The future is FedNow: how the new RTP service is aiming to future-proof US payments

The US is often held up as a bastion of progress when it comes to finance and technology. With the likes of Silicon Valley and Wall Street, the nation has often been ahead of the curve in this arena.

But when it comes to payments, the US has been lagging compared to its peers in Europe, Africa and Asia. Whether it’s contactless payments, UPI, open banking, PayNow or NITMX, nations across the world are racing ahead when it comes to innovation in digital payments.

In the US, cash and paper cheques are still relatively common ways to pay. According to Pew Research Center, as of late 2022, 59% of Americans still pay for at least some of their weekly purchases with cash while cheques are still used for 60% of retail payments, according to the Federal Reserve Bank of San Francisco.

Cheques can take several days to process, as can Automated Clearing House (ACH) transfers, which are used for moving money between bank accounts digitally.

Payments in the US, therefore, seem ripe for disruption. The stage is set. Enter FedNow.

Showtime!

FedNow is a real-time payment system developed by the Federal Reserve, allowing for instant money transfers between banks, individuals and businesses.

Checkbook CEO PJ Gupta

Set to debut in July, the system will operate around the clock and works off the principle of real-time gross settlement (RTGS), settling funds almost instantaneously rather than overnight, therefore improving cash flow and increasing operational efficiencies.

It also has the potential to drive innovation in the financial services industry by enabling the development of new payment products and services and could promote financial inclusion by providing a more accessible payment system for underserved communities.

“While many other countries have already deployed a real-time system, it’s good to see the US finally getting its own real-time/instant payment system,” says PJ Gupta, CEO at Checkbook, a US-based push payments platform.

For financial services providers, Gupta believes FedNow will improve both customer satisfaction and increase revenue. It will also enable businesses to offer more flexible payment options to their customers, such as real-time payments and on-demand payments.

Crucially, FedNow can create opportunities for payment providers to develop new payment products and services that leverage the real-time capabilities of the system. It will also create competition for existing payment providers, as businesses and consumers may choose to use FedNow instead of traditional payment systems.

“Basically, enabling faster payments creates huge opportunities across the board. FedNow has the potential to transform the payments landscape by providing a faster, more efficient and more accessible payment system that benefits both consumers and businesses, though it will take some time before it’s enabled with all banks,” Gupta says.

Real-time payments could also help consumers to manage their finances more effectively. For example, if a consumer needs to make an urgent payment, they will be able to do so instantly without having to worry about waiting for funds to clear or incurring fees for expedited payments.

Additionally, real-time payments can help consumers to avoid overdraft fees and other penalties, as they will have more visibility and control over their account balances in real time.

“Another potential benefit of FedNow is that it will increase competition in the payments market, which could lead to lower fees and better services for consumers,” Gupta believes.

By providing an alternative to existing payment systems, FedNow will give banks and other financial institutions motivation to innovate and improve their services to remain competitive.

Teamwork makes the dream work

In addition to the Federal Reserve, there are several other players involved in the development and implementation of FedNow.

The Fed has worked with a number of industry players to develop FedNow

Alongside banks and FIs, payment processors such as Checkbook and other third parties will play a key role in integrating FedNow into their systems.

The Clearing House, a private organisation that currently operates the largest real-time payment system in the US, called RTP, is working closely with the Federal Reserve to ensure that the FedNow system is compatible with RTP and other payment systems.

Technology providers will also be crucial in the development and implementation of the FedNow system. They will be responsible for building and maintaining the technical infrastructure that powers the system, including the software, hardware and network components.

Industry associations and standards bodies, such as the National Automated Clearing House Association (NACHA), will set standards and guidelines for the use of real-time payments in the US. These organisations will work closely with the Federal Reserve and other stakeholders to ensure that the FedNow system is compatible with existing standards and regulations.

Overall, FedNow is a complex project that involves multiple stakeholders across the payments industry, including banks, financial institutions, payment processors, technology providers and industry associations.

“Cooperation and collaboration among these stakeholders will be critical to the success of the project,” Gupta says.

Going live

Checkbook will be going live with FedNow on day one with its banking partners and has been a member of the FedNow pilot programme since it launched in 2019 to test the system’s functionality and gather feedback from participants.

“As a participant in the pilot programme, Checkbook has been able to provide valuable insights and feedback on the system’s design and functionality,” Gupta says.

The company is working to develop solutions that will enable its clients to access the FedNow network. This includes enabling its existing APIs to integrate with the FedNow system and make real-time payments.

Checkbook is also working to raise awareness of FedNow and the benefits it offers. “This has included speaking at industry events, publishing content and engaging with key stakeholders in the payments ecosystem,” Gupta says.

FedNow has a lot of ground to cover in order for the US to catch up with its peers across the globe. So why has the US lagged behind when it comes to payment technology?

“It’s a simple but ubiquitous reason,” Gupta believes. “Once a system is built and all the banks and institutions are integrated with it, it becomes more and more difficult to make any changes since any change must be accepted and implemented by every bank and institution. In other words: it’s easier to build a new system than to transform an older one.”

“ACH was one of the first online systems when the US built it almost 48 years back. However, the world has come a long way since. It doesn’t scale in today’s day and age,” Gupta says.

Another factor is that the US has historically been focused on card-based payments, such as credit and debit cards, rather than other forms of payment, such as mobile payments or real-time payments. “This focus on card-based payments has led to a less developed ecosystem for other forms of payment in the US,” Gupta believes.

But with the introduction of FedNow, the US is taking a “significant step” towards catching up with other parts of the world when it comes to payment technology. FedNow has the potential to provide a more efficient, secure and cost-effective way for businesses and individuals to make real-time payments, which is a key feature of many other payment systems around the world and “is essential for staying competitive”, says Gupta.

The future of FedNow

Gupta believes FedNow will act as a foundation for other payment technologies in the future.

“The real-time payment infrastructure that FedNow provides can serve as a platform for the development and implementation of other payment technologies and services, such as digital wallets, mobile payments and peer-to-peer (P2P) payments,” Gupta says.

Much care has been taken to future-proof FedNow

One example of how FedNow can be used to support new payment technologies is through the use of application programming interfaces (APIs). FedNow’s open architecture will enable banks and other financial institutions to develop their own APIs and integrate them with FedNow, allowing for the creation of new payment services and applications.

Another example of how FedNow can be used to support future payment technologies is through the use of artificial intelligence (AI) and machine learning (ML).

FedNow’s real-time payment infrastructure can provide the necessary data and connectivity to support the development and implementation of AI and ML-based payment technologies.

“These technologies can be used to enhance fraud detection and prevention, automate payment processes and provide more personalised payment services to customers,” Gupta believes.

Built using modern technology and best practices, with a focus on security, resiliency and reliability, FedNow has been designed to be adaptable and scalable, with the ability to support future upgrades and enhancements as needed.

“The Federal Reserve has also stated that they plan to work closely with industry stakeholders to ensure that the FedNow system remains relevant and effective as payment technology continues to evolve,” Gupta concludes.

Despite dragging its heels for decades, the US may now be set to reclaim its crown as chief global innovator, with FedNow opening up new and unknown opportunities for financial institutions, paytechs and, of course, consumers.