FedNow advances toward making real-time payments mainstream

Frost Bank

Real-time payments are moving beyond early adopters to a new phase as a number of banks and credit unions take up the government-backed FedNow network as it enters its second year. There are now more than 900 financial institutions offering FedNow, the Federal Reserve said in August. That's up from 450 in February and 35 at the real-time payment network's launch in July 2023. 

While that's a large jump, it also leaves as many as 8,000 eligible banks and credit unions in the U.S. that have not signed up. And the U.S. lags countries with government mandates to use real-time payments, or transactions that settle in a few seconds instead of on the same day or in two to three days. Brazil and India far outpace the U.S. About 95% of digital payments in Brazil process through that country's network, compared with the projected 4% real-time payments share in the U.S. by 2026, according to Statista. 

"The volumes will come in the U.S., but it takes time," said Erika Baumann, director of commercial banking & payments and health care payments at Datos Insights. "Everything that is market-driven moves slow in this space, and FedNow is no different."

How real-time payments are being used

Instant settlements are gaining attention as a way to help businesses manage their cash positions by matching payments to available funds, and to quickly pay freelancers and other gig economy workers. 

"There are companies that need help with liquidity management, and they're looking to see what we can do in terms of not having to dance around payment cutoff times," said Aaron Wiatrek, manager of treasury management for Frost Bank, a $52 billion-asset bank based in San Antonio. 

Payments

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February 17, 2023 12:27 PM

Frost recently signed with payment technology company Finzly to support real-time payments for FedNow and RTP, with the ability to receive payment planned to go live later this year and sending payments debuting in 2025. Frost is combining FedNow and RTP in a single system to make it easier to work with the two networks, which have different processing models and are not interoperable. Wiatrek anticipates business payments and treasury management will be the initial users for both RTP and FedNow. 

Frost is also interested in using Request for Pay, or an option that matches the delivery of an invoice directly to the RTP Network (FedNow is also developing an RfP option). RfP is designed to include billing information with the instant payment to better manage balances for accounts payable and receivable. "That will help with the dissociation that comes with business payments being made over new channels," Wiatrek said of the current mix of paper invoices, digital payments and long settlement windows. 

Keeping pace

FedNow's impact has included attracting small financial institutions given the competitive pressure to either adopt real-time payments or at least have a plan. About 77% of banks either offer or plan to offer FedNow, according to research from Arizent, American Banker's publisher. The research said 62% offer or plan to offer RTP.

"We are starting to see real-time payments pick up among the smaller to mid-sized institutions," said Debbie Buckland, a director and analyst at Gartner. "These smaller banks need to support real-time payments to stay competitive."

About 78% of FedNow's participants are credit unions and community banks, the Fed said. In an email Wednesday, the Clearing House said there are 711 banks and credit unions on RTP, up from 652 at the end of June and 340 at the end of June 2023. About 93% of the RTP network's members are community banks or credit unions. 

In an earlier interview, James Collassano, a senior vice president at the Clearing House, said, "FedNow has shined a light on real-time payments in the U.S. and reinforces that real-time payments will be the payment mechanism of the future." 

The Federal Reserve, which has not released FedNow payment data, did not return a request for comment by deadline. 

FedNow has boosted awareness of real-time payments given the name recognition of the Federal Reserve and the broader attention instant settlement is now getting, said Nicole Dilts, vice president of commercial solutions for MSU Federal Credit Union, a $7.8 billion-asset credit union that primarily serves members connected to Michigan State University. "FedNow has been helpful," Dilts said. "There are a lot of transactions that are processed in real time that we would not have been getting otherwise."

The credit union started real-time payments on the six-year-old RTP network in 2021 and launched FedNow in August 2023, making it one of FedNow's early adopters. MSU processed 685 payments on RTP in the first month in 2021, with transactions expanding quickly to more than 84,000 by the end of the year and 185,000 by the end of 2022, and 250,000 in 2023 and 155,000 in the first half of 2024. Only about 1% of the credit union's total payments volume processes in real time, so there is room for expansion, Dilts said. 

Gig economy and P2P transfers have been the primary payment types for real-time settlement at MSU. "These are the types of payments where people want to have availability right away instead of in a couple of days," she said.

The Dime Bank, a niche bank that sells financial services to small businesses that operate or are connected to day and overnight camps in the Poconos, added RTP in 2021 and "just started" supporting FedNow. The bank processes about 550 transactions per month through RTP and has not yet gathered data on FedNow."Real-time payments are a drop in the bucket right now," said Ferdinand Feola, senior vice president and chief technology officer at The Dime Bank, a $990 million-asset bank based in Honesdale, Pennsylvania. 

Feola anticipates the volume of real-time payments will increase as account-to-account payments and gig economy payments get added to real-time networks in the coming months. 

Frost Bank also anticipates a boost in real-time volume via A2A payments, an older payment method that is getting new life as businesses and consumers try to avoid credit card fees. "Workers will be able to get paid as they work each day and determine the funds they have available to pay bills," Feola said.