The Federal Reserve's
FedNow has attracted dozens of banks and credit unions interested in supercharging their intake of funds. But getting more to connect and transmit through the system will rely on the discovery of new use cases, experts say.
Since FedNow launched in July, nearly 140 financial institutions and 22 certified service providers have signed up for the network, according to a public register of users, a fraction of the nearly 10,000 institutions with access to the central bank's other payments and settlements services. But early adopters and former Fed staffers say the rollout has played out as expected and compares favorably to the trajectory of the private RTP network, which has amassed roughly 400 participants since 2017.
Miriam Sheril, a former FedNow project manager at the Federal Reserve Banks of New York and Boston, said industry-wide adoption was never going to be instantaneous. She noted that most banks were reluctant to foot the bill of connecting to the system until they could see it in action.
"There was a lot of wait and see — to see when FedNow would land and, from a budgeting cycle perspective, banks weren't willing to make commitments," Sheril said.
Now the head of U.S. product at the payments service provider Form3, Sheril said she is seeing banks embrace the idea that instant payment capabilities could be beneficial, if not essential, in the not-too-distant future. But the lag between acceptance and adoption remains substantial.
"You can't build and connect to a brand new rail in three months. It just doesn't happen," she said. "For all the banks that were waiting or were hesitant, even if they're making the decision to connect now, they're not going live right now, so FedNow is not going to miraculously have 1,000 banks come online overnight."
Payments specialists say the launch of FedNow has benefited the instant payment space in multiple ways. Along with giving banks another option for facilitating faster transactions, it has also ended the stasis that came from financial institutions sitting on the sidelines until the Fed-back system debuted.
Rusiru Gunasena, senior vice president of RTP product management and strategy at The Clearing House — a private payments platform owned by a consortium of large U.S. banks — said the Fed's announcement in 2020 that it would create an instant payments network caused many banks and
"Finally, now the institutions can make a decision and move on," Gunasena said. "They understand the value of real-time payments. It has created a renewed interest in the industry, in the marketplace among the financial institutions. Both banks and credit unions are now implementing real-time payments."
Gunasena said there is now a "backlog" of interested counterparties looking to join the RTP network.
Similarly, Justin Jackson, senior vice president and head of enterprise payment solutions at Fiserv, described the launch of FedNow as a dam breaking open. Since then, he has seen a surge in demand for groups to connect to FedNow or RTP — and, in many cases, both.
Jackson said many early adopters were motivated by a desire to be ahead of the curve rather than risk being left behind. Others, meanwhile, view it through a "dollars and cents" lens, he said, which has led to some mixed results. For now, he said, it is "significantly more common" for banks and credit unions to set up as receive-only participants in the FedNow network rather than send-and-receive — even though it is most cost effective to get set up for both functions at once.
"The economics are still pretty unsettled in this space. The transactions that are flowing across these rails, what type of transactions are they? Are they cannibalizing other revenue streams, like wire transactions? Are they a source of incremental revenue because they're replacing an ACH payment and they're adding real value there?" Jackson said. "The types of payments really influences the economics, so there are a lot of questions in play for institutions to consider."
On the receiving side of the equation, Jackson said, the math is easier. Anything that lowers the barrier to banks receiving funding through deposits is going to be beneficial, he said, whether it comes in the form of a payroll direct deposit or an insurance disbursement.
Most of the origination activity on FedNow comes from a small number of financial institutions, though that group includes the U.S. Treasury. The story is similar on the RTP network, Gunasena said, though the sending contingent consists of TCH's owner banks.
Overall, the strongest case for instant payments is being made by commercial banking customers, Jackson said, largely from entities that deal with large transactions that can take place outside traditional banking hours, such as auto purchases or certain homebuying-related activities. But he said he expects more applications to develop over time, creating greater adoption incentives for financial institutions.
"You will see originations on the retail side perhaps lag a little bit compared to originations on the commercial and business side," he said. "But, eventually, both will be there with originations. That's a short-term thing."
On the topic of innovation, some in and around the payments space see meaningful differences between the FedNow and RTP networks.
Sheril said the messaging technology that underpins FedNow was designed to enable a wider variety of use cases. She cites the example of an option for selecting account types in transactions as a feature that could make it easier for creating specific payments products.
"None of these things say 'I allow or don't allow a use case' — neither RTP nor FedNow say that, they say they're agnostic, but they enable them," she said. "FedNow has opened up the
Sheril noted that RTP has adopted its approach over time and she expects the two systems to push each other to be more innovative.
Jackson has noted that FedNow takes a more permissive approach to different use cases than RTP, but he sees the difference between the two as minimal and likely to close over time as participant demands and expectations solidify.
"For the Fed, once you're connected to FedNow you can use FedNow, regardless of use case. TCH has certain use cases that are allowed to be supported on the network and others that are not, that is true, but I don't know that that's a long term thing," he said "That that's more about TCH wanting to make sure that they're ready for each use case that comes on board."
Jess Cheng, a lawyer with Wilson Sonsini Goodrich & Rosati and a former Fed attorney, said the legal framework within the FedNow system is advantageous to financial technology firms and other nonbank financial institutions.
Cheng, who helped draft the framework during her time working for the Fed Board of Governors, noted that while both FedNow and RTP require fintech to partner with an approved financial institution to access their networks, the Fed's process is less onerous on fintechs.
"It's just a different approach, one that's just more open to nonbanks," Cheng said. "It's not like any and everyone can just use it, but it is a different approach that the Fed has taken and in part it's relying more on the bank, the FedNow participant that a nonbank is partnering with, and expecting them to do the risk management."
Gunasena said RTP and FedNow are subject to the same regulations regarding access to payment rails and chalks up the differences between the two networks to lessons learned during the past six years of operation.
"Both networks operate as the financial institutions being a part of the network, they are the participants and then their customers will integrate either directly to the network or through a financial instrument. Both models are the same," he said. "I would say we have streamlined operations throughout the years from the lessons learned and the feedback."
