This summer's upcoming launch of the Federal Reserve's real-time payments FedNow Service will have a significant impact on the payments industry. This new service will have commercial implications for participants in the payments ecosystem and spur key stakeholders to devote necessary resources to support instant payments if they haven't done so already.
FedNow will enable participating financial institutions to provide real-time payments services 24 hours a day, seven days a week, 365 days a year. Once rolled out, FedNow will operate in competition with RTP, the real-time payments network operated by The Clearing House that has been in existence since November 2017.
Through financial institutions participating in FedNow, businesses and individuals will be able to send instant payments, and recipients will have full access to funds almost instantaneously. Due in part to FedNow's incentive pricing, most U.S. banks are expected to participate, although rollout and widespread adoption by businesses and consumers will inevitably take some time.
Market trends suggest that there will be an uptick in adoption of real-time payments for various business and consumer use cases once the availability of real-time payments becomes more ubiquitous.
Initial naysayers of FedNow have questioned whether its rollout would stifle private sector competition. That is unlikely to be the case. Key stakeholders are incentivized to make real-time payments available since both consumers and businesses view this functionality as table stakes.
On the contrary, as a result of the launch of FedNow, we are likely to see an increase in payments innovations and new hybrid payments offerings from financial institutions and other payments service providers as they consider how to recoup the potential loss of lucrative interchange fees to real-time payments products.
Real-time payments cost less to process than other types of payments transactions such as debit and credit transactions — just look at the RTP transaction fees compared to credit and debit card interchange fees. FedNow is also offering key pricing discounts for new customers in 2023.
Over time, as use of FedNow becomes more widespread, especially at the business-to-consumer level, merchants will apply greater scrutiny on the (higher) rates they currently pay to facilitate acceptance of payment methods that are not real-time payment products and re-evaluate the existing commercial arrangements in their payments contracts.
Real-time payments' lower rates will put downward pressure on the rates for these existing payments products. Merchants in particular may re-evaluate their customers' appetite for different types of functionalities in their payment methods, which come with different fees imposed on the merchants.
That is not to say that real-time payments will completely replace existing payments products. Consumer credit products aren't going anywhere, but they may evolve. Instant payments have benefits, but not every aspect of instant payments will be desirable in every situation. Certain features of both credit and debit card products may benefit from using FedNow's real-time payments rails, and some aspects of instant payment services and functionalities may find their way into credit and debit products and their related services.
Risk allocation in the payments space will also become more important than ever before as fraud detection and prevention will run up against the promise and expectation of instantaneous payments. Real-time payments introduce always-on-service and near-instant payment finality to a landscape already wrought with fraud. While regulations such as Regulation E and Article 4-A of the New York Uniform Commercial Code will play a role in allocating risk responsibilities for real-time payments, there will be gaps to cover in the commercial agreements negotiated between business parties. And all of these agreements, including the risk allocations, will be re-evaluated from a commercial terms perspective.
There have also been endless industry debates about whether interoperability issues — the inability of RTP and FedNow to route payments to the other service — would adversely impact the initial launch of FedNow. We do not expect an initial lack of interoperability between RTP and FedNow to affect real-time payments adoption in any meaningful way. The reality is that lack of interoperability is nothing new.
As long as the products are well defined, easily accessible (even if on different platforms), and the price is right, then consumers and businesses will not be deterred from using real-time payments.
From the gig economy to P2P payments to metaverse economies, tomorrow's consumers and business customers will seek flexibility in selecting real-time payments functionality.
But, this will take time.
