Technology companies in the payments space should pay close attention to the Federal Reserve’s (the Fed’s) upcoming launch of a long-awaited new payment system, the FedNow Service. The system will change the consumer payments landscape by providing a new instant payment alternative to existing retail payment rails.
It is rare for the U.S. central bank to build a wholly new payment rail, and importantly, the U.S. government has announced its backing for instant payment systems. FedNow promises to both pose challenges to fintech companies whose business models depend on activity over existing payments rails and offer key new opportunities to innovators in the space. These new drivers and risks will be important considerations for many players in the market and critical to their success.
The Fed’s Instant Payments Platform
An instant payment is a new type of payment from one bank account to another, where the recipient receives final funds in near real time, enabled by immediate interbank settlement of the payment. This means there is no buildup in interbank obligations, and end users can instantly send and receive money. This is an improvement to payments via credit or debit cards and automated clearinghouse (ACH), which come with higher costs or delays to receiving final funds.
FedNow, expected to launch between May and July of this year, will be the central bank’s new core instant payment infrastructure. It will process retail payments in real time, 24 hours a day, 365 days a year, with funds made available immediately for use by the recipient of the payment. Eligibility to participate in the new system will generally be limited to U.S. banks; these banks, in turn, would offer instant payment services to individuals and businesses. The new system is a much-needed upgrade to the national infrastructure for retail payments, which is currently closed on weekends and can at times take several days before funds are available. The Fed’s ultimate aim is to give consumers and merchants faster access to their funds and greater flexibility to manage cash flow, at low cost and with reduced payment risk.
A key milestone was the Fed’s publication in October 2022 of the legal terms and conditions governing FedNow transfers, which contain granular legal details about the service. These terms reveal important shifts to the status quo and critical ways the service will impact the competitive outlook for retail payments, especially for fintech companies.
Challenges and Opportunities for Technology Companies
The Fed’s launch of FedNow this year is significant because it will enable banks of any size to offer convenient instant payments with nationwide reach. This will alter the retail payments landscape in three critical ways:
Why This Matters
Importantly, the U.S. Department of the Treasury has endorsed the adoption of instant payment systems in its recently issued report on “The Future of Money and Payments,” encouraging U.S. government agencies to use instant payment systems where appropriate. As history has shown with the growth of ACH payments, participation by U.S. government agencies in a payment system drastically amplifies that system’s ability to scale and reach ubiquity.2 While it may take time for consumers and corporates to change deep-rooted payments behavior, the government’s support makes FedNow and instant payments well worth watching—not just for banks that are eligible for the service, but also payment processors, end-user interface providers, and other fintech companies.
There is a critical role for technology companies in the growing U.S. instant payments space—by rolling out the end-user interfaces needed to make instant payments convenient and safe, by offering the processing services that many banks rely on, or by integrating instant payments into platforms and products that drive the digital economy. Fintech companies that intend to take advantage of the faster movement of money through this new national payment rail will need a solid understanding of the service’s key features, the areas to innovate and offer tailored functionality within the bounds of FedNow’s legal terms, and, importantly, the regulatory compliance obligations and areas of emerging risks.
For more information, please contact Jess Cheng, Amy Caiazza, or any member of the firm’s fintech and financial services practice.
 The Fed itself has recognized the importance of the contributions of highly motivated and engaged technology companies and service providers in its outreach campaigns. Among other things, the Fed has created an Ecosystem Accelerator Group to promote engagement with these service providers and a Service Provider Showcase to connect service providers with FedNow banks.
 Indeed, Treasury notes in its report: “In settings where appropriate, U.S. government agencies should consider and support the use of instant payment systems. The U.S. government sends and receives millions of payments per day. Use of instant payment systems by U.S. government agencies could promote the expedient distribution of disaster, emergency or other government-to-consumer payments, potentially providing more rapid support for underserved communities.”