July 20, 1969, marked the day when human beings first set foot on the moon, forever changing how we viewed the world beyond us. It’s also the date in 2023 when the Federal Reserve launched its FedNow instant payments service.
Although the impact has not been nearly as epochal as the moon landing, FedNow has met expectations in its first year of operation. It will likely take just one major use case or disruptive event to make the service a regular part of life.
Where It Stands
On Day One, 35 banks and credit unions, along with the U.S. Department of the Treasury’s Bureau of the Fiscal Service, joined FedNow. As of now, more than 900 financial institutions are connected, ensuring representation in all 50 states and D.C. Participants include a mix of the nation’s largest financial institutions like Chase and Wells Fargo, as well as numerous smaller community banks and credit unions across the country.
It should be noted that many of these institutions are using FedNow on a limited basis. Some have opted to start with receive-only payments, waiting until their old batch processing operations can be refigured so they can handle real-time gross settlement payments. Others have expressed concerns about potential fraud risks, given the irrevocable nature of these transactions. There are also challenges related to the current FedNow transaction limit, set at $500,000, which may not accommodate larger business transactions that could easily exceed this threshold. In comparison, The Clearing House’s RTP and Same Day ACH both offer transaction limits up to $1 million.
RTP, the chief competitor to FedNow, has been operational since 2017 and has achieved broader adoption in terms of reach and market share. However, many smaller financial institutions have been waiting for a system that is operated by the Federal Reserve, as opposed to The Clearing House, which is owned by 20 major banks. Some smaller banks and credit unions may prefer not to use a system operated by the largest private financial institutions.
“There are nearly 10,000 financial institutions, so 800 FedNow participants is still a relatively small percentage of that,” said Elisa Tavilla, Director, Debit Payments at Javelin Strategy & Research. “There’s still a ways to go in getting the system to be ubiquitous and broadly adopted, similar to what we have with ACH today. I think broad uptake will be a gradual process.”
Catching Up with the World
Globally, roughly 80 countries have implemented an instant payment network. The UK introduced instant payments in 2008, India’s UPI arrived in 2016, and the Single Euro Payments Area (SEPA), enabling instant payments among 36 countries, launched in 2017—the same year RTP launched in the U.S. Brazil’s Pix followed in 2020 and already handles more transactions in the country than credit and debit cards combined.
In some ways, the U.S. was a victim of its own success regarding instant payments. Unlike some other markets where payments systems were less developed, the U.S. had the revolutionary ACH system, launched in 1972. Other nations transitioned directly from largely cash-based economies to digital economies, with instant payments representing a great leap forward for them.
“These new real-time payment systems were a way to help bring the unbanked or underbanked segment of the population into the mainstream economy,” said Tavilla. “They also make the economy as a whole less reliant on cash and more prepared for the digital future.”
The Life-Changing Event
Despite a significant number of institutions participating, FedNow has not yet become an integral part of the payments system in the U.S. It’s difficult to predict what could propel it to household name status. Many transformative events in the payments industry were unforeseen until they happened and changed the world.
Consider contactless payments. A longtime veteran of the Federal Reserve, Tavilla said that experts had anticipated their rise in the American consciousness through mobile apps or physical cards for years. Yet adoption rates remained in the low single digits—until the events of 2020.
“When we had the pandemic, contactless all of a sudden became everyone’s obsession,” Tavilla said. “Contactless payments became an everyday household term because nobody wanted to touch anything.”
But it doesn’t take an external shock to produce such an effect. In other countries, government support or mandates for real-time payment systems have driven widespread adoption. Brazil, for example, mandated digital accounts for emergency benefits, accelerating Pix adoption. Similarly, India leveraged its real-time payment system for government benefit disbursements.
A similar government initiative in the U.S. could be a game-changer. Imagine if social security or other safety-net payments were distributed through FedNow, or if Americans could pay taxes and other government fees using FedNow.
To date, there have been no announcements regarding such use cases. “But remember, the Treasury is connected to FedNow, so that could be a strong catalyst for adoption,” Tavilla said. “A similar example occurred under the Clinton administration, where all federal payments, except tax refunds, were mandated to be issued electronically by January 1999, which significantly expanded direct deposit using ACH.”
Moving FedNow into the Future
FedNow’s first year has gone smoothly, with no major interruptions or downtime on the network. The Fed ran a robust pilot program for about a year leading up to the launch to make sure everything functioned properly.
This bodes well for FedNow adoption to grow quickly if critical use cases emerge. There’s also demand for instant payment services. A Federal Reserve study found that 86% of businesses and 74% of consumers used faster or instant payments in 2023. The survey also found that most people prefer using a traditional bank for payments but are increasingly open to non-bank payment solutions if they better meet their needs.
The current $500,000 transaction limit may also keep some businesses from participating. This limit is partly intended to prevent fraud, but it may be raised in the future to accommodate higher-value business transactions.
A further complication is that FedNow and RTP are not interoperable. If the two systems could work together, it could accelerate the adoption of real-time payments in the U.S.
“FedNow adoption is growing, and financial institutions know that instant payments are something that they need, given all the other technologies that we have are immediate and real time,” Tavilla said. “Everything else in our lives is real time now—payments should be too.”