In the context of the global financial industry, instant payments are not a new phenomenon. The Bank of England launched instant payments in 2008, and The Clearing House followed with its RTP real-time payment network in 2017. Brazil’s PIX network recently reached three billion monthly transactions, less than three years after it was first introduced in 2020. With the addition of the U.S. Federal Reserve’s FedNow service in July 2023, instant payments are experiencing rapid growth as the global banking industry moves toward systems of instant settlement.
But despite the proliferation of instant payments in recent years, many financial institutions still lack the infrastructure to provide these services in alignment with customers’ expectations. These organizations may have yet to explore the use cases for FedNow, or lack a complete understanding of how to engage with the system. But in an increasingly competitive landscape, it’s important for financial institutions (FIs) to recognize how leveraging instant payment rails can drive new revenue streams.
Instant payments are approaching a tipping point
Of the thousands of financial institutions based in the U.S., only about 350 are members of RTP. While this number includes many of the largest U.S. banks, the majority of U.S. financial institutions are not using the network — although more have signed up since the announcement of the FedNow pilot program. However, we have already seen strong adoption of FedNow soon after launch, with the numbers increasing, likely due in part to the fact that every U.S. bank has an account representative with the Federal Reserve. Many FIs are also realizing there is value in having access to both instant payment rails to facilitate faster payments for commercial and retail customers alike.
What’s in it for financial institutions?
Instant payments offer a number of potential benefits to financial institutions and their customers. For example, the U.S. Treasury department may decide in the near future to send Social Security payments and tax refunds to citizens via FedNow. Many of the recipients who will no longer have to wait for days or weeks to receive their funds are customers of community banks and credit unions and will expect their financial institutions to enable instant access to their payments. Meanwhile, on the commercial banking side, instant payment rails allow corporate treasurers to move money 24/7, which significantly impacts liquidity management.
Additionally, FedNow could open new revenue streams for financial institutions. For example, smaller financial institutions often have numerous small business customers. While account managers serve commercial clients and tellers serve retail customers with less complex needs, banks often struggle to offer the right mix of monetized services to small business customers. Instant payments can help solve this challenge with use cases like supply chain finance, which allows banks to provide financing for invoices. With FedNow, banks can offer payment right away, rather than in 30 days. These are only a few examples of the opportunities financial institutions can derive from the growth of instant payments.
What FIs need to do to get onboard
For financial institutions looking to leverage instant payments, the first step is education. Specifically, they need to understand their options for accessing FedNow. Owning, operating and hosting a direct in-house connection requires a significant investment in IT architecture. Large financial institutions are more likely than smaller ones to have the scale to support direct connection to FedNow, and may prefer hosting on-prem.
Alternatively, financial institutions can partner with Payments as a Service providers like Finastra, a certified member of the FedNow pilot program. Engaging with an experienced Payments as a Service partner that serves many FIs of all sizes offers a light-touch approach to implementation. As an example, Finastra provides FI partners with tested and certified connectivity to the FedNow network, while also handling the operational and regulatory updates and related overhead, saving financial institutions from devoting internal resources of their own to the process. Additionally, adopting a scalable Payments as a Service solution helps level the competitive playing field between smaller financial institutions and their larger counterparts, allowing the smaller players to be nimble in taking advantage of modern technology while avoiding technical debt. This is often an easier and faster path to adopting a new technology like instant payments. Furthermore, by working with a provider like Finastra, FIs can tap into a growing ecosystem of pre-integrated fintech specialists and cross-border service partners to accelerate innovation, enhance compliance and fraud mitigation capabilities as well as customer experiences, and increase efficiencies.
Finally, smaller financial institutions should keep in mind that when it comes to implementing instant payments, they can start small: for example, by only receiving FedNow transactions as opposed to sending and receiving. To date, this has been a popular approach for FIs looking to “dip a toe into the water” of instant payments rather than diving in all at once.
While instant payments have been a reality around the world for years, the launch of FedNow is a game changer. As consumers only grow more accustomed to operating in a real-time world, U.S. financial institutions should focus on leveraging the opportunities that instant payments present.