Insight & Analysis

FedNow boosts prospects for US consumer market

Published: Aug 2023

The launch of the Federal Reserve’s real-time payments system joins the private-sector Real-Time Payments system and the large-value FedWire in the United States, adding to the real-time coverage for individuals’ and small businesses’ payments.

The long-awaited launch of the Federal Reserve’s FedNow real-time payments system has arrived, giving a boost for corporates that rely on consumer or small-business payments. First announced back in 2019, the US consumer market now has the instant payment system, which was officially launched on 20th July.

Real-time payments are not new to the US market; corporates are already making high-value real-time transactions on the central bank’s FedWire system. And The Clearing House, a private-sector organisation, has been operating the Real-Time Payments (RTP) system since 2017. The addition of FedNow, however, expands the coverage of instant payments, providing an infrastructure to the entire market that opens access to all institutions, no matter how small they are.

Lance Noggle, Senior Vice President and Operations and Senior Regulatory Counsel at the Independent Community Bankers of America (ICBA), commented on how the new service was welcomed by ICBA’s members. “Having the Fed in the space makes our members feel more comfortable that their needs will be met, that they will be treated fairly for pricing,” he was quoted by Reuters as saying.

At the time of the launch, the Federal Reserve Chair Jerome Powell said, “Over time, as more banks choose to use this new tool, the benefits to individuals and businesses will include enabling a person to immediately receive a pay cheque, or a company to instantly access funds when an invoice is paid.”

It could be argued this increased velocity of money is not critical, and the economy has functioned well so far without it. Real-time payments, however, are crucial in times of stress, as a blog by MasterCard points out. During the pandemic, businesses became dependent on relief from the government, and the slow speed at which they received their stimulus cheques hampered their ability to survive. “Speed is also key in disaster relief, particularly when brick and mortar banks are closed and people are dependent on cards and mobile wallets to receive aid,” the blog continues. With real-time payments, individuals and businesses can receive their money instantly.

And for corporates that operate in the direct-to-consumer space, this has implications for their cash and liquidity management. Now there is no need to keep aside funds to cover outgoing payments because of the uncertainty of when they’ll be settled, which means their cash can be put to better use. And on the receiving end, there’s no need for short-term borrowing to tide a company over until they are paid.

It’s not just the payments that will be in real-time; everything else needs to be in real-time to accommodate this new rhythm of business. Accounting systems will need to be real-time, as will monitoring systems. With real-time payments comes the prospect of real-time fraud as money can be siphoned throughout multiple money mule accounts and laundered within a matter of seconds, a risk corporates and financial institutions alike will have to be attuned to. Meanwhile, customer expectations will be raised in this real-time, on-demand environment where they usually get what they want, when they want it.

Many markets around the world have already implemented real-time payments, but the United States by comparison has been slow on the uptake. According to a recent report by ACI Worldwide, more than 70 countries have real-time payment systems, which handled US$195bn’s worth of transactions in 2022, which was a 63% increase on the year before.

Now the United States has greater coverage, it opens up opportunities not only for corporates that serve the consumer market, but also for fintech companies that operate in the payments space. With scale, there will be more opportunities for them to invest and develop services for the US market. For example, Zach Perret, the CEO of data network and payments platform Plaid said FedNow will be a “large accelerant” and catalyst to fintech companies, as well as a boon to businesses.

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