FedNow catches up with real-time payment pioneers, but full implementation still takes time

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

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

The U.S. lags behind several countries in building real-time payment systems. Research released in April by payment processor ACI Worldwide and Oxford Economics (Centre for Economics and Business Research) showed that real-time payments accounted for less than 1% of U.S. transaction volume last year, compared to 5.7% in China. This means the U.S. gained only $1.35 billion in macroeconomic benefits from real-time payments, while China gained as much as $18.65 billion. 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 director of Berlin-based consulting firm Lipis Advisors.

Beyond the RTP Network

The existing private-sector 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 further expand real-time payment services. To broaden its reach, FedNow is attracting thousands of small U.S. banks that have been cautious about using the competing RTP service.

Payment industry consultant Peter Tapling, who has served several payment companies including Zelle, noted: "There is still a feeling in the market that the system provided by The Clearing House would in some way disenfranchise community financial institutions and credit unions, so these institutions lobbied the Federal Reserve heavily to create its own system." Tapling, who previously held a leadership role at the Faster Payments Council, believes the federal government tends to support the existence of two operators in any critical service area.

"Because payments are so critical to the U.S. economy, the Fed believes that, from a resilience standpoint, it's better to have two instant payment capabilities in the market," he said.

FedNow Runs Around the Clock

Businesses and institutions will be able to 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 also have this capability, but they are primarily consumer-focused with typically smaller transfer amounts.

FedNow aims to drive the widespread adoption of instant payments in a way unique to the federal government, supporting the construction of a faster, more advanced 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 physically carry cash on a flight, whereas today real-time payments can arrive in seconds at a lower cost.

The Federal Reserve began efforts to improve the U.S. payment system in 2015, establishing the 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 subsequently transformed into an industry membership organization—the Faster Payments Council—which continues to advocate for the adoption of "world-class payment systems" 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. In 2019, Ken Montgomery, chief operating officer of the Boston Fed, was appointed as the FedNow project lead, with his colleague Nick Stanescu serving as senior vice president of FedNow. Connie Theien, senior vice president at the Chicago Fed, has also played a key role in promoting the project.

"We are spending a lot of time engaging broadly with the ecosystem," Theien said in a video update in May. About 80 financial institutions and 40 service providers—from payment software company ACI to processor Fiserv and fintech firm Jack Henry & Associates—have joined the project, forgoing compensation in exchange for the opportunity to help shape FedNow during its initial phase. As part of the pilot program, they are not only assisting in developing and testing FedNow but also brainstorming use cases for real-time payments.

Tede Forman, vice president of payment solutions at Jack Henry, gave an example: community banks could benefit from real-time payments by accepting Uber and Grubhub drivers depositing digital wages into local institutions. Two surveys released by the Federal Reserve asked consumers and businesses about their interest in faster payments, and the majority of respondents supported faster payment options. Businesses were mainly concerned about access to funds for payroll and supplier payments, while consumers focused more on control over their money and bill payments.

Craig Ramsey, head of real-time payments at ACI, said real-time payments could also help low-income workers get their wages faster and avoid check-cashing fees. He mentioned a conversation during a break at a New Orleans city council meeting this year, where he learned how much the poor lose when cashing checks. He believes a real-time payment alternative would be equivalent to a 25% pay raise. "This has an impact on people's lives," Ramsey said. "I think this is where real-time payments can make a difference in the U.S. It can modernize payments, reduce costs, and truly change lives."

Despite FedNow's active promotion, the project team is not enthusiastic about media discussions. Payments Dive made multiple requests to interview FedNow officials and was refused each time. Spokespersons declined to answer basic questions about leadership, costs, and progress, other than citing previous press releases. Theien said in an update that FedNow is on track to launch next year, but industry insiders say the project has faced delays.

"Progress may be slower than they hoped, but any large project takes time to ensure all the pieces are connected and long-term solutions are developed," 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 introducing new payment methods but not at phasing out old ones. "You can't just build the rails and expect people to use them," he said.

Some hold a more pessimistic view, pointing out that banks profit handsomely from issuing credit and debit cards and lack the incentive to support real-time payments. Jim Angel, a professor at Georgetown University and former participant in the Faster Payments Task Force, said: "The problem in the U.S. is that the incumbents don't really want a faster, better, cheaper payment system." He noted that the current payment system imposes an additional burden of 1% to 3% of U.S. GDP through printing, card swipe mechanisms, delays, and fees.

The Clearing House is not pleased with the competition FedNow brings, even though the Fed has said its pricing will be similar to RTP. Critics argue that FedNow's pricing strategy is unlikely to spur significant new adoption. Fran Duggan, CEO of Payrailz, said that while FedNow has an advantage over RTP in terms of bank relationships, its pricing lacks appeal. "I would strongly suggest they consider lowering the price to truly drive transaction volume onto the platform," he said. To succeed, FedNow must displace other U.S. payment methods.

Angel noted that FedNow's initial pricing appears more expensive than European real-time payment systems. He submitted a Freedom of Information Act request to the federal government this month to learn about FedNow's costs. He speculates 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's costs.

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

Obstacles for FedNow

Despite FedNow having numerous private-sector partners, Angel and others worry about the so-called "last-mile problem"—the lack of real-time capabilities at point-of-sale devices and the lack of connectivity with other payment tools, which could prevent the system from achieving widespread adoption. "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 FedNow follows the international ISO 20022 standard, its data fields may not align with other systems like RTP, let alone systems in other countries. Gomez said: "There has been very little discussion about whether The Clearing House and the Fed will work together to make the two systems interoperable."

As a result, large banks may bear the cost of connecting the two systems, while smaller banks may not, leaving "friction" gaps in the overall network. Tapling estimates that solving the interoperability issue could take five years, and 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 about the fraud risks of FedNow. In a May press release, the National Consumer Law Center (NCLC) criticized FedNow's rules for failing to protect consumers from scams prevalent on peer-to-peer payment systems like Zelle. Lauren Saunders, deputy director of NCLC, said: "The upcoming FedNow service will prevent instant payments from being controlled by big banks, but fraud protection is critical and currently severely lacking. The Fed must take steps before FedNow launches to ensure it does not become a haven for fraud."

If FedNow succeeds, a more robust real-time payment system will boost the U.S. economy, accelerate commercial payments, and support fintech innovation. Conversely, the U.S. may fall further behind India, Thailand, Brazil, and South Korea in real-time payment progress, which could put it at a disadvantage in future cross-border real-time transactions. ACI predicts that if instant payments rise to 3.8% of U.S. payment traffic, the economic benefits of real-time payments in the U.S. could triple by 2026.

Angel concluded: "Anything that reduces the cost of payments basically benefits the entire economy."