Payment methods on the horizon - FedNow Service

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While we’ve been enjoying ‘Faster Payments’ in the UK since 2007, spare a thought for our friends on the other side of the Cable. Some decade and a half later, the USA are now beginning to move towards giving American’s immediate access to their money. Giving the name a Hollywood makeover, the USA is developing their ‘Instant Payments’ structure, but the fact remains we are in a digital age, especially for payments, instant is expected – and growing. Central banks in more than 50 countries, including the UK (with Faster Payments), have already implemented payment networks that support the immediate posting and settlement of funds.

What is FedNow?

Let’s take a step back and catch you up on what exactly the ‘FedNow’ Instant Payment infrastructure is. FedNow is a new instant payment service that the Federal Reserve Banks (in the USA) are developing to enable every size financial institution and individuals in the U.S. to provide safe and efficient instant payment services in real time, 24/7/365. It is a digital infrastructure that banks will access in order to use near real-time settlement.

Currently in the USA, the main form of transferring payments is via a ‘messaging network’ called the ‘Automated Clearing House Network’, or ACH. ACH payments are processed in batches, and it typically takes between three and five days for the transfer to be complete and for the funds to appear in the account. Currently The ACH Network does not settle payments on weekends (or holidays) when the Federal Reserve system is closed, meaning that on National Holidays like Thanksgiving, payments will take even longer to process, and a payment made on the Wednesday before Thanksgiving will not be processed until the next Tuesday at the earliest.

The FedNow Service will launch this year, with future iterations expected so that the initial phase isn't delayed.

Why is the USA so behind?

Instant Payments are not the only payments innovation the US has been slow to adopt. After two decades of chip and pin technology in European nations making payments more secure – the USA is only just really seeing ‘chip and pin’ in common use now. Late to that party and afraid of a drop in consumer spending due to the ‘hassle’ of remembering a pin – the USA first opting for ‘chip and sign’ - and even still using manual click clack machines.

The Fed has even admitted that advancements in other countries means ‘that the U.S. retail payment system lags behind systems in other countries.’

Why it’s good for international payments?

At launch, the FedNow Service will support domestic payments between U.S. depository institutions. However, if you think about the journey your money takes on an international payment, the payments require ‘clearing’ and ‘settlement’ between depository institutions, and for an international payment there can be several intermediaries required for the transfer ‘message’ to go through. Since the FedNow service will take care of clearing and settlement between US banks, once the money from another country reaches the US bank, in theory the payment can use this system which will hopefully speed up cross border payments in the U.S. and especially those companies with settlement accounts held locally.

Beyond speed and convenience, instant payments will give economic benefits (in the form of better cashflow) for individuals and businesses by allowing them to make time-sensitive payments when required (and not in advance).

Payments innovation

Now whilst this is extremely exciting for the US and those that transact in the USD, innovation is taking place across the globe in many ways. We have the launch of Swift GO, the release of the New Payments Architecture and Swift tracking all on the horizon, more to come on those in future blogs.

So needless to say, whilst payments is about getting money from A to B and by and large I’m sure they are seamless, we always want more. Whether it’s more cost effective, faster or more connectivity and the good news is that payments groups will continue to deliver.

I think it’s safe to say that payments is one area, innovation will continue for some time to come.