What have we learned about real-time payments in the US?

It’s been a year since the U.S. government launched FedNow, its long-awaited real-time payments (RTP) system. More than 70 other countries already had national RTP binaries at the time, and some, like Brazil, India, and China, have seen huge adoption in the years since they launched their own infrastructure. At the time, I compared their experience with the uniquely fragmented banking landscape and consolidated card payment infrastructure in the U.S. to make 10 Predictions for FedNow.

These predictions were:

1. FedNow would start a domino effect of RTP adoption, driven by consumer use cases
2. Massive network connectivity would take nearly a decade
3. FedNow would replace cash and checks, but not credit cards
4. Person-to-business (P2B) account-to-account use cases would grow slowly but steadily
5. FedNow would offer an incremental improvement to the payments infrastructure, not a paradigm shift
6. Interoperability would be a prerequisite for any QR code revival
7. Digital Wallets Will Become the Next Battleground in E-Commerce and Point of Sale
8. Authorized push payment fraud would increase
9. Attracted by high speeds and low costs, consumers and small businesses would be quicker to adopt RTP
10. FedNow would fuel the cross-border movement of money

With FedNow launching a year later, it’s time to take a look at these predictions, some of which require more explanation than others. Let’s look at the quick ones first:

• FedNow is at the beginning of a long process of replacing cash and checks, but not credit cards.
• FedNow proposes a gradual improvement of the payment infrastructure, but not a paradigm shift.
• For now, we are still waiting for widespread adoption of FedNow nationwide, which would help fuel an increase in international money movements.

Well, let’s take a look at what we learned:

Mass connectivity will take a long time…

…But I hope not for too long. I recently attended a Wharton FinTech Podcast interview with Nick Stanescwho is the Chief FedNow Executive at the Federal Reserve Bank of Boston. During our discussion, he shared that there are now about 900 financial institutions active on FedNow, including banks and credit unions of all sizes in all 50 states. A year ago, that number was 35. However, remember the uniquely fragmented American banking system: the country has nearly 8,000 banks and credit unions. So while mass connectivity is still a ways off, this encouraging early adoption rate hopefully means we’re closer to five years, rather than ten.

Special Panel for the First Anniversary of FedNow Instant Payments

Wharton Fintech Podcast

FedNow will start a domino effect on RTP adoption

As Stanescu noted in our interview, the majority of FedNow transactions fall into consumer use cases. Most of these have been account-to-account payments, funding digital wallets, and even access to earned wages, where workers can access their wages the same day they earn them. Other exciting use cases include insurance payments and emergency relief payments, typically lengthy processes that would happen instantaneously on FedNow rails.

Incentives for traders: cost savings alone are not enough

Brazil’s Pix system has one of the most impressive RTP adoption rates in the world and is expected to account for 40 percent of the country’s online shopping transactions by 2026. There are a number of structural reasons for RTP’s success in Brazil versus the U.S., including differences in card payments infrastructure and the aforementioned banking fragmentation (or lack thereof: in Brazil, the top five banks account for 80 percent of total commercial activitiescompared to 49 percent in the United States). But there is another structural difference that we had not initially taken into account: the incentives for traders.

In Brazil, card transactions typically take 30 days to clear, while higher discount rates for merchants result in higher interchange rates for card transactions — 2.9 percentage for credit and 1.6 percent for debit. In the United States, these rates are around 1-3 percent and 0.25-1 percent, respectively. There is therefore an incentive to push Brazilian merchants towards Pix, while their American counterparts have no such incentive. Boleto, a printed cash voucher, is another popular Brazilian payment method, and it costs less to accept but takes much longer to process, and is inconvenient for users to pay.

Compared to these two options, Pix offers dramatic improvements on all fronts: higher conversion, lower costs, and faster settlements. Cost alone is not a strong enough incentive for US merchants to adopt FedNow. Looking ahead, RTP providers will need to rethink the overall merchant and customer experience, including conversion, loyalty, and customer satisfaction.

