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July 2023 marks another watershed moment in the realm of instant, or real-time, payments: The Federal Reserve’s public infrastructure solution, FedNow, is up and running. The distinction between FedNow and The Clearing House (TCH) goes well beyond public versus private — it represents a potentially pivotal turn towards widespread US adoption of universal instant payments.
Many bankers have looked at FedNow and dismissed the idea of an incoming real-time payment (RTP) revolution, but hear us out. Compared to TCH, FedNow is accessible to a broader array of financial institutions, and it can serve as the backbone for various instant payment systems. Those qualities can seed the ground for a revolution in RTP adoption. In other words, FedNow’s widespread availability within banking could spark innovation across diverse sectors (e.g., e-commerce, the gig economy and commercial real estate [CRE]) which further democratizes instant payments and organically leads to universal US adoption.
One key advantage of FedNow over earlier payment rails (such as ACH and Fedwire) is that it facilitates seamless and real-time fund transfers between accounts during nights, weekends and banking holidays. In addition to the service level, FedNow offers a robust network that provides flexibility, security, risk mitigation and efficiency through the use of modern technologies and standards.
Those technologies and standards can help instill higher consumer and commercial confidence in RTP as well as the broader financial system by improving bank defenses against financial crimes, identifying fraud attempts before a transaction is executed and helping banks know in real time if they need to tap liquidity to match outflows as digital banking use grows. Following recent events in banking that have tested depositor loyalty, it may reassure customers to know that FedNow is the only digital payment platform created and backed by the US government.
In our previous publication, we focused on FedNow-readiness and key considerations to help banks adapt to the evolving payments landscape. With FedNow up and running, we will dive into our observations since its launch, based on the early adopters among major banks. We’ll also shed light on how smaller, regional financial institutions are thinking about and strategizing adoption of the new rail as they evaluate its near- and long-term applicability across industry and customer segments.
Achieving success in your FedNow adoption: A roadmap in three phases
The US continues to be a laggard in comparison to its global peers in rolling out advanced instant payments solutions. But with the launch of FedNow that competitive gap should close. More US institutions may now feel more confident in offering international money transfers based on FedNow’s use of the globally recognized ISO20022 standard, which helps with transparency by capturing more data that can be used to reduce financial crime.
Since the first announcement of the FedNow platform in August 2019, banks and financial institutions have engaged in measuring readiness and reassessing their payments model. The launch of FedNow is driving banks to build a payments strategy that requires analysis of their ranking on a payments maturity model (from basic to optimized). Although FedNow is live, banks are at different stages in their payments adoption journey, primarily due to limited technology frameworks and a lack of trained personnel.
To successfully integrate FedNow into your institution’s operations, consider a structured, three-phased approach. Begin with discovery: Assess your current customer experience, any technological enhancements required and your competitors’ offerings. Then, shift to strategy development: craft a customer-centric game plan, build a timeline to upscale technology and conduct cost-benefit analysis and risk assessments. Finally, move to implementation: plan for and manage disruptions, optimize internal and external resources to ensure smooth operations and set a goal for the future state of the payments system. This roadmap helps your institution execute a strategic, customer-focused and efficient transition to instant payments.
Unlocking ROI with FedNow: Transforming the financial landscape
FedNow is catalyzing a revolution in instant payments, driving financial institutions to seize multifaceted opportunities. Beyond consumer and business transactions, FedNow’s impact extends to a wide array of use cases where immediate access to funds is a valuable banking service, such as insurance claims, merchant funding, e-commerce, point-of-sale transactions and loan disbursements.
One immediate ROI avenue with FedNow payments lies in lowering transaction costs as compared to domestic wires and ACH transfers. Utility payments, rent and subscriptions can now be processed in real time, enhancing customer satisfaction while lowering a business’s operational overhead. Liquidity management and internal transfers also gain efficiency through FedNow.
The integration of FedNow with digital wallets empowers instant funds transfers, delivering seamless banking experiences. Low-value payments, salary disbursements and vendor payments can transition to FedNow for instant processing. As FedNow matures, opportunities will continue to emerge.
Looking ahead, FedNow can enable customer payment acceptance and instant e-commerce settlements. Non-bank institutions may leverage FedNow’s capabilities to broaden market reach, particularly as international payments will become enabled as part of the solution offering, aligning with evolving regulations.
FedNow’s flexibility and innovation unlock ROI across various use cases and industries. It reshapes payments, from ERP integration to ACH optimization, positioning institutions at the forefront of the digital economy.
How can we help?
PwC can support the end-to-end implementation of FedNow, including advisory and systems integration. PwC offers support throughout the entire FedNow life cycle, including:
- Alignment: Discovery, project planning workshops, project management and project plan creation, current state assessment, vendor landscape mapping and process flow documentation
- Innovation: Blueprinting, design strategy, interface mapping, future state design, technology architecture and integration strategy
- Build: Backlog development, training content creation, testing support and RACI support
- Transition: Readiness support, testing support and data model configuration
- Post-go-live support: Production support, KPI benchmarking, COE strategy and ongoing training
For more information on how PwC can support your adoption of FedNow, check out our official service offering catalog on the FedNow showcase site.
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