FedNow at Year One

As the Federal Reserve’s real-time payments network celebrates its first birthday, the payments industry takes stock of its impact on instant transfers.

Launched with great fanfare in July 2023, the widely and long-anticipated FedNow has largely enjoyed a successful first year.

One area where the network has excelled is in establishing connections with financial institutions. FedNow has links to more than 700 FIs, more than the rival Real Time Payments network, which was launched in 2017 by The Clearing House Payments Co. As of June, the RTP network had connections to about 630 financial institutions, more than double the number a year ago.

The speed with which FedNow has connected to financial institutions is considered a big win for the network, as it demonstrates real-time payments are a high priority for the nation’s financial institutions, large, small, and mid-size. That bodes well for the future of real-time payments in general, payment experts say.

Another check in the win column for FedNow is that is has succeeded in broadening real-time payments connectivity to small and mid-size financial institutions, something payments experts say is necessary for real-time payments to become ubiquitous in the United States. Indeed, the majority of financial institutions connected to FedNow are small to mid-size institutions.

Where FedNow has not fared as well is in transaction volume. While the Federal Reserve has yet to release monthly volume for FedNow, payments experts believe the network’s volume is a fraction of the 1 million daily transactions handled by the RTP network. As with any new payments rail, building volume takes time. And the RTP network did not have high volume its first year out of the gate, payments experts note.

Another area where FedNow has work to do lies in the fact that the majority of banks connected to the network are only set up to  receive transactions. Even with links to more than 700 financial institutions, FedNow needs to grow the number of originators on the network if it is to substantially grow its volume, observers say.

In payments, this is what is known as “a chicken and egg scenario,” says Jennifer Lucas, Americas Payments Consulting Leader for EY (Ernst & Young Ltd.). “It’s hard to build products and services that can build volume for a network when the network doesn’t connect everywhere,” she says.

Another factor that might make financial institutions hesitant to join FedNow as an originator is concern in the marketplace about the risk of sending an irreversible payment over a network that has a thin track record. For some observers, the Fed may be behind the nascent system, but it’s still a nascent system.

As a result, until FedNow can achieve a better balance between originating and receiving banks, it won’t move the needle for real-time payments in the U.S. much beyond niche status, says Michael Greenwood, a research analyst for Juniper Research.

“FedNow has given a boost to real-time payments in the U.S. and done well in some areas, but its volume is low compared to the RTP network and it still has only connected to a fraction of the financial institutions in the U.S.,” Greenwood says. “The next challenge for FedNow will be in boosting usage on the origination side.”

‘The Second And Third Inning’

That will be a challenge. There are more than 11,600 financial institutions in the U.S., according to San Francisco-based Plaid Inc., an open-banking specialist.

Another speed bump for FedNow’s growth engine is that several of the largest banks in the country, including Bank of America, Chase, Citibank, and Capital One, have yet to connect to FedNow. Instead, those banks are connected to the RTP network. Indeed, BofA, Chase, and Citi are among the 20 major banks that own The Clearing House Payments Co., RTP’s parent company.

Having the largest national banks on board gives the RTP network connectivity to about 70% of the demand-deposit accounts in the country. The RTP network’s appeal also extends across financial institutions of all sizes, with connections to about 90% of the banks and credit unions in the U.S. market

“For us, the heavy lifting is done as we have the [account and bank] reach,” says Rusiru Gunasena, senior vice president for RTP product development for The Clearing House, which enjoyed a big March quarter statistically (chart, page tk). “The challenge for FedNow going forward will be to achieve the same level of reach as financial institutions grapple with joining a network that doesn’t have the same reach as the RTP network.”

While there are certain to be growing pains for FedNow, there will be plenty of use cases that can generate volume for both networks, Gunasena adds.

But the fact remains that the nation’s central bank is behind FedNow, an undeniable advantage. Payments experts predict the network will become a force in real-time payments in the next few years.

“While the immediate impact of FedNow has not been that sizable, the promise it holds to make real-time payments more common in the U.S. is still there,” says Nick Babinsky, chief product officer for Solutions By Text, an Addison, Texas-based provider of text-payment and messaging solutions. “The real impact of FedNow on real-time payments will start to be seen in the second and third inning.”

Emerging Use Cases

Signs that FedNow is gaining momentum are already emerging, especially when it comes to rapidly increasing volume at some banks.

“We’ve seen banks go from a few hundred FedNow transactions a month to a few thousand, and then a few hundred thousand,” says John Wilson, director and product line manager for instant payments at FIS Inc., a big Jacksonville, Fla.-based transaction processor. “We expect to see continued volume growth for FedNow in 2025, then substantial growth in 2026.”

Another indication of FedNow’s impact on real-time payments is that it has represented a choice of networks for financial institutions looking to implement real-time payments, prompting many fence-sitters to connect to FedNow or the RTP network.

One reason FedNow has been successful connecting to small and mid-sized financial institutions is that those financial institutions view the Federal Reserve as the primary non-card network operator.

