While FedNow, the instant payments system launched by the Federal Reserve in July 2023, has grown to touch more banks than the real-time payments network operated by The Clearing House, the latter still holds a significant market share advantage.

A report issued by the Federal Reserve Bank of Richmond last month focused on how FedNow compares its evolution to that of The Clearing House’s RTP network, and other such instant payment systems globally. FedNow and RTP are the only real-time payment systems in the U.S. The report, by two Fed researchers, sought to examine FedNow’s “long-term prospects.”

While the report points to FedNow’s growth over the past three years, explaining that it now connects to 1,725 U.S. banks and credit unions, it notes that RTP’s transaction volume dwarfs that of FedNow. The report suggested RTP connects to 1,193 financial institutions, but a spokesperson for The Clearing House said the figure is 1,350 financial institutions.

For the second quarter, RTP’s payments volume was 142 million versus about 5 million during that period for FedNow, according to public data. The Clearing House system launched six years before FedNow, in November 2017.

“Despite being newer, FedNow has higher enrollment than RTP from both banks and credit unions,” the August report says. “In contrast, RTP maintains connections to a greater percentage of total demand deposits due to stronger adoption among large financial institutions.”

The Richmond Fed report explains that FedNow and RTP have similarities and differences, with both rails being backend services that financial institutions and fintechs integrate for commercial or consumer use, allowing for differentiation in the offering of services or apps.

RTP processed 128 million transactions during the first quarter of this year valued at $480 billion, giving it an average transaction value of $3,750, the report said. By contrast, FedNow had an average transaction value of $99,414, “indicating different use-case portfolios from RTP,” the report said.

Both systems also offer around-the-clock services for the sending and receiving of real-time payments, typically taking place in seconds, with request-for-payment functionality also possible. The per-transaction fees are “comparable,” according to the report, which also notes that both systems raised their limits for payments from $1 million to $10 million last year.

Still, the RTP spokesperson notes that The Clearing House system dominates the real-time arena in the U.S. with “97% of instant payments volume” and connections to 75% of the deposit accounts in the U.S. The Clearing House is owned by a pack of major banks.

The two systems operate differently when it comes to settlement with banks and with respect to their liquidity models, partly because FedNow sought to cater to smaller financial institutions that may have been leery of a system run by their larger rivals.

“RTP relies on a prefunded joint account held at the Fed, where participating financial institutions must commit commercial bank money in advance,” the report notes, without deeming one approach as superior to the other. 

“This ensures instant settlement but creates liquidity costs and requires active prepositioning of funds. By contrast, FedNow settles payments directly in each bank's Fed master account, using central bank money and offering intraday liquidity management tools. As a result, FedNow places a lighter liquidity burden on smaller participants.”

Nonetheless, The Clearing House spokesperson noted that 90% of RTP’s financial institution participants are smaller banks and credit unions.  

The Richmond Fed report, written by the researchers Zhu Wang and Vinh Phan, underscored that the U.S. still lags other parts of the world in the real-time payments arena, partly because of competing systems that have an “instant-feel” even though they’re not part of a real-time system. For instance, the Zelle system offered by the bank-owned Early Warning Systems allows for faster payments as do some services sold by the card networks Visa and Mastercard.

The report noted the higher per capita use of real-time systems in Thailand, Sweden, Brazil and India, and also pointed out that those countries have significantly lower average transaction values, suggesting more consumer use as opposed to commercial transactions.

FedNow and RTP “lag international counterparts in transaction volume, primarily because Americans already have extensive access to digital payments and ‘instant-feel’ alternatives,” the report said.

The ‘instant-feel’ competition in the U.S. may present challenges for growth of the real-time systems, especially for FedNow, the researchers said, noting RTP’s “first-mover advantage.”

Still, they noted that the Federal Reserve’s system in any case may offer other benefits to the market by contributing competition, resilience and a good fit for smaller financial institutions as a second system in the U.S. 

“FedNow remains in an early and cautious adoption phase,” the report said. “Over the longer term, FedNow holds strong potential to become a significant component of national real-time payment infrastructure.”

Interest in the real-time systems keeps mounting, based on the experience of Keith Melton, a senior vice president at The Clearing House, who spoke on the subject of real-time payments during a panel discussion at a PaymentsFirst industry conference in Pigeon Forge, Tennessee, last month.

“I definitely feel like the word is getting out,” he said in reflecting on the reaction of audience members to a real-time panel discussion panel he participated in. “People are getting more sophisticated around real-time payments and the benefits that it provides to not only their financial institutions but also their customers.”