We all know the phrase “cash is king,” but with the increased prevalence of real-time payments there might be a new leader.
While the U.S. is one of more than 50 countries to offer real-time payments, adoption has lagged greatly behind other key players. For example, Japan launched its first real-time payments system in 1970, and China, India, and the U.K. all had real-time payment rails by 2010. But, while slow to release, real-time payments have proven to already be a major player (and adoption continues to grow).
So what does that mean for the U.S.? While 1.8 billion real-time payment transactions took place in 2022, it is projected that volume will hit 8.9 billion in 2026. As the consumer demand for convenient and modern payment options increases, it is critical for community banks and credit unions to ensure these capabilities are readily available.
The first U.S. real-time payment rail, aptly named RTP, launched in 2017 via The Clearing House, which is a membership organization that is owned by 22 of the major U.S. banks. With that said, any FDIC-insured financial institution is eligible to leverage the rail.
In order to communicate seamlessly from one financial institution to another, all parties must leverage ISO 20022, which creates a standard for exchanging electronic messages.
Upon its release, RTP was able to:
While this was a far better option for consumers versus options previously available to them, it still has its limitations. For example, RTP can only allow push transactions where the payee sends the money and requests for payment where a potential recipient requests a payment. Pull payment options are not allowed. There is also currently a limit of $1 million per transaction (which is a major increase from $25,000 upon launch).
Zelle is an example of a P2P option, but with one major difference from those outlined below; its transactions can be cleared via The Clearing House’s RTP rail. If both the payee and the recipient use banks that leverage the RTP rail, the transaction will settle instantly. If not, it will typically settle in a matter of minutes. Since users can send money to recipients outside of their bank and the funds settle in real-time (or nearly), it is considered to be an open (rather than closed) loop payment.
Notably, Zelle has seen massive growth since its launch in 2017 and is now available to nearly 80% of the U.S. population, with adoption by over 1,600 financial institutions. Similar to The Clearing House, Early Warning Services (owner of Zelle) is privately held by 7 major banks.
The FedNow Service is the first real-time payments service to be made available within the U.S. that is not a proprietary option. Since it was created and owned by the Federal Reserve, it is expected that there will be mass adoption across the country’s 10,000 banks and credit unions.
Similar to RTP, the FedNow Service will be very low cost (about 4 cents per transaction) for financial institutions, will include both push and request for payment options, and be 24/7/365. The main difference, however, will be that this payment rail will be available to most (rather than some) financial institutions. Beginning in July 2023, the service will be launched for early adopters, with the Fed targeting to have most (if not ideally all) U.S. financial institutions onboarded by the end of 2023.
As we have learned from the huge uptick in P2P payments, consumers crave instant gratification. So, although the FedNow Service may be a few years behind the other real-time payment services, given its widespread accessibility, it is positioned to be a relevant option.
Other key impacts of the FedNow Service include:
It is also important to understand other payment options that are currently available, although the below examples do not constitute real-time payments and thus have some additional limitations.
The bottom line is, no matter what service you select, having a real-time payment option for your customers and members is critical for the consumer experience and your efficiency.