“With FedNow, the Fed is establishing that real-time payments will be part of the U.S. economy, and that gets more foundational conversations around real-time payments started,” EY’s Lucas says. “The Fed’s involvement in real-time payments carries a lot of weight.”

Having a choice of networks also prevents financial institutions from being forced to join a real-time payments network to meet customer needs because no other option exists.

“Not being forced down a path cuts both ways for FedNow and the RTP network,” FIS’s Wilson says. “Smaller financial institutions tend to be hesitant to join the RTP network, but understand the Fed’s payment strategies, which makes choosing a network easier for them.”

The Fed’s brand power alone, however, is not enough to drive volume over FedNow. Use cases will play a critical role in building volume, payments experts say. One of the most intriguing of the use cases to emerge so far is digital-wallet drawdowns, which enable funds to be moved from a digital wallet to a bank account in real time.

The appeal of these drawdowns for consumers is that they can move money out of a stored digital wallet and into a bank account immediately. Otherwise, money would be moved via the automated clearing house, which can slow the transfer of funds by as much as 24 hours, payment experts say.

Other use cases expected to drive volume for real-time payments include payroll, earned wage access, disbursements, push credits, pay-by-bank purchases online, and account-to-account payments. Bill payment is yet another frequently mentioned use case.

Dutch fintech Adyen NV is working with merchants to implement FedNow for such use cases as instant payouts, topping up their Adyen account, and enabling instant transfers for embedded and enterprise bank account holders at Adyen.

“We see FedNow as a strategic opportunity to help settle funds as fast as possible with an instant offering that can be faster than same-day ACH,” says Trevor Nies, senior vice president and global head of digital at Adyen.

Leveraging AI

Enabling those use cases falls on the shoulders of fintechs and payment-service providers. Fiserv Inc. for example, is embedding many of the aforementioned use cases into its platform to kickstart adoption of real-time payments.

“There really are no [technical] obstacles to embedding capabilities for these use cases, it’s really a matter of prioritizing needs within the market,” says Matt Wilcox, president, digital payments, at Milwaukee-based Fiserv. “Where immediate accessibility to funds is critical, real-time payments will be key.”

While many of the use cases for real time payments involve consumer-to-business and business-to-consumers payments, the motherlode of transaction volume lies in government-to-consumer and business-to-business transactions, experts say.

Tapping into B2B volume will be slow going because speed of transaction is not necessarily a priority in B2B payments. What’s more important is the messaging around the transaction, such as what the payment is for. This, indeed, is more important than the speed of the transaction, says Juniper’s Greenwood.

One advantage of real-time payments in the B2B world is that it can dramatically improve the recipient’s cash flow. “Even the relatively short payment delays from ACH can increase day sales outstanding and keep working capital from being available to other business needs,” says Brandon Spear, chief executive for TreviPay, a B2B and invoicing platform provider.

Apps that leverage artificial intelligence for messaging around B2B transactions can be just the ticket for unlocking B2B volume over FedNow, according to Greenwood. “Integrating AI around B2B messaging can enable messages to be machine-read by another app and automatically logged in to an accounting app upon receipt,” he says. “Those are the kinds of the tools businesses want.”

Getting government agencies onboard with real time payments is another way to provide a big boost to network volume. “Think of what it would mean for the IRS to use FedNow to send refund checks or the Social Security Administration to send out checks, that would be a seismic shift,” says EY’s Lucas.

‘Plenty of Volume’

Two points of differentiation the RTP network has over FedNow, at least for the time being, are speed of transaction and higher caps on transaction dollar amounts. The RTP network can complete a transaction in about five seconds, compared to 20 seconds for FedNow, according to Abhishek Veeraghanta, founder and chief executive of payments-platform provider Pidgin Inc.

Despite those differences, payment experts do not see them as negatives for FedNow, as the difference in transaction speed is unlikely to be that noticeable to most consumers. Plus, FedNow’s cap of $500,000 per transaction is adequate for most transactions and will likely be raised over time. And transaction speeds will shorten as the network gains its footing.

“One of the strengths of FedNow is that it settles transactions directly, you don’t have to open an account on a separate network,” says Veeraghanta. “FedNow is demonstrating its value, and the use cases for both networks will define themselves.”

One drawback for both FedNow and the RTP network is their lack of interoperability. While the inability to share data between the two networks is a chasm that will eventually have to be bridged, fintechs and payments platforms are getting around it by encouraging financial institutions to link to both networks to ensure senders can reach their desired endpoints.

“If the receiving bank is not in the originating bank’s network, the originator can simply waterfall to the next network,” says Fiserv’s Wilcox.

With plenty of volume available from cash and check transactions alone to be moved over real-time payment networks, the prospects for FedNow and TCH remain bright.

“Between cash, check, wire, and ACH, there’s plenty of volume to go around for FedNow and the RTP network,” says Lucas.