Real-time payments improve cash flow for businesses and individuals, freeing up funds for purchases and investments that can drive wider economic growth. FedNow, the Federal Reserve's new instant payment infrastructure, could then become a welcome catalyst for the U.S. economy.
The Fed's efforts to facilitate real-time payments, however, could fall disappointingly short if it doesn't take some lessons from the world's most widely used real-time digital payments system: India's Unified Payments Interface (UPI).
Smartphones have changed how people interact with the world, right down to how we buy everyday goods and services. Paying digitally may seem inconsequential, but the reduced frictions it brings to financial processes boosts business productivity and can foster innovation. Adding real-time settlement to that dynamic simply amplifies the economic impact.
We know this because we've already seen the benefits in Asia.
Asia's dynamic economies have been at the leading edge of a rapid convergence between finance and technology. Even before the pandemic, the region outpaced the rest of the world in adopting cashless transactions. From the birth of Alipay and WeChatPay in China to the PromptPay platform in Thailand, BI-Fast in Indonesia or most dramatically with UPI in India, Asia is home to some of the most successful real-time payments projects globally.
Consumers in many Asian markets pay for almost everything digitally with payments that deduct from accounts immediately. Ride hailing, big-box retail, e-commerce, hawker stalls — every vendor displays a QR code to connect with consumers' digital wallets via their smartphones. These real-time payments networks have brought the benefits of financial inclusion to millions of unbanked citizens, and helped countless businesses to become more efficient.
Loans, banking and insurance providers have capitalized on data from payment activity to speed up or automate credit decisions, helping to elevate competition for consumer business among finance providers and others.
The next wave of development will enable cross-platform and cross-border commerce. India has already linked UPI to Singapore's PayNow network, and further expansions that allow other countries
The U.S. has lagged in implementing real-time digital payments partly due to the success and ubiquity of its credit card networks. There's simply been less need for alternatives. But with e-commerce and innovations like open banking or buy now/pay later (BNPL) continuing to transform the retail landscape, all businesses are looking for ways to improve customer experiences.
Market intelligence firm IDC predicts that nonbank digital payments, like the digital wallets already popular in Asia, will overtake bank payments in the U.S. as soon as 2028.
In that context, UPI may have some lessons for the newly launched FedNow about modernization.
Despite healthy second-quarter revenue growth, PayPal's stock fell Thursday amid higher-than-expected losses from merchant loans.
Since UPI's launch
Aside from increasing convenience for consumers and businesses, an important lesson from UPI is how a mobile-first and interoperable payments system heightens access to financial services by expanding the pool of providers. Greater competition and collaboration between market players, as well as across industries, leads to more choices for consumers and better user experiences.
To replicate that success, FedNow must include clear standards for the integration of Application Programming Interfaces (APIs). APIs promote the kind of technical openness and commercial interoperability that ensures healthy competition and collaboration among companies — finance, technology, retail or any kind of business. Apple, once just a computer company, now offers savings accounts; its own digital payment platform is key to enabling that, and FedNow could support more of this kind of industry cross-pollination.
But first, it will need to boost corporate participation in FedNow. UPI is ubiquitous in India and there are government mandates for private firms to support it. FedNow's more free-market approach may ultimately be more beneficial to companies, but the initial
But after 100 billion transactions, the most important lesson UPI may have for FedNow is promoting consumer take-up.
Using UPI is incredibly simple. It is an open framework, so people don't need to use a special app to make or receive payments. It is as simple as cash but with the benefits of digital data.
UPI is compatible with low-tech feature phones as well as advanced smartphones. That brings more users into the pool, especially from older or marginalized populations, who are often left out of technological advances. These financial inclusion benefits may be greater in India's 1.4 billion population than in the well-banked U.S. economy of 350 million, but there is still a wide range of technological as well as financial literacy in the U.S. For FedNow to deliver the economic benefits that India has enjoyed from UPI, it must be accessible to everyone.
Still, UPI is not perfect, and this could be a lesson too. A
For FedNow benefits to reach everyone in the U.S., users will need to understand its availability, capability and what it means for them. Much of UPI's success grew from comprehensive public awareness campaigns and the Fed should likewise invest in educating the full range of U.S. citizens and businesses that will come to depend on its platform.
This isn't just about adding tech to finance; it's about simplifying finance to catalyze growth. UPI has done it. FedNow can too.
