The ubiquity of digital payments continues to grow every year. According to a recent McKinsey & Co. report, global payments revenue grew 7% every year between 2018 and 2023, and by 2028 should result in a revenue pool of $3.1 trillion. While the majority of progress on digital and instant payments has been made outside United States borders, the U.S. still commands a significant share of digital payments activity, dominated by third-party providers such as PayPal Holdings, Early Warning System’s Zelle and Block’s Cash App.
The Federal Reserve recently launched its own instant payments service, FedNow, which provides real-time inter- and intrabank payments functionality to any financial institution looking to onboard its technology at a fraction of the price-per-transaction, compared to third-party competitors. As of January, just over 1,000 institutions are live on FedNow in some capacity, but greater expansion is inevitable given the service’s potential to address big-picture needs, such as earned wage access and the improvements to payments infrastructure proposed by advocates of a U.S. central bank digital currency (CBDC).
In thinking about FedNow and its place in a diverse, comprehensive payments ecosystem, it’s important to distinguish what FedNow offers at the current moment — and what is likely on the horizon.
Users initiate a payment through FedNow much like they would with traditional automated clearing house (ACH) payments by using account and routing numbers to instantly send or receive money to another account. Of the financial institutions currently using FedNow, the majority have begun with receive capabilities. That trend is expected to continue until the ecosystem gains momentum.
Because of its reliance on account and routing numbers — information not widely shared by consumers — the initial business banking use cases for FedNow are likely to account for a higher dollar volume, with important benefits to consumers developing quickly.
The implications of a strong instant payments infrastructure for business banking could drastically change how we conduct a myriad of back-end functions like forecasting and cash flow analysis. So far, business banking customers of FedNow have found the benefit of earned wage access, which enables employees to access their money in real time rather than waiting for the next payroll cycle.
“This has huge real-world implication,” says Martin Lindholm, director of technical product management at Narmi . “We’ll have people be in better control of their cash management and not rely on other short-term lending sources, like predatory check cashing or payday loans.”
FedNow also offers benefits for consumer applications in the near term, such as moving money between their own accounts, like a brokerage account to a checking account.
In questioning whether consumers or businesses will benefit more from FedNow and their respective rates of adoption, one clear winner emerges in a world where FedNow use becomes industry standard: financial institutions. The advent of the service will result in banks and credit unions having more granular control over the payment user’s experience than they do when using a third-party service. This control will allow financial institutions to layer in their own technology and design approach, tailored to their communities’ needs. As usage of FedNow grows, the structure of the service itself has the potential to shift the culture of primacy away from fintechs and towards financial institutions.
“There aren’t any debit capabilities through FedNow: You can’t pull money from another account,” said Lindholm. “There are security benefits to that, but what’s also interesting is that a user has to continuously approve money coming out of their account.”
FedNow combines the immediacy and interactivity of third parties like Paypal’s Venmo with the safety of a Federal Deposit Insurance Corp.-insured financial institution.
“[FedNow] is fundamentally going to change how we interact with payments, and in many cases, how we interact with financial institutions,” Lindholm said.
FedNow is an untapped resource for the majority of financial institutions. It’s difficult right now to predict where the service will sit in the payments ecosystem in both the short and long term, especially in relation to consumer uptake, but regardless, the system poses a significant opportunity banks should consider leveraging.
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