FedNow to transform the digital payments market dynamics in the United States

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Unified Payments Interface (UPI) has changed the digital payments market dynamics single-handedly in India. The payment method, since inception, has continued to gain popularity among consumers year over year, and this is reflected in the soaring transaction value and volume. The total UPI transaction value, in May 2023, reached INR 14.3 trillion. The volume, on the other hand, reached 9.41 billion.  

Looking at the success and adoption of UPI in India, several developed countries have been seeking to implement similar payment processes in their domestic market over the last few years. This also includes the United States, which is set to launch the FedNow real-time payment system in July 2023.

• After a pilot program, which lasted for six months, the Federal Reserve System is set to launch the payment service that is designed to increase liquidity. Small businesses and participants in the supply chain will experience significant advantages as they receive instant payment for their goods and services, leading to substantial benefits. The new payment service will also benefit employees, especially hourly-rate and gig workers, enabling them to receive payment more frequently and quickly.
• FedNow is designed to complete transactions instantly. Banks, businesses, and consumers can send and receive payments in about ten seconds. Like with other payment methods, there is a fee associated with the FedNow system. It is up to the banks to decide who bears the fees – merchants, consumers, neither, or both. Initially, the FedNow system will only enable banks to receive payments. The ability to send payments is expected to kick in later.

Banking institutions are not operating 24x7 in the United States. Consequently, they will have to set up procedures to accommodate the liquidity management taking place in the middle of the night. In addition, the current practice of banking institutions having a full day to carry out processes such as know-your-customer, anti-money laundering, and anti-fraud will no longer be applicable. These processes will need to be automated to enable real-time detection.

During the pilot program, more than 120 entities including banks, service providers, and vendors participated. As of June 2023, the US Federal Reserve has announced that a total of 57 firms have been certified to use the FedNow payment service, after it gets launched in late July 2023. Big names like JPMorgan Chase, US Bancorp, Bank of New York, and Wells Fargo have completed the testing and are ready to offer the payment service.

It is important to note that the FedNow payment system is not replacing the existing payment systems such as ACH (Automated Clearing House network) and wire transfers. FedNow is an additional payment system that will certainly challenge other services and PayNXT360 expects the impact to be significant.

In India, for instance, UPI has taken over other forms of payment methods. India customers have ditched cash, prepaid, and debit cards in favor of UPI transactions. In Brazil, where the central bank launched Pix instant payment system in 2020, similar trends have emerged. Within a year of launch, over 100 million users were using the Pix payment services. Today, it is serving more than 150 million in Brazil.

These stories, coming from India and Brazil, suggest that the adoption of FedNow will be quick across banking and business sectors in the United States too and there is a good reason behind it.

To expedite payment processes for businesses dealing with numerous transactions with distributors and suppliers, it becomes advantageous for all parties involved to prioritize faster receipt of funds. Just like Brazil's Pix, the introduction of FedNow will facilitate instant payments to vendors, contractors, and other business partners. This advancement will not only enable swifter access to funds but also enhance cash-flow management, empowering businesses to reinvest more rapidly.

Currently, the majority of firms in the United States make use of the ACH system to send and receive payments. These firms experience next-day clearing or end up paying higher fees for wire transfers. This is another reason why the adoption of FedNow is expected to be swift and fast in the United States.

Nearly 50 countries globally have already implemented same-day payment mechanisms, most of which have also experienced faster uptake. The launch of FedNow will, therefore, also enable the United States to play catch-up with the rest of the world in terms of real-time payment mechanisms.