What will it take to get more banks plugged into FedNow and RTP?

A version of this article first appeared in the July BAI Executive Report: Modernizing payment methods. Find more insight within the issue on topics including consumer payment preferences, FedNow and RTP, check fraud, ISO 20022 compliance and more.

More and more U.S. financial institutions—large and small—now offer faster digital payments capabilities to their business and retail customers. But centralized, nearly instantaneous payments technology adoption in the U.S. still lags that of other major economies. And use cases here are more selective, which has slowed building out a much stronger end-to-end payments ecosystem in the U.S.

We delve into how participants have initially deployed both the Federal Reserve’s FedNow payments technology, the more recent of the two major U.S. payments systems up and running, and its competition, The Clearing House RTP (RTP signifying real-time payments). The Clearing House is the banking association and payments company that’s jointly owned by the largest U.S. commercial banks. FedNow came online in July 2023, after RTP’s 2017 launch.

And we examine what the two systems’ proponents believe it will take to accelerate a groundswell of use among financial organizations.

Growth is expected, but how fast?

Real-time payment transactions overall within the U.S. are projected to increase at a 31.7% compounded annual growth rate (CAGR) by 2028, according to ACI Worldwide’s Prime Time for Real Time Global Payments Report. One of the main contributors to that prediction hinges on having both networks operating at the same time, which they currently are, and an increasing number of banks and credit unions signing up.

“The U.S. is currently behind some other major developed countries in the world when it comes to the adoption of real-time payments, but the exciting news is that we’re really starting to see a change in that,” says Bridget Hall, ACI’s leader of real-time payments for the Americas.

Other countries have successfully adopted real-time payments, particularly India, Brazil, Malaysia, Indonesia and the Netherlands, according to ACI’s report.

Some of the gap is owed to challenges with alignment given the sheer size of the U.S. banking system and because domestic participation remains voluntary.

“In the U.S., we have 9,000-plus financial institutions, many more than other countries,” Hall says. “We also aren’t expecting to see a government mandate for financial institutions to connect to or use either FedNow or RTP.”

At the same time, use cases for existing, smaller-scale U.S. payment rails continue to evolve, and those payment methods might be better for particular use cases, she says.

As new real-life situations emerge on a case-by-case basis, such as earned wage access, which allows workers to tap accrued earnings before the next payday, and as payment volumes increase, it may be more appropriate for some financial institutions to use select instant payment rails that banks and credit unions already transact with, even if these choices prop up a disjointed system for now.

More demand for payments features from banks, credit unions

“One of the benefits of real-time payments is speeding up the availability of funds,” Hall says. “For businesses, there is also the timely transparency of knowing whether or not their transaction has settled, so they can move on with an immediate reconciliation process rather than having this big amount of work from an accounts receivable or an accounts payable perspective.”

For Hall and others, interested banks and credit unions can find motivation to test the technology, even if the case for high volume lags.

Mass adoption of FedNow and RTP will occur as more financial institutions connect, “as the conversation evolves from just moving money to more about the overall flow of the transaction,” she says.

The $3.4-trillion-asset Chase Bank headquartered in New York is now enabling both consumers and business customers to send and receive real-time payments, says Ginny Chappell, Chase’s lead for payments products, new payment rails.

Use cases for business customers include faster wage access through on-demand payroll, gig worker pay disbursements and other general money disbursements where a digital, faster payout is more efficient than alternative payment methods—for instance, a mailed paper check.

Chase’s payment teams are engaging with the Federal Reserve to advocate for guiding principles and risk management standards to promote consumer protections and operational parity with The Clearing House’s RTP rail, Chappell says.

“Reach and ubiquity is critically important for any payment rail, and given the newness, FedNow is still working on that reach,” she says.

To reach mass adoption, the industry needs to create features in new rails to bolster trust and reliability, like those already found in mature payment networks, Chappell says. These include clear liability frameworks; network-level fraud prevention; straightforward consumer dispute processes and resolution protocols; ecosystem accountability for support in disputes; and sophisticated risk management, security standards and compliance requirements for participants within the ecosystem.

