FedNow catches up with real-time payment pioneers: full rollout still years away

The Federal Reserve's long-awaited real-time payment system, FedNow, is scheduled to officially launch next year. However, industry insiders involved in the project say businesses and consumers may still have to wait years before the United States can rely on widespread instant payment services.

This new interbank payment rail aims to modernize and increase the efficiency of the U.S. payment system by reducing payment times from days to seconds. This move could eliminate credit risk caused by time delays, allowing businesses and individuals to use and invest funds earlier.

The United States lags behind several countries in building real-time payment systems. According to an April research report by payment processor ACI Worldwide and the Center for Business and Economic Research, real-time payments accounted for less than 1% of U.S. transaction volume last year, while in China the figure was 5.7%. Correspondingly, the macroeconomic benefits the U.S. derived from real-time payments were only $1.35 billion, compared to $18.65 billion in China. ACI noted that China and emerging countries such as India and Brazil are benefiting from real-time payments, while Western countries, especially the U.S., are missing out.

"Relatively speaking, the U.S. market is far behind other markets," said Andrew Gomez, managing consultant at Berlin-based Lipis Advisors.

Beyond the RTP network

The existing private real-time payment system in the U.S., the RTP network, has seen slow adoption since its launch in 2017. FedNow aims to build on this system sponsored by large banks through The Clearing House. To expand real-time payment services, FedNow is attracting thousands of small U.S. banks that are cautious about using the RTP service offered by large competitors.

"There is still a feeling in the market that the system offered by TCH could deprive community financial institutions and credit unions of their rights, so these institutions lobbied the Federal Reserve heavily to create this system," said Peter Tapling, a payments industry consultant who has worked at several payment companies including Zelle.

Tapling, who held leadership roles at the Faster Payments Council, noted that the federal government tends to maintain two operators in any critical U.S. service area. "Because payments are so vital to the U.S. economy, the Fed would think: 'From a resilience standpoint, the market is better off having two instant payment capabilities,'" he said.

FedNow operates around the clock

Businesses and institutions can send up to $500,000 instantly through the FedNow system around the clock (24/7/365). This limit is lower than the RTP network's $1 million, but FedNow is expected to eventually offer services similar to RTP. RTP is not the only system capable of second-level transfers; Zelle and Visa Direct can also do this, but they are primarily consumer-focused and typically handle smaller amounts.

FedNow aims to promote broader adoption of instant payments in a way unique to the federal government, supporting the construction of a faster, next-generation payment system in the U.S. JPMorgan noted in last year's report "Payments are Eating the World" that in 2010, the fastest way to transfer funds same-day from New York to London was to personally carry cash on a flight, while over a decade later, real-time payments can achieve this. The bank also noted that funds not only arrive in seconds, but also cost less to send.

The Federal Reserve began working on improving the U.S. payment system in 2015, establishing a faster payments task force and attracting industry participants. By 2017, large U.S. banks were ready to launch RTP without federal involvement, and the task force then transformed into a new industry membership organization, the Faster Payments Council, which continues to push for a "world-class payment system" in the U.S.

Fed employees lead the project

The FedNow project is led by Kansas City Fed President Esther George, who oversees the Federal Reserve's payment improvement initiatives. Ken Montgomery, an executive at the Boston Fed, was appointed in 2019 to lead the FedNow effort, with colleague Nick Stanescu serving as senior vice president of FedNow. Connie Theien, senior vice president at the Chicago Fed, also plays a key role in promoting the project.

"We are investing a lot of time in broad outreach to the ecosystem," Theien said in a project update recorded in May. About 80 financial institutions and 40 service providers—from payment software vendor ACI to processor Fiserv, to fintech company Jack Henry & Associates—have joined the project, forgoing compensation to help shape FedNow in its initial phase. As part of the pilot program, they are not only helping develop and test FedNow but also brainstorming real-time payment use cases.

For example, community banks could benefit from accepting real-time payments that allow Uber and Grubhub drivers to deposit digital wages into local institutions, said Tede Forman, vice president of payment solutions at Jack Henry. Two separate Federal Reserve surveys of consumers and businesses showed that most respondents support faster payment options. Businesses are mainly focused on access to funds for payroll and supplier payments, while consumers place more emphasis on control over funds and bill payments.

Real-time payments can also help low-income workers get wages faster and avoid check-cashing fees, said Craig Ramsey, head of real-time payments at ACI. He recalled a conversation on the sidelines of a New Orleans city council meeting this year, learning that poor people lose significant amounts when cashing checks. He said a real-time payment alternative would be equivalent to a 25% pay raise. "This means a lot to people," Ramsey said. "I think this is where real-time payments can make a difference in the U.S. It can modernize payments, reduce payment costs, and truly change people's lives."

