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Federal Reserve Set To Join Parade Of Real-Time Payments Providers

This Month In Commercial Banking

The Federal Reserve will introduce its long-awaited real-time payment and settlement service in just a few months, representing a critical piece of infrastructure to the U.S. payment system. The FedNow system will provide financial institutions 24/7 access to instant payment services, enabling them to offer their customers near-instant payment options.  

FedNow is the latest service to advance faster payments in the U.S. Nacha (formerly National Automated Clearinghouse Association) began its same-day ACH payment system in 2016. That was followed in 2017 by Real Time Payments (RTP), a 24/7 service from The Clearing House that made payments even faster. 

The new FedNow service will initially have a transaction limit of $500,000, half of the limits permitted by Nacha and The Clearing House. 

Transaction volumes have grown rapidly thanks to these accelerated payment options. Nacha has reported there were 182 million same-day ACH transactions valued at more than $500 billion in the fourth quarter of 2022, representing an 87.5% year-over-year increase, and The Clearing House has reported 49 million RTP transactions valued at $22.7 billion. 

Designed with the goal of enabling all financial institutions to offer real-time payment services to their customers, FedNow will focus its efforts on becoming an efficient payment system accessible to all Americans. Its potential use cases include: 

  1. Payroll: Real-time payments can help payroll departments and service providers make payroll adjustments quickly to individual employees.
  2. Accounts payable: Because payables departments are at the end of the approval workflow, their processes and systems sometimes leave little time to execute payments. Real-time payments can help avoid both late payments and breaching supplier credit limits.
  3. Claims payments: With real-time payments, property and casualty insurers can accelerate claims payments in disaster areas without using checks or drafts.

In addition to the real-time payment systems in the U.S., there are several in other countries that are well established, including: 

  1. India and China: India had 48.6 billion payments in 2021, representing the largest number of real-time payments outside of the U.S., according to the payment systems company ACI Worldwide. China ranked second with 18.7 billion.
  2. SEPA (Single Euro Payments Area) Instant Credit Transfer: Available in the European Union (EU) and European Economic Area (EEA) countries, this system can execute Euro transfers within the SEPA region in as little as 10 seconds.
  3. Faster Payments: One of the U.K.’s national retail payments systems run by Pay.UK, Faster Payments enables real-time money transfers between U.K. bank accounts. 
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