FedNow: Strategies for Widespread Adoption One Year In

FedNow, the Federal Reserve’s instant payments service, recently celebrated its first anniversary and currently has over 900 financial institutions enrolled. While this initial rollout has been successful, with 40% of participants actively sending and receiving payments, experts believe widespread adoption is necessary to unlock the full potential of this innovative technology for the U.S. financial system. Here are four key strategies the Fed can employ to achieve industry-wide adoption among the nearly 10,000 financial institutions in the U.S.

1. Showcase the Benefits and Use Cases

The Fed aims to double enrollment within a year. One strategy is to encourage existing members to increase payment volumes going through the network. This could be done by collaborating with the existing members and helping them identify opportunities to move some of their traditional payments over to FedNow. For instance, most small services focused businesses (such as lawn maintenance, house cleaning services, pet sitting services, etc.) collect their payments via checks, which is an operationally expensive payment method for the banks. Helping participating banks to gradually move some of these payments over to FedNow will be a win-win outcome for both the institutions as well as their customers or members.

This growth in transaction volumes will demonstrate rising demand and foster a network effect, where a larger user base makes the service more attractive for new participants. This influx would also allow the Fed to highlight other potential use cases, such as real-time B2B, B2C and C2B payments. These concrete examples will further incentivize new bank participation, creating a positive feedback loop that drives even faster adoption.

2. Collaborative Competition: Leverage Existing Strengths

FedNow has already surpassed enrollment in The Clearing House’s RTP (Real Time Payments) system. While these services attract different core audiences (RTP for large member banks, FedNow for all sizes), they share key features – speed, security and instant, irrevocable funds availability.

Instead of competition hindering growth, the industry could benefit from interoperability. A “technology-smart” approach could bridge the gap between these rails driving volumes across both the networks and provide a frictionless customer experience for instant payments.

3. Target the Biggest Players

Many large banks are currently on the sidelines, opting solely for RTP membership. However, this may be a short-sighted strategy, especially when government grants and tax credits are paid out through FedNow, providing FedNow enabled customers with a clear advantage with sooner access to these funds. Customers increasingly expect faster payment options, and a broader network offering both RTP and FedNow capabilities could be a major selling point. Several large banks have signaled their intention to join FedNow soon, and wider adoption is likely as the benefits become clearer and the risk of losing customers to FedNow-connected institutions becomes evident.

4. Address Fraud Concerns for Smaller Institutions

The potential for fraud associated with instant payments is a concern for some smaller financial institutions. While FedNow implements strong security measures, these institutions may need to bolster their own prevention efforts. Legacy systems lacking real-time processing capabilities for comprehensive fraud and anti-money laundering checks might be a hurdle. Fortunately, numerous technology solutions exist to help smaller banks and credit unions bridge this gap, enabling easier integration with FedNow and robust fraud prevention.

Despite these challenges, the value proposition for financial institutions is clear. Joining FedNow unlocks participation in an interconnected network, bringing innovation and accessibility of instant payments to the mainstream consumer.

Beyond the Initial Strategies

The Fed’s efforts should not stop with these initial strategies. Here are some additional considerations to ensure long-term success:

• Public education: Consumer awareness of FedNow remains relatively low. The Fed can collaborate with institutions and industry bodies to launch targeted marketing campaigns that educate consumers about the benefits of instant payments and how to utilize them. A well-informed public will drive demand and further incentivize financial institution participation.
• Regulatory support: Streamlining regulatory hurdles for institutions considering FedNow adoption can be a significant incentive. The Fed can work with regulatory bodies to establish clear and consistent guidelines that minimize compliance burdens without compromising financial stability.
• Standardization and innovation: Ongoing collaboration with industry stakeholders is crucial for maintaining a standardized and interoperable network. This collaborative approach will foster continued innovation in the instant payments landscape, ensuring FedNow remains at the forefront of this evolving technology.

By implementing a comprehensive strategy that addresses the needs of all stakeholders – existing members, potential new entrants, and large and small institutions alike – the Fed can drive widespread adoption of FedNow and fundamentally transform how Americans send and receive money. The potential benefits for consumers, businesses and the overall U.S. economy are significant, paving the way for a faster, more efficient and an inclusive financial system.

Heman Daswani is Principal Consultant in the Payments group at Temenos, a provider of banking software for financial institutions in the U.S. and globally and a certified service provider for the FedNow Service.