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:
- Payroll: Real-time payments can help payroll departments and service providers make payroll adjustments quickly to individual employees.
- 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.
- 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:
- 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.
- 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.
- 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.