The ubiquity of digital payments continues to come closer to reality every year: according to a recent McKinsey report, global payments revenue has grown 7% per year since 2018, and will result in a revenue pool of $3.1 trillion dollars by 2028. While it’s agreed that the majority of progress on digital – and especially instant – payments has been made outside our borders, the U.S. still commands a significant share of digital payments activity, dominated by third-party providers such as PayPal, Zelle, and Block.
With much of work and life increasingly transferred to a digital analogue, it’s no surprise that payments have become increasingly digital. And with digital processes come the expectation of instant gratification -- and the drift of these standards into the payments realm.
“The expectation is increasingly becoming that payments should be instant,” said Sarabeth Perry, Senior Product Marketing Manager at Narmi. “Internationally, this is the norm — especially for businesses. There’s such a stickiness in having instant gratification that it’s inevitable instant payments grow.”
Amid the dominance of third-party payments providers like Venmo and Zelle, the Federal Reserve recently launched its own instant payments service, FedNow. Available 24/7, 365 days a year, the FedNow service provides real-time inter- and intra-bank payments functionality to any financial institution looking to onboard its technology, at a fraction of the price-per-transaction vs. third-party competitors.
The result is the beginning of a quiet revolution in payments technology: at time of writing, just over 1,000 institutions are live on FedNow in some capacity, but 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 terms of intra-bank payment rails, FedNow is the first that is truly digital end-to-end, and broadly made accessible through a neutral provider,” said Martin Lindholm, Director of Technical Product Management at Narmi. “Once you get a taste of instant payments, waiting three days to get your money is going to seem ridiculous.”
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 ACH, by using account and routing numbers to instantly push money to another account (Send) or accept money (Receive). Of the financial institutions currently on FedNow, the majority have begun with Receive capabilities, and we can expect that trend to continue until the ecosystem gains momentum.
“It’s really important to make the distinction that right now, FedNow is not a peer-to-peer network,” said Lindholm. “There’s a big difference between a Zelle/Venmo, and FedNow. In many ways, FedNow is more a faster ACH than an alternative to Zelle.”
Because of its reliance on account and routing numbers – not information 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 myriad back-end functions like forecasting and cash flow analysis. However, business banking customers have already found the benefit of one specific use case in the year FedNow has been live.
“One of the big use cases we’re seeing right now is this concept of earned wage access (EWA),” said Lindholm. “Say I’m an hourly employee. Instead of waiting every two weeks for my payroll cycle to hit, I can take out the portion of my already-earned wages in real time.
“This has huge real-world implications. 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.”
But not to say that FedNow touts no consumer applications in the near term: “For the consumer, there are a lot of applications for what people like to call ‘Me2Me’ payments — I’m instantly moving money from my brokerage account to my checking, or from my high yield savings account to my credit union account,” said Lindholm.
Between questions about whether consumers or businesses will benefit more from FedNow and their respective rates of adoption, one clear winner emerges in a world where use of FedNow becomes industry standard: financial institutions. The advent of the service will result in banks and credit unions having much more granular control over the payments user experience than plugging in a third-party service, allowing them to layer in their own approach to technology and design tailored to their communities’ needs.
“A lot of instant payments offerings are provided by core providers or payments processors,” said Perry. “But at the end of the day, they don’t control the end-user digital experience. For a financial institution to offer a seamless banking experience, you’re going to want to look for solutions that you can fully customize or integrate through a specialized partner.”
As usage of FedNow grows, the structure of the service itself has the potential to shift the culture of primacy away from fintechs created to address gaps in the market, and towards the banks and credit unions closing them.
“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.
“This is much more interactive than something like ACH, and retains some of the user-centric functionalities of a Venmo or a Cash App. The user ends up interfacing with their bank more. It’s a big reason why Narmi is so excited about FedNow: we believe it will live in digital banking.
“You combine the immediacy and interactivity that you get from third parties like Venmo, but you’re getting it from an FDIC-insured financial institution where your payroll is hitting, where your savings are, etc. This is fundamentally going to change how we interact with payments, and in many cases, how we interact with financial institutions.”
With FedNow a resource that is untapped by the majority of financial institutions, how does one respond to the difficult task of predicting where the service will sit in the payments ecosystem in the short and long term – especially when it comes to consumer uptake?
“FedNow will become a significant volume of the instant payments volume in the US, if not a majority,” said Perry. “Once the Fed starts seeing more of their larger customers on Send, people will definitely start to feel the benefits of the service more.
“It depends on the approach that banks and credit unions take towards the financing of FedNow. They could make it a consumer benefit and front the cost for it, or they could do something where they charge a percentage of each transaction. That will play a part in consumer behavior and adoption.”
“On the consumer side, we may see more pay-by-bank cannibalizing card-based consumer and retail payments,” said Lindholm. “FedNow payments are cheap, and are probably going to become a lot cheaper.
“There’s a strong potential for bills to be paid through FedNow — why would Netflix have to pay a 3% card interchange fee to collect payments when they could do it for significantly cheaper? You could see situations where users pre-authorize banks to allow funds to be taken directly from their account for subscriptions and the like.
“That’s a little further down the line as the necessary infrastructure develops, but I think gravity will pull a lot of industries towards lower-cost payments.”
