Instant settlement will soon become accessible to just about the entire U.S. financial system, creating an opportunity to change a variety of transactions — perhaps even the most important payment in most people's lives.
"If I'm working on July 4 and want to get paid, my company can pay me," said Uma Wilson, chief information and product officer for UMB, a $37 billion-asset bank based in Kansas City.
Like hundreds of financial services executives, Wilson is preparing for the launch of FedNow, the Federal Reserve's government-backed real-time payment network. FedNow, which recently announced it will
One of the opportunities — and challenges — for the two real-time networks will be improving payroll flexibility as more people are employed outside of the traditional 40-hour work week.
"The gig economy is a demanding environment. … If you are in a position to pay someone every day, that's very powerful," Wilson said. "Real-time payments are available at all times; there are no after hours or bank holidays for real-time payments."
Before the pandemic, about 57 million people were part of the gig economy in the U.S., meaning they worked as freelancers or contract workers, according to
The gig economy is a segment that lends itself to
"Payroll, normally the sleepier side of the banking industry, is heating up," said Rob Nardelli, director of commercial banking and business development for DailyPay, a fintech that provides early wage access and other salary payment products. "Anyone who collects a paycheck is a use case for real-time payments."
Nardelli, who like Wilson will address the coming of FedNow at
UMB, which has been formulating its
"When was the last time the country launched a new payment system? It doesn't happen all of the time," said Wilson, who has helped lead a
Beyond payroll, UMB is considering other business and consumer uses for real-time payments, addressing issues such as supply chain transactions and liquidity for consumers and merchants.
Businesses can, for example, negotiate terms to make payments in real time under certain conditions, using instant settlement as a sort of smart contract. "There's a lot of flexibility for businesses and consumers that can come with instant settlement," Wilson said.
Both FedNow and RTP charge $0.045 per payment. FedNow has a lower transaction limit of $500,000 compared to the RTP's limit of $1 million. RTP has about 300 banks in its network, covering about two thirds of the U.S. banking market. FedNow will be available to all banks that have a relationship with the Fed when it launches in July.
Banks will have to consider other costs beyond transaction fees, such as how real-time payments will impact existing payment products, according to Joshua Siegel, partner at Capco who specializes in payments and banking.
"How do you price new products that take advantage of instant settlement?" Siegel said. "How will this exist with other products such as wires? Some smaller banks are thinking about margin erosion for existing products."
But broadly speaking, the existence of two versions of real-time payments will gradually drive costs down for banks, Siegel said.
"We all have responsibilities to shareholders and to manage costs, but I don't think the industry is here to say this one payment rail is cheaper or a lower cost than another," Wilson said. "What we're doing more than cutting costs for the payment is changing how payments settle between point A and point B."
The differences
"It's not just UMB, many financial institutions have shared that need for interoperability with the Fed and The Clearing House," Wilson said. "The Fed offers ACH processing, so they are interoperable in other areas. Eventually I'm hoping that works for real-time payments as well."
