2023 is promising to be an exciting year for payments, maybe. In the US, we should be getting our first new bank payment rail since the 1970s (the last one was regular ‘ole ACH in 1978, not counting Same Day ACH which rolled out in 2010).[^1] In 2022, the Federal Reserve Banks (“The Fed”) announced the long anticipated launch of FedNow, their real-time payments system. Launch is set for mid-2023, eight years since the Fed started talking about it in 2015.[^2] Technical testing has kicked off with more than 110 organizations participating in the FedNow Pilot Program. What does this mean for the rollout of real-time payments in the US? For me, not much.

I want to be clear, I would love to see a world of ubiquitous real-time payments in the US. However, I am a skeptic - the proverbial dove to the Fed’s hawkish real-time rollout plans. Perhaps my negativity stems from a hedge, an attempt to set the bar low to avoid the disappointment of a US payments system still woefully behind and trapped in incentive structures.

Regardless, let’s celebrate progress. In honor of the 2023 launch of FedNow, I am rolling out a three-part series on real-time payments in the US. This series includes:

Let’s dive in.

Since 2017, The Clearing House (“TCH”), the private sector competitor to FedNow owned by the largest banks in the US, has operated the RTP real-time payment network. To avoid confusion, RTP is the name of The Clearing House’s real-time payments rail and should not be confused with all real-time payments systems which are often abbreviated “RTP”.

When TCH launched RTP, the only “real-time” payment options were wires (~$25+ a pop and not really instant[1]), same-day ACH for B2B (not really same-day), Venmo (payee doesn’t receive payout to bank until ACH clears), or debit card push payments via Visa Direct and Mastercard Send (launched in 2016). Indulge me in a quick aside on debit push payments, another synthetic real-time option offered by the card networks that will compete with RTP and FedNow.

Debit push payments use the same mechanism a consumer uses to pay a merchant via debit card but in the reverse direction - the same rails can be used to push a payment from a business to the debit cardholder’s bank account without the need for a routing or account numbers pretty much instantly. It is like a refund back to your card and commonly referred to as an “OCT” or Original Credit Transaction. Funds are generally available within 30 minutes, depending on the financial institution (“FI”).

Many real-time payouts services, including Stripe and payment platforms like Venmo and Zelle, partner with Visa Direct and Mastercard Send to make this happen. Cost-wise, it is generally less than merchant card processing but more than direct bank payments. I looked for exact figures and could not find specifics on debit push payment fees amidst the over 50 pages of interchange fees for Mastercard and Visa. I dropped in an old fee schedule below for reference but it is dated. Does someone out there know and care to share without violating NDAs?

Source: Visa

A brief reminder to everyone that VocaLink, the developer of RTP tech and Faster Payments in the UK, is owned by Mastercard. Okay, back to The Clearing House…

So far, 285 banks are connected to RTP but only 20-25 are certified to originate, i.e. act as senders.[2] With that number, the network now includes banks holding 61% of the nation’s demand deposit accounts.[3] RTP is being used by many larger fintech players - Square, PayPal, and Venmo offer instant transfers from their products to a customer’s bank account over the RTP network, and Uber and Grubhub use the RTP network to pay drivers instantly.[4] Zelle, owned by Early Warning (another private consortium of seven of the largest US banks) has also been moving some settlement to RTP since 2021.[5] Talking numbers, in Q4 2022, RTP did 49 million transactions for $22.7 billion.[6]

Source: The Clearing House

For comparison in Q3 2022, ACH handled 7.6 billion transactions for $19.2 trillion, or 845x RTP volume.[7] Assuming 35% CAGR[8] for real-time payment adoption in the US and 0% growth in ACH, it would take 23 years for RTP and FedNow to catch up with ACH.[9]

So while RTP is ahead of FedNow, the adoption of faster payments has been relatively low and slow. Will FedNow perform better and increase adoption or does the limited adoption of RTP point to a systemic disinterest in real-time payments overall? First, let’s compare the two.

Both RTP and FedNow are irreversible push payments operating with instant (within seconds) transfer and settlement 24x7x365. There are some key considerations differences:

*I am going to be excited when these are outdated

Thanks for playing. Stay tuned for Part II dropping next week - The Why.