Banking incentives: overcoming the revenue hurdle

There are already real incentives for banks to participate in RTP networks. There are cost savings from a reduction in check and cash handling, including the use of ATMs. However, some banks are concerned that FedNow will cannibalize revenue from other payment methods, such as wire transfer and credit card interchange fees, because the RTP option will tend to be cheaper. It is true that in countries with high RTP adoption rates, such as Brazil, high interest rates and the ubiquity of installment payments (the original BNPL) mean that fewer consumers carry credit card balances. This means that the loss of credit card revenue is not as high for Brazilian issuers as it might be in the United States.

However, businesses and consumers have a strong preference for speed. “Pseudo-RTP” players like Venmo, Cash App, and Zelle are useful early indicators of demand for the real thing, and Zelle is well on its way to catching up. $1 trillion in run-rate volume by the end of the year. Meanwhile, as FedNow adoption grows among financial institutions, there are huge opportunities for fintech startups to help financial institutions with obstacles such as authorized push payment (APP) fraud, instant reconciliation, and ERP integration.

Safety is a moving target

Wherever RTP systems take hold, crimes such as social engineering fraud, scams and even physical robberies associated with APP fraud increase as a result. In 2023, the Brazilian Public Security Yearbook counted approximately 1 million phone robberies, with thieves tending to operate on Fridays, which gives them more time to drain accounts while banks are closed on weekends. Once inside the victim’s phone, a thief can do anything from placing an order through MercadoLibre’s one-click payment to accessing bank accounts (the average Brazilian has 5.8 accounts per person) and Pix rails, along with the 800 or so fintechs linked to them.

Fighting app fraud is a team effort. Google has recently launched a new anti-theft feature for Android devices that locks the screens of Brazilian phones when its AI detects a theft. The Federal Reserve has developed a tool called Scam Classifier to help the payments industry improve fraud reporting, detection and mitigation. And startups are emerging to tackle fraud on a global scale, with TunicPaga, Archer ProtectAND SOS Coup just to give a few noteworthy examples.

Tap-to-Pay could level the playing field for offline PoS payments

One of my predictions last year was that digital wallets would become the next battleground in e-commerce and point-of-sale, and that has become increasingly true over the past year. At last count, digital wallets were the leading payment method for e-commerce in the United States, accounting for 37 percent of all e-commerce transactions (Asia Pacific at 70% and China at 82%), while credit cards ranked second with 32% and debit cards a distant third with 19%.

However, digital wallets are lagging behind physical outlets (15 percent of total transaction value) due to a lack of interoperable QR codes and other sources of friction. After all, it’s a laborious process to open your banking app, enter your credentials, and scan a QR code while a teller waits. Tap-to-pay technology would level the playing field for real-time payments, reducing the entire process to a single step, much like swiping your credit card. For now, however, issues like dispute management, instant refunds, and reconciliation have yet to be ironed out.

Tap-to-pay has a tailwind right now. Earlier this month, as part of the anti-competition deal, the EU just accepted Apple’s bid to enable near-field communication (NFC) capabilities for non-Apple wallet systems on Apple devices, including tap-to-pay. It also includes Face ID biometric authentication, a default for preferred payment apps, and a dispute resolution mechanism. And that same month, the NFC Forum announced a new feature called multipurpose tap. With it, a customer in a store could hold their phone up to a terminal that simultaneously pays for their goods, checks their ID if they’re buying age-restricted goods like alcohol, adds points to their loyalty account, and provides a digital receipt.

Overall, the infrastructure is emerging to help merchants manage a customer’s entire purchase journey, generate more sales, and ultimately increase customer loyalty. Because remember: improved costs and settlement times alone are not enough to entice merchants or consumers to adopt FedNow-enabled real-time payments.

Looking ahead, opportunities abound for fintech startups to build and partner with financial institutions to combat APP fraud, enable instant reconciliation, integrate with ERPs, and create interoperability between payment systems. Wherever startups help financial institutions orchestrate a seamless FedNow implementation and onboarding, we look forward to collaborating.

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