FedNow's first year, and its impact on real-time payments

The Federal Reserve's FedNow real-time payment network will mark its first anniversary on July 20, but it's not the only network with reason to celebrate.

The Clearing House's RTP Network, which launched six years ago, had its first $1 billion day on June 28. It's likely not a coincidence, given the influence, fast growth and potential scale of the government–backed FedNow system has also likely drawn attention to the RTP network. 

The "rising tide raises all ships" nature of the networks' relationship will be key as each provider attempts to add banks, support international payments and eventually clear the hurdles that prevent the networks from working together. 

"FedNow has shined a light on real-time payments in the U.S., and reinforces that real-time payments will be the payment mechanism for the future," said James Colassano, a senior vice president at The Clearing House. "We're seeing people waking up to the fact that real-time payments are here and are real."

A milestone for real-time payments

By nearly all measures, the RTP Network has expanded significantly in the past year. RTP processed about 82 million transactions in the second quarter, totaling $55 billion. That's up from the second quarter of 2023, when there were 57 million transactions totaling about $29 billion. There were 652 banks and credit unions on RTP at the end of the second quarter of 2024, up from 340 at the end of 2023's second quarter. 

The number of end users is also growing. There were 250,000 businesses that used RTP to send payments each month in the second quarter of 2024, up from 130,000 in 2023; and more than 5 million consumers, up from 3 million. 

FedNow is similarly gaining traction. Thirty-three percent of banks offer FedNow and another 43% plan to offer it, according to a survey by Arizent, American Banker's publisher. Thirty-eight percent of banks offer RTP, and 24% plan to offer RTP.

"We've had a number of years to be aware of real-time payments. FedNow's significance was it signifies instant settlement is not just a novel innovation, but a permanency," said Jennifer Lucas, the Americas payments consulting leader for EY.

More than 800 financial institutions and other firms are connected to FedNow, up from fewer than 60 at launch on July 20, 2023. The addressable market for FedNow is about 8,000 users, with near-full adoption expected to take years.

The Federal Reserve has not released data for FedNow payments. A Fed survey released in May found that 86% of businesses and 74% of consumers had used faster or instant payments in 2023, and 74% of businesses and 79% of consumers say they are "looking" to their financial institution to provide these services. (The difference between "faster" and "real-time" payments is "real-time" payments settle in generally less than one minute, while "faster" payments settle within the same business day). 

"FedNow was a success out of the gate," said John Wilson, director and product line manager for instant payments at FIS, which sells real-time-payments technology for both RTP and FedNow. FIS was part of the FedNow pilot and has over 60 banks supporting FedNow with an additional pipeline. "We started with just a small handful. The growth has been explosive," Wilson said. 

What's next for FedNow?

FedNow's introduction has led banks to consider how to use real-time payments for specific products. Banks need to consider the balance between the cost of investing in two new payment methods with the potential to move funds faster and improve money management. Ninety-five percent of banks and 100% of the credit unions listed improvements in customer experience as a reason to support real-time payments, according to Arizent's survey. 

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Mainstream activities such as transferring funds from digital wallets to bank accounts, and payments for gig economy workers, should pick up rapidly as uses for the real-time networks, according to EY's Lucas. 

"We are seeing growth across a number of use cases," TCH's Colassano said. "While we opened the network six years ago, it takes a while to get the scale and the reach. Now we have significant reach and we're starting to see scale." 

For the next year, TCH is focused on three areas to expand real-time payments — collections, cross-border payments and B2B transactions — which Colassano said are still largely reliant on checks. 

TCH has worked on Request-for-Pay, or RfP, for several years, with early adopters including JPMorgan Chase, Citigroup, PNC and BNY Mellon. RfP ties the RTP Network to invoicing, and is designed to better match payments against the payor's cash position to reduce overdrafts. RfP has found early use among utilities, and TCH is working to expand the billing and payment types over the next year. 

"Most of what has been done with real-time payments is to push transactions out, like payroll," Colossano said. "There hasn't been too much done around collecting. But real-time can make collection more efficient." 

TCH is also working with international counterparts such as the Paris-based EBA Clearing network in the European Union to enable international real-time payments, with Bank of America, HSBC, ABN Amro and BBVA among early participants. 

In testing, TCH found that a cross-border payment can clear and settle in 30 seconds. TCH and its partners are building a regulatory framework for international payments with a formal launch scheduled in about 18 months. 

"A large boost in cross-border volume will be next," said Nilesh Vaidya, global industry head of banking and wealth management at Capgemini, noting that there are more than 50 countries with real-time payment networks. 

To boost uses for FedNow, the Fed recently launched a user group to promote collaboration on payment technology among network members, a digital onboarding process to speed adoption and added security controls to mitigate fraud. 

"We are encouraged to see the breadth of FedNow Service adoption across the country, bringing the accessibility of instant payments to communities of all sizes, and generating momentum for our expanding network," said Mark Gould, chief payments executive for Federal Reserve Financial Services, in an email from the Fed's public relations office. "While we're still early on the road to instant payment ubiquity, it's exciting to see people and businesses start to reap the benefits of instant payment solutions provided by their financial institutions."

There are still challenges for real-time payments in the U.S. FedNow and the RTP Network are not interoperable. The two networks process payments differently, but both networks have pledged to iron out those differences in time.  

RTP reaches 68% of U.S. checking and savings accounts in the U.S., while FedNow reaches 29% of checking and savings accounts; about 95% of FedNow's coverage overlaps with RTP, according to TCH. 

"We're working with the Federal Reserve to ensure that there is interoperability in the future," Colassano said. "For now, we're trying to minimize any differences in the specifications between the two networks." 

Since there are two major and distinct real-time networks in the U.S., it creates a challenge for banks to choose one or both or try to determine which network has the best chance of reaching the most users, Lucas said. 

"If you are sender and recipient that supports different networks, that's a challenge," Lucas said. 

And even given the dramatic growth of both FedNow and RTP over the past year, real-time payments in the U.S. still lag far behind the adoption in countries such as Brazil and India. 

Part of the reason is development and adoption in the U.S. is market driven, rather than tied to a government program.

"There are mandates in those other countries," Lucas said. "Regulators in the U.S. focus more on safety and soundness than on adoption." 

Future adoption of the ISO 20022 protocol, which enables more information to accompany financial transfers, should also enable growth in instant settlement for cross-border transfers and interoperability between real-time networks, Wilson said, adding that should spur wider adoption.  

"ISO [20022] will take a lot of the ambiguity out of real-time payments," Wilson said.