For FedNow to take off, many things need to be true. Below are my top five:

FedNow is fundamentally a service to banks. It is not mandatory. That is, banks will be the primary gateway to FedNow and will choose if/how to supply these services. As we discussed in Part II, connecting to real-time payment rails, RTP and FedNow, is no small task. Banks need a business case to shift. Many allude to the cannibalization of card payment revenue as a hindrance to bank real-time payment adoption. This argument makes sense on its face. Visa and Mastercard payments in the US alone total over $2 trillion per quarter, about 75 times RTP volume.[^1] The provision of card payment services is highly profitable for banks in comparison with RTP services. Banks’ card processing fees totalled ~$140 billion in 2021.[^2]

However, FedNow and RTP are most likely to tackle P2P and B2B use cases, dominated today by OCT (discussed in Part I) and ACH and checks over offline or online merchant card acceptance. It is never too frequent to remind readers that an estimated 40% of all B2B payments in the US are still made via check.[^3] Cool cool cool. As a quick comparison across payment types (these numbers are directionally correct but outdated since COVID), while cards dominate by volume of transactions, ACH and check dominate by value of transitions - accounting for ~90% of all noncash payment value in the US.

Source: Federal Reserve Payments Study (FRPS) 2019 and 2020[^4]

Some banks have shown signs of movement here. Jamie Dimon is pushing JPM into pay-by-bank, a project that would shift fees away from their annual $5 billion credit card business. Since JPM’s 2021 Payments are Eating the World report, Dimon has been more public about the bank’s strategic push into bank rail payments, famously threatening to fire top executives if they didn’t cooperate.[1]

I see a few other potential tailwinds, too. Not all banks are created equal and some have prioritized waiting for FedNow over integrating already with RTP. Generally, community banks and credit unions view FedNow as a higher priority than RTP.[2] Some of this is due to the fact that small banks inherently mistrust large banks that own TCH, some of this is due to the liquidity management tools and other aspects of RTP that may make it easier to connect to and work with. There could be competition from the new fintech-forward banks (looking at you Column and Lead) although they would need to pull significant volume to create pressure. FIs already using RTP will likely begin using FedNow (especially given that most are the large TCH banks) as a redundancy for security and flexibility.

The other potential force is stablecoins or a Central Bank Digital Currency (“CBDC”). For stablecoins to put pressure on banks to adopt new rails, you would have to believe that Circle can get more banks to join their USDC network than the Fed can get to join the FedNow network. A CBDC could also potentially jump-start banks to adopt and promote real-time payments. Today, about 11 countries have launched a CBDC, 17 are running a pilot program, and 33 are in the development phase - including the US.[3] However, if the CBDC services are also provided to consumers and businesses by banks like is the case with FedNow, in a manner chosen by banks, forget this entire point.

For banks to have to want to adopt it, consumers and businesses have to want to adopt it more than the banks don’t want to adopt it. Go with me here. For consumers and merchants, this is about a move away from cards. Card adoption in the US is fundamentally different from that of other countries with high real-time payments adoption so it is starting with less of a pain point to move away from. Generally, consumers love their rewards programs and merchants love fraud protection. Merchants don’t love credit card fees but is that pain point high enough for them to switch to a pay-by-bank option if it could mean lost sales?

Some companies already do this and it doesn’t seem like lost sales. Starbucks is famous for this with ~$1.5B in stored value in customer wallets on the Starbucks App.[4] Customers can pre-load their Starbucks app directly from their bank account, allowing Starbucks to avoid paying credit card fees.[5] Smash cut to this oldie but goodie from 2016:

Source: Starbucks Holds More Cash Than Many Banks

Target makes and saves money in a similar way too through their Red Card (Alex Rampell did a great teardown of this recently). This would show that customers will pay-by-bank, although they are often incentivized to take this option with discounts greater than the fee savings. Interestingly, in January EWS, the owner’s of Zelle, along with seven of the largest banks announced a new wallet to compete with Apple Pay and PayPal.[6] However, they are launching only with card options. They seem worried that consumers won’t use the wallet with a pay-by-bank option. I would like to see them try.

Speaking of wallets, P2P players like CashApp and Venmo who already utilize RTP for pay-ins/outs to banks are likely to utilize FedNow rails as well (potentially cheaper and the good kind of redundant) However, FedNow’s P2P capability could create more competition (if FedNow invests and makes it as easy as Pix).

Perhaps more importantly, businesses also need to adopt real-time rails for B2B. This is about big value and a movement away from ACH, wires, and checks. 84% of companies already view faster payments as a “must-have”.[7] Cash-flow management and transparency are the biggest factors.

