SPONSORED CONTENT PRESENTED BY FEDERAL RESERVE FINANCIAL SERVICES
More than 900 financial institutions across the country are using the FedNow® Service, an instant payments infrastructure developed by the Federal Reserve, to create new payment solutions their customers are demanding.
According to recent Federal Reserve surveys, 86% of businesses and 74% of consumers said they used faster or instant payments in 2023, and most (74% of businesses and 79% of consumers) reported looking to their financial institution to provide these services.
With the FedNow Service, banks can provide payment products their customers are seeking while delivering real value to their own organization. Offering instant payments can help your bank:
- Stay competitive in an ever-evolving market
- Improve customer experience
- Generate new revenue and save on costs
- Attract and retain customers
Individuals and businesses using instant payment solutions through their banks can also reap important benefits such as gaining more control over cash flow and precisely timing payments. For some financial institutions, these benefits to customers were a driving force in their FedNow Service adoption.
“In our first year with the FedNow Service, our enabled customers have embraced the innovation of instant payments and are reaping the benefits of the FedNow Service in their daily business transactions,” said Andrea Short, president and chief executive officer of 1st Source Bank, a locally controlled financial institution serving businesses and consumers throughout the U.S., with a majority of their customers in northern Indiana and southwestern Michigan. “From the early days of the FedNow Pilot Program, we understood that instant payments would be a game changer for our customers and a big differentiator for our bank. Watching that come to fruition — delivering the innovative solutions that our customers expect — is thrilling.”
Use cases in action
The FedNow Service supports a range of use cases and transaction types, allowing financial institutions and other organizations to build instant payment solutions that align with their business strategies and the needs of their customers.
Certain use cases have already started gaining traction such as account-to-account transfers, digital wallet funding and defunding, real estate transactions, microdeposit account verification, online marketplace seller payouts and more.
One use case of particular interest among FedNow participants is bill pay. When asked why Salem Five Bank, a regional mutual bank helping to meet the complex financial needs of families and businesses throughout New England, adopted the FedNow Service, Head of Digital Delivery Rob Ames said:
“We see a pressing need for innovation within traditional banking bill pay solutions. Our customers’ bill pay usage over the past few years has shown a portion of transactions migrating from our bill pay solution to direct billers, meaning some consumers are paying bills using a direct biller to receive real-time acknowledgment of the payment,” Ames said. “We look forward to the day when our bill pay solution has an instant payment option because it can reduce that migration. For consumers, consolidating bill pay at their financial institution means better reporting options and stronger visibility into the entirety of their payments.”
What the industry is saying
It’s not only financial institutions eyeing certain instant payment use cases. Fintechs and others in the industry that partner with financial institutions to deliver payment solutions using the FedNow Service are also innovating and seeing great value in various use cases.
Instant payroll and earned wage access are among the use cases drawing attention because employees and gig workers can immediately access money they’ve earned, allowing them to improve financial security and well-being. For businesses, providing this use case can allow them to attract and retain employees and improve employee experience.
“Earned wage access offers choice and control over money that you have already earned and are entitled to,” said Rob Nardelli, director of commercial banking at DailyPay, a fintech that provides earned wage access. “It is especially important for those living paycheck to paycheck who need more flexible access to their money to pay bills, groceries or gas.”
Another instant payment use case gaining attention in the industry is microdeposits. This small (usually less than $1) but critical payment plays an important role in mitigating the risk of fraud by verifying account ownership and authenticity to offer peace of mind that funds are being routed correctly. Often limited to traditional banking hours, the conventional microdeposit process typically takes 1-3 days to clear and settle, which can result in a negative experience, high abandonment rates and lost business. Instant payments can transform the microdeposit process and outcomes significantly.
“Our customers constantly tell us that users who can quickly verify their external account are more likely to move money, apply for a loan or begin using the service, especially when compared to a user who has to wait several days to verify,” said Shaffer Bond, product manager at Plaid, a fintech organization enabling users to share financial data with third-party apps.
Digital wallet funding and defunding is yet another use case of particular interest in the industry. Federal Reserve surveys revealed that U.S. consumers’ use of digital wallets, such as those popularized by non-bank technology or fintech providers, surged 32% in 2023 from the prior year.
“From the receive side, I think we will start to see significant traction in the person-to-person space, with digital wallets pushing money back to the financial institution so that account holders can instantly use funds received from their friends for lunch or whatever it may be,” said Marcell King, chief commercial officer at Tyfone, a digital banking solution provider.
Justin Jackson, senior vice president and head of enterprise payments at Fiserv, a global fintech and payments company that serves as a processor connecting financial institutions to the FedNow Service, had this to say about the instant payment use cases they have seen gain traction:
“These use cases provide tangible examples and build the case for financial institutions to connect to instant payment rails and better serve their customers,” Jackson said. “There are also clear opportunities to build customer loyalty. While consumers and businesses aren’t always thinking about the ins and outs of financial services, they just want to get their wages the same day or pay a forgotten bill fast to avoid a late fee. The FedNow Service helps solve this need.”
Take the next step toward instant payments
The use cases mentioned above only scratch the surface of what is possible with instant payments. Banks and others in the payments industry will continue to innovate and create solutions that bring value to their businesses, customers and communities.
“When we think of how we see the FedNow Service being utilized by our customers in the future, we want to prioritize those use cases that benefit the community: rent payments, insurance payouts, bill pay,” said Nate Parrish, president of First Citizens State Bank, a locally owned and operated community bank based out of Whitewater, Wisconsin. “We want to be responsive to the use cases that will help our business customers better manage their cash flow, for example, or help our account holders avoid late fees with on-time payments.”
While the U.S. is still early on the road to instant payment ubiquity, the strong growth of the FedNow Service shows that financial institutions are stepping forward to meet changing customer expectations, recognizing their power to help consumers and businesses gain benefits from these new payment solutions.
Read more from FedNow participants on FRBservices.org and get all the details on the service and how to prepare for it on FedNowExplorer.org.
