Despite clear value in receive-only FedNow transactions, many banks are wary of the send side. To fully embrace FedNow, they will need a clear sign that the benefits outweigh the risks.
By David Ritter
Six months after launch, FedNow closed out 2023 with more than 300 participating banks. The service expects that growth to continue this year. Still, there are nearly 10,000 banks and credit unions, so FedNow is still in its infancy. RTP, the instant payment system of The Clearing House, a consortium of large banks, has a similar number of participants several years after its launch.
For the many banks on the fence about instant payments, it’s essential to understand where FedNow is currently creating value, and what that potential looks like in 2024.
In this piece, I’ll explain what FedNow participants have learned, where they are hesitating and where there is untapped value.
FedNow participants have embraced receive-only B2C transactions
Currently, most FedNow participants have opted only to receive instant payments. But they are already seeing a lot of B2C activity. According to FedNow, three of the most common use cases are:
- Earned wage access: Businesses that employ hourly or contract workers can instantly deposit a day’s paycheck in employees’ bank accounts.
- Loan funding: Consumers can immediately receive and access funds from personal and student loans.
- Insurance payouts: When an insurance company issues a payout, consumers immediately see the funds in their account.
Customers will likely stick with banks that support these capabilities. They will love the ability to access new funds in seconds.
More than that, though, these payment innovations could help attract new customers—especially if banks market the end-user benefits. In some cases, the payment sender might even help out.
For example, I recently heard about one manager who gave their hourly employees a list of banks that accept instant paycheck deposits. If a worker’s bank was not on that list, the potential for same-day wage access might have encouraged them to consider a new banking relationship.
It’s worth noting that most FedNow participants have tapped into only half of the service’s potential. Customers sending instant payments is a prospect that leaves many bank leaders uneasy. In the next section, I’ll explain why.
What most banks still want to know: Is sending instant payments worth the risk?
Many banks hesitate to embrace FedNow’s full send and receive capabilities, partly because of concerns about account takeover, or ATO, fraud. With the ability to instantly send and receive money, a bad actor could steal a customer’s account credentials, access their savings account, send funds to a separate “money mule” account, and cash out. All in real time.
Alongside ATO fraud, some banks are also worried that FedNow-powered transactions could cannibalize payment types that actively generate revenue (such as wire transfers). Customers likely won’t pay hefty fees if they can send large amounts of money for free.
But beyond these concerns, there’s a more fundamental problem: Many banks need to be more precise on the full range of business problems that FedNow can solve. While the service has an explorer where bank leaders can self-educate about high-level use cases, most banks still define the most relevant ones for their customers and businesses.
The bottom line is that despite clear value in receive-only FedNow transactions, many banks are wary of the send side. To fully embrace FedNow, they will need a clear sign that the benefits outweigh the risks.
With B2B payments, the answer could be yes
One untapped aspect of FedNow offers some light in the fog. Instant B2B payments solve a real problem for businesses: In an age of same-day Venmo consumer deposits, B2B payment technology still needs to be faster and more cohesive. But with FedNow’s infrastructure, banks can bring instant payments to commercial customers using their existing Federal Reserve master account. (The Clearing House’s RTP requires a separate account.)
When banks opt into FedNow’s send and receive capabilities, they can empower businesses to:
- Instantly pay vendors for goods and services.
- Send digital requests for payment with an embedded instant payment button.
- Aggregate real-time payment data in their invoicing software.
With FedNow-powered payments, banks can give businesses more control over their cash flow, invoicing speed, and so on. All powerful ways to retain and attract commercial customers.
Even better: Compared with B2C transactions, B2B payments have differentiators that could mitigate many banks’ concerns about FedNow.
For starters, companies’ internal vetting processes for vendors create a first line of defense against fraud. That’s on top of FedNow’s ISO 20022 messaging standard, which lets banks instantly screen transactions using information-rich payment data. Together, these elements reduce the fraud risk associated with sending instant payments.
Instant B2B transactions are also likely to coexist with—not replace—wire transfers, particularly for smaller payment values.
Many companies will continue to wire large sums and payments to banks that don’t use FedNow, especially cross-border payments. Over time, banks can earn revenue on both transaction types via instant payment fees, at least in a limited capacity (if transactions exceed a specific size or frequency, etc.). Banks must experiment with different pricing models to find what works best.
The takeaway is clear: Instant B2B payments offer enormous value that offsets or mitigates potential risks. The banks that opt into FedNow’s full service will more quickly reap the benefits.
It’s time to craft a practical FedNow strategy
FedNow can transform the payment experience for businesses and consumers. But that transformation depends on a strategy enabling instant payments wherever customers need them. Whether in their mobile banking app or invoicing software.
With the right partner, banks can quickly build and test proofs of concept that solve your customers’ most significant pain points. The result is faster payments that impress customers and help banks gain an edge in a competitive banking landscape.
David Ritter is director, financial services strategy at CI&T, a global digital specialist.