Despite FedNow's active promotion, the project is cautious about media discussions. Payments Dive's repeated requests to interview FedNow officials were denied, and a spokesperson, aside from citing previous press releases, declined to answer basic questions about leadership, costs, and progress. Theien said in an update that FedNow is on track to launch next year, but industry insiders say the project has faced delays. "It may be slower than they hoped, but any effort of this scale takes time to ensure all the pieces are connected and to develop long-term solutions," Forman said.

Resistance from big banks

Ultimately, consumers may be reluctant to give up rewards-generating credit cards in favor of real-time payments. Ramsey noted that Americans are good at adopting new payment methods but not at abandoning old ones. "You can't just build the rails and expect people to use them," he said.

Some views are more pessimistic, pointing out that banks profit handsomely from issuing credit and debit cards and lack the incentive to support real-time payments. "The problem in the U.S. is that existing players don't really want a faster, better, cheaper payment system," said Jim Angel, a Georgetown University professor who served on the Faster Payments Task Force. He also noted that the current payment system imposes a heavy burden of 1% to 3% of GDP through printing, card swipe mechanisms, delays, and fees.

The Clearing House is not pleased with competition from the government-backed FedNow system, even though the Federal Reserve says its pricing will be similar to RTP. Critics argue that FedNow's pricing strategy is unlikely to spur significant new adoption. Although FedNow has an advantage over RTP—it has established relationships with banks nationwide that could help promote real-time payments—its pricing is not attractive, said Fran Duggan, CEO of Payrailz, which is working with FedNow to design the system. "I strongly suggest they consider lowering prices to truly drive transaction volume to the platform," Duggan said. To succeed, FedNow must displace other U.S. payment methods.

Angel noted that FedNow's tentative pricing appears more expensive than European real-time payment systems. He filed a Freedom of Information Act request with the federal government this month to obtain FedNow cost information. He speculated that the Fed is trying to avoid trouble by not pricing below RTP. "The Fed is afraid of the big banks because they have strong lobbying power," Angel said. A Fed spokesperson declined to comment on FedNow costs.

"The more people who use the network, the more valuable it becomes," Angel said in a follow-up email. "If the Fed really wants fast payments to take off, it should price as low as possible so there is no reason not to use instant payments."

Obstacles for FedNow

Despite FedNow having many private partners, Angel and others worry about the so-called "last-mile problem." This refers to the lack of real-time capabilities in point-of-sale devices and insufficient connectivity with other payment tools, preventing the system from becoming widespread. "The elephant in the room is the last-mile problem," he said. This also involves another obstacle: achieving interoperability between FedNow and other systems. Although it follows the international ISO 20022 standard, FedNow's data fields may be organized differently from other systems (such as RTP, not to mention other countries' systems), Gomez said. "There is little discussion about whether The Clearing House and the Fed will cooperate to make the two systems interoperable, or even whether they will cooperate at all," Gomez said.

As a result, large banks may bear the cost of connecting the two systems, while smaller banks may not, leaving gaps in the overall network and creating "friction" for transactions. Tapling estimated that solving the interoperability issue could take five years, and he expects integrating real-time payments into point-of-sale terminals could take 10 to 15 years.

Addressing fraud

Another consumer concern is ensuring that instant payments do not lead to instant fraud. Consumer advocates have warned of FedNow's potential risks. In a May press release, the National Consumer Law Center expressed dissatisfaction that FedNow's rules fail to protect consumers from scams prevalent on peer-to-peer payment systems like Zelle. "The upcoming FedNow service will prevent instant payments from being controlled by big banks, but fraud protection is crucial and severely lacking," said Lauren Saunders, associate director at the National Consumer Law Center. "The Fed must take steps before FedNow launches to ensure it does not become a haven for fraud."

If the Fed successfully launches FedNow, a more robust real-time payment system could boost the U.S. economy, accelerate commercial payments, and support fintech innovation. If it fails, the U.S. could fall further behind countries like India, Thailand, Brazil, and South Korea in real-time payment progress, potentially leaving the U.S. at a disadvantage in future real-time cross-border transactions. Ultimately, according to ACI forecasts, if instant payment usage climbs to 3.8% of national payment flows, the economic benefits of real-time payments in the U.S. could triple by 2026. "Anything that reduces the cost of payments is basically good for the entire economy," Angel said.