Source: Market Readiness Brief

RTP and FedNow also provide the potential for businesses to delight and surprise their customers. While many are excited about things like payroll adopting real-time payments, I am skeptical. Why would a company dependent upon revenue from float, especially in our new high interest rate environment possibly give that up? While they may adopt real-time capabilities, they will either 1) use it to extend the duration of their float and not pass it through to customers and/or 2) charge an enormous amount for immediate settlement to make up for the lost revenue and the administrative hassle. Other players like the third party senders (Dwolla, Stripe, Tabapay), who earn float in the middle of transactions they orchestrate before they settle, will likely do the same. So the promise of an instant, cheaper system is a pipedream. The promise of an instant, more expensive system is more the reality.

RTP and FedNow are not interoperable, at least for now. This, coupled with no to limited access for non-bank payment service providers (“PSPs”), will put a damper on adoption.

Since the August 2022 Treasury Report, I am holding out hope that FedNow might migrate design towards an approach that is more interoperable across PSPs. PSPs with access to FedNow could be extended to include non-bank payment services or new special purpose narrow banks providing payment services. This would be up to the Fed, absent legislation. The Treasury report also suggests the idea of a national payment services regulator.[8] If that were to happen, then PSPs (including banks and non-banks) could all be required to provide access to a common FedNow portal, analogous to Pix.

Don’t mind me over here with my anxious attachment style to the Fed. I want the Fed to communicate more - and they are starting to. There is more coming out week-over-week and that makes me hopeful. I mainly track the FedNow News Center. In a totally normal, healthy way.

With all that behind us, let’s look at what is possible. There are many exciting use cases for real-time payments and opportunities for supporting infrastructure to be built. Fundamentally, the success will be about the enablers.

Who will help banks connect and build the necessary tech and operations to launch RTP and FedNow? Some I am watching are Trice built through Diagram and Form3 (from the UK and making its may to the US). Volante, Alacriti, and Finzly also in this arena– who else?

As noted above, there will be P2P functionality to compete with current players. We still don’t know what it will look like but Mark Gould, Chief Payment Executive for Federal Reserve Financial Services likens it to an “easy button”.[9] I personally am excited for updates from the request for payment (“RFP”) working group. RFP would be a major unlock. To define it, RFP is simply a way for someone (an individual or a business) to request an instant payment from someone else (another individual or business). RFPs require that the requestor input key information like the amount due, the date to complete the payment and the expiry date to complete the payment however, only the payer can initiate the actual flow of funds. Just think about finally paying your landlord via RFP and not a check slipped under the door.

First there is business acceptance. There are a ton of players going after this space, from closed-loop networks built with real-time payments to online real-time payments gateway options. My concern here is about adoption and scale when fundamentally merchants care about cart conversation and fraud. Some names I am watching that either use RTP today or could benefit from it in the future: Waivr, Zage, Clerq, Link, Banked, and GrailPay. Then there is B2B where I am more bullish. Many players can support businesses to move money in real-time from Modern Treasury to Tabapay, Dwolla, Orum, etc.

Assuming interchange is a feature, not a bug, of card payments, what will be the insurance/protection mechanism for real-time payments? Whatever has been built to make card networks so successful as synthetic real-time networks will be needed for real-time payments.

Authorized push payment (“APP”) scams (when a fraudster convinces you to send a payment to them) pre-date real-time payments but have been on the rise. In the U.K., for example, gross losses to APP fraud have overtaken card fraud for the first time.[10] Some are already in this space a la Sardine and Plaid could move in there with many pieces of authorizing payments already in place. Another way to combat APP is to have the initiating and receiving ends of transactions collaborate – real-time KYC/KYB anyone? Consortium time anyone?

This is happening already and there should be more to come. In the insurance industry, immediate payouts are being used as a selling point for property and casualty insurers. In the auto financing industry, you can now get car financing on the weekend allowing you to drive out of the dealership with a car. In the real estate industry, imagine closing on a house and everyone getting paid right then and there. In startup world, imagine trying to close your deal and instead of dealing with wires you send a FedNow RFP and it is done.

I may be most excited about the data unlock. Real-time payments allow you to connect more data than other payment methods through the use of ISO20022 protocol. Enhancing POS and embedded finance transactions with behavioral insights comes to mind. Another is automated real-time accounting and reconciliation or connecting data into ERP systems and further verticalization of ERP systems due to this. Also, ISO20022 is a new global standard and could make way for international cross-border interoperability.

. . .

Well, that is all for now. As always, this is a team effort and the community is made better by all those who contribute. What did I miss? Get wrong? Get right? I would love to hear from you and continue to learn together.

Special thank yous to Sophia Goldberg (stealth CEO and author of the Field Guide to Global Payments), Bruno Werneck de Almeida (Plaid) and Jeremie Bedard (Diagram) for the reviews, questions, and meaningful additions. Thank you as well to Scott Brady at Innovation Endeavors for the thought partnership since my initial rabbit hole last Spring. Shout out to Sophie Vo at TWIF for the patience as I pieced together these learnings and for providing a platform to share them with others. Lastly, thank you to all of you who made it this far. What a journey it has been and what a journey it will continue to be 🚀