Bankers and industry experts see FedNow as an expanding service with room to grow 14 months after it launched.
More than 900 financial institutions had gone live on FedNow as of July. UMACHA President and CEO Angi Farren predicted 1,200 financial institutions could be signed up for the payments service by the end of the year. Many smaller financial institutions were in “wait-and-see mode” before FedNow was introduced, as they didn’t see an immediate need for instant payments.
“To see the growth that we are seeing already in 12 months is quite impressive,” Farren said. “A lot of our smaller financial institutions were waiting for FedNow to come out.”
Roseville, Minn.-based North American Banking Company was one of the first banks to enroll in send and receive capabilities through FedNow when it launched in the summer of 2023. Payments customers were demanding instant credit and debit services at the time, noted President Michael Bilski.
The $1.2 billion bank established a connection to both FedNow and The Clearing House’s RTP network through its software vendor Open Payment Network. Growth has been incremental on the receiving side, with a couple payments clients starting immediately, Bilski said.
For Bilski, who says FedNow is easier to use than The Clearing House’s RTP network, the benefits boil down to one reason: Why — regardless of whether banks are in the payments business — should customers not be able to access RTP on demand? “It’s a great product that the Fed has put together,” Bilski said. “Their customers are working diligently to provide transaction flow.”
FedNow adoption has been slow at Oxford, Mich.-based Oxford Bank as many customers could already access RTP, noted Director of Operations and Security Emily Anderson. The $883 million bank onboarded receivership services through FedNow in April to grasp how the payment rail works and plans to eventually transition into also allowing customers to send instant payments.
Emily Anderson“Instant payments is something that everybody is wanting,” Anderson said. “With FedNow and RTP being the two products for instant payments, we already have our RTP, and figured by getting FedNow, we give our customers the opportunity to have instant payments sent directly to them without having to wait.” Anderson expects RTP network users will gravitate toward FedNow, or that the Federal Reserve will try connecting them to FedNow to enable send capabilities while attracting others not using instant payment rails to choose the service.
Muscatine, Iowa-based CBI Bank & Trust receives FedNow payments through automation technology provided by JackHenry. The $1.5 billion bank went live on FedNow last December and had its first transactions early the following month, said Senior Vice President Larry Randazzo.
CBI Bank & Trust had waited to adopt instant payments before onboarding FedNow as Zelle was much more expensive. “Customers don’t really see an impact, so it’s nice, at least on the receiving side,” Randazzo said. “They can see the deposit come in, whether they realize it’s real time or they don’t.”
As of July, CBI Bank & Trust customers could only receive FedNow payments as the bank waited for fintech partner JackHenry to set up security protocols and make send capabilities available natively with Banno and iPay.
“We’re excited that in the future — as we get the fraud pieces put in place and they allow us to do sending — that we will be able to allow customers to do account-to-account, peer-to-peer, some of those same things that Zelle is allowing, at a much more economical and a little less controversial pace,” Randazzo said.
Focus on B2B payments
Sixty percent of participating banks are receiving FedNow payments, while 40 percent have send and receive capabilities, noted Heman Daswani, principal consultant in the payments group at core banking technology provider Temenos.
Heman Daswani“We were hoping to see even more institutions sign up in the first year,” Daswani said. “Nevertheless, getting 800 institutions onboarded within a year is a big feat.”
The vast majority of businesses view B2B payments as a key use for instant payments, according to a survey from Federal Reserve Services. Seventy-one percent cited business-to-person payments as a major benefit, while 40 peRrcent listed account-to-account payments. Nearly half of businesses use RTP to reduce expenses, according to the report, while 39 percent say instant payments provide flexibility.
“The growing demand for faster and instant payment services suggests that tools like the FedNow Service will continue to play a crucial role in helping financial institutions meet their customers’ needs,” said Mark Gould, chief payments executive for Federal Reserve Financial Services.
A top concern is the possibility FedNow will exacerbate bank runs, after deposit exoduses were cited as the reasons for the spring 2023 failures of Silicon Valley Bank and Signature Bank. Consultants say those fears are overblown and can be addressed by selecting the right vendor.
“If you pick the right vendor, you already have pieces in place such as limits, controls over who is able to spend, and that on its own is enough to stop those risks, to prevent a liquidity crisis that a bank run might cause,” said Abhishek Veeraghanta, founder and CEO of financial services firm Pidgin. He advised banks to select a vendor to help reconcile payments at the end of the day rather than for each transaction.
The number of service providers certified to support payment processing for financial institutions has doubled to 32 from 16 at launch. A feature being rolled out allows banks to configure maximum thresholds to reject either individual or cumulative payments.
Though Daswani said fraud has become synonymous with instant payments, security risks will eventually decrease as financial institutions, customers and regulators learn to prevent cybercrime. He said banks can adopt an offensive strategy to ensure customers don’t lose money, including having shared liability for FedNow senders and receivers. Fraud protection services built on top of a bank’s existing infrastructure can reduce fraud, he said.
“There are already enough means for customers to withdraw their money — going into an ATM, using checks, doing a wire transaction,” Daswani said. “These things are not as convenient as an instant transaction, but if a bank is ever at risk of not having enough liquidity, the end consumer already has enough ways of moving funds that are in that organization into another organization or withdrawing those funds from the troubled organization. It’s not adding as much fuel to that particular run on deposits.”
‘Change can sometimes be hard’
Daswani expects FedNow will become a prominent payment rail supported by every institution over the next several years as government payments — Social Security, tax benefits and tax refunds — become available through the service.
Banks that initially faced longer wait times can now enter the queue more quickly to begin FedNow verification, Daswani said. It still takes months to implement because of the time-consuming process of working with a vendor, receiving Fed certification, making necessary tech upgrades and testing and implementing the program. Community banks onboarding FedNow will need to improve their fraud prevention offerings, Daswani added.
The timeline of rolling out FedNow payments “will remain months,” he said. “It will not shrink to days or weeks, because we are talking about a pretty significant change with the financial institution, especially banks that have never experienced any kind of instant payments offering.”
While Daswani also deemed the rollout of FedNow as successful, he noted the Federal Reserve must still tap potential business partners to spark greater participation among banks. He said the payments sector will benefit from TCH’s RTP and FedNow partnering to bridge the current tech gap between rails. “While many big banks have already joined FedNow, it will take a critical mass of financial institutions utilizing the system to motivate lagging players to enroll,” he added.
Onboarding more banks to receive FedNow payments should convince more institutions to enable send capabilities, added American Bankers Association payments expert Steve Kenneally. Many banks still don’t see payments as a core part of their business, he said. Kenneally advised banks looking to add FedNow to speak with their core provider as vendors have the necessary systems in place. There are also vendors willing to help banks work with their cores to go live on FedNow.
Farren said banks should turn on send and receive capabilities through FedNow even if they don’t plan to initially use both to make it easier to eventually enable the sending option. “If you are going to play in one, you should play in both, because then you are able to gain access to all of the faster payments off of both rails,” Farren said.
More successful FedNow use cases will be required for broader adoption, said Bridget Hall, leader of real-time payments for the Americas at RTP firm ACI Worldwide. “We’ve certainly seen in the payments landscape that change can sometimes be hard, just like any other industry,” she said. “Through the pandemic, seeing that need for digital transactions, the use of QR codes, we saw a little bit of that change happen very quickly because there was a need and an incentive.”
The introduction of FedNow means banks must choose an instant payments rail to meet customer demand, said James Colassano, SVP of product development and strategy at The Clearing House. “By the time you hear from customers that they want instant payments, you’ve already lost the battle,” he noted.
Jim Colassano FedNow adopters are at a competitive advantage if they are taking advantage of both send and receive capabilities, Farren said. UMACHA is rail-agnostic but does advocate for financial institutions to use rails to send and receive transactions.
“As consumers we live in a world of ‘now’ and we expect things to be at a faster pace,” Farren added. “We talk to our members about the competitive advantage, and that’s what it is — giving some of those smaller financial institutions that edge to stay relevant.”
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