Seizing the power of FedNow: What US banks can learn from global peers’ adoption of instant payments

Patrick Devlin, Senior Vice President of Payments, Temenos

The recent launch of the FedNow Service in the US presents an enormous opportunity for banks. Looking at the global adoption of instant payment systems, it’s clear this trend isn’t going away, and financial institutions worldwide have taken notice. For instance, in the UK, Faster Payments recorded 379.4 million instant payments in June, an 18% year-on-year increase. With a total value of $400 billion, this constitutes a 20% increase from the previous year. Similarly, in Brazil, the Pix system is only three years old, yet processes $260 billion worth of instant payments monthly. Almost 150 million Brazilians – 70% of the population – and 800 banks and fintechs are now utilizing Pix. That is astonishing growth.

For US banks considering whether to adopt the FedNow Service, these global success stories should serve as compelling evidence. Instant payments are becoming increasingly popular worldwide, addressing the limitations of traditional payment methods. Cash is insecure, paper checks require extensive reconciliation management, credit card transactions are relatively costly, and ACH transfers are slow. These inefficiencies impact merchants in terms of time and finances, creating pressure on cash flow.

The competitive advantage of FedNow Service

The FedNow Service boasts low processing fees and immediate settlement, offering enhanced liquidity. Merchants can pass on these advantages to consumers through discounts and incentives to choose the FedNow Service for payments. The immediacy of the FedNow Service aligns with the expectations of a digitally native generation that demands 24/7/365 services, making waiting for money transfers a thing of the past. The benefits to merchants and their customers also benefit the banks, offering a clear driving force for banks to adopt the FedNow Service.

Among the potential use-cases for the FedNow Service, such as payroll, insurance payouts, government subsidies, and bill payments, banks also have the ability to tap into new revenue streams from both existing clients and entirely new customer segments. By consolidating their treasury banking with their payment activities, they can achieve interoperability, economies of scale, and improved user experiences.

Moreover, when banks play a larger role in transactions, they gain access to valuable data about both payers and payees. These insights empower banks to better understand their customers, offer improved products, and provide personalized recommendations for services, such as loans, savings, wealth management, and more. Smaller banks in particular can seize the opportunity to challenge the dominance of larger banks in the credit card market, leveling the playing field against the behemoths that traditionally overshadow the space.

Catalyst for change

The opportunity with the FedNow Service is a catalyst for banks to modernize their payments platform and capability. The challenge of supporting instant, real-time clearing services, and processing across an organization can be immense. Banks need the right technology and platform to innovate and scale efficiently. A modern technology solution or Payment Hub not only allows banks to stay competitive and speed to market with the FedNow Service, but also provides them with the agility and flexibility longer term to upgrade all their payment capabilities and to further innovate on these with easy-to-use APIs.

Options for adoption

When it comes to the logistics of adopting and implementing the FedNow Service, banks have two main options: enable the service in-house or partner with a technology provider. While the former is more viable for larger banks that have significant technical resources, budget, and time, the latter is the easier and faster approach for most institutions. Therefore, it's crucial for banks to select a technology partner based on trust, ease of integration, and scale. The partner should have a track record of managing similar deployments, facilitate seamless integration through APIs and cloud-based solutions, and offer scalability beyond the FedNow Service to support various services on a single platform. Choosing a partner with experience in such deployments ensures optimal flexibility and support so that banks can expand seamlessly, support multiple payment schemes, and maximize their cost efficiency. The solution should also provide compliance capabilities including fraud protection, AML and sanctions screening along with Instant Payments at scale.

The future of FedNow

As the global adoption of instant payment systems continues to surge, financial institutions worldwide are taking notice of this transformative trend. The launch of the FedNow Service in the US heralds a monumental opportunity for banks that extends well beyond its borders. The remarkable success stories of Faster Payments in the UK and the Pix system in Brazil underscore the undeniable opportunity in the US for banks to enhance their offerings and revenue streams. Whether pursuing in-house or selecting a technology partner, the sooner banks take the first step, the longer runway they have to gain an advantage against their competitors and begin capitalizing on the tremendous untapped opportunity of the FedNow Service.