RTP) which they market as Zelle.
Many financial institutions will provide FedNow or Zelle to their customers for free as they many do with ACH payments, but the cost of a FedNow or Zelle payment is 4.5 cents per payment, regardless of the size.
So far the volume of money RTP is moving is comparatively miniscule. In the first quarter, $26 billion was transferred over RTP, equal to 0.13% compared to the $19.7 trillion sent over the nation’s dominant but slower (ACH) Automated Clearing House.
While ACH itself now settles transactions by the next banking day, services using it may take longer than that—for example, Venmo takes up to three business days to move money from your wallet to your bank account using ACH and Square takes three to five business days for ACH transfers. ACH is typically used to pay recurring bills, paycheck deposits and loans. Another $277 billion was sent in the first quarter over the far more costly FedWire, a Federal Reserve run service for one-time wire transfers.
Small banks, in particular, have been reluctant to sign on to the big-bank-controlled RTP Zelle system. Industry experts predict that more banks and credit unions will now sign up for FedNow and that the existence of two competing systems–known in payment-speak as “rails”—will speed innovation and the widespread adoption of instant payments in the U.S., a relative laggard when compared to Europe, India and Brazil.
“This is part of this inevitable shift to safe, instant, bank-data payments here in the U.S.,” says John Anderson, head of payments at Plaid, a perennial on the Forbes Fintech 50 list, which connects financial services apps with consumers’ bank accounts. (It has its own Instant Payouts on Transfer service which allows businesses to disburse loan payments, insurance payouts and wages instantly.)
To use a new instant-payments system (like RTP-Zelle) or FedNow, the more than 4,000 banks, another 4,000 credit unions need to build an interface for customers to interact with, which can be time-consuming and costly. But many banks and fintechs didn’t want to make that investment until they were convinced that other banks, regardless of size, would be on an instant payment rail too and that customers would come to demand instant payments.
FedNow makes that universal adoption more likely and the technology investment more compelling. Tellingly, nearly a quarter of financial institutions were waiting for the FedNow launch to even adopt a real-time payments strategy, according to a report from financial services consulting firm Cornerstone Advisors.
“FedNow is part of the solution, it’s that last piece of the puzzle,” says Davi Strazza, president of North American at Adyen, a Dutch payment processor. “It's just cost efficiency and cash flow. How do we help merchants move money fast–extremely fast, real-time, if possible.”
Adyen holds a European banking license and a U.S. Federal Foreign Branch license, which allows it to offer business checking accounts and small business loans. It isn't listed as participating with the RTP network, but is one of the 41 financial institutions which had completed certification to use FedNow by the end of June–before it even launched. Another 15 service providers, some of whom will help build the infrastructure small banks need to connect to FedNow, have also been certified.
In the short term, smaller institutions are likely to gravitate to FedNow while larger institutions stick with RTP. (Because the RTP system is used by the big banks, it already reaches 65% of deposit accounts in the United States. For consumers, the most visible application of RTP is the Zelle peer-to-peer money transfer system, which the big banks launched to compete with PayPal’s PYPL +0.5% Venmo and Block’s CashApp.)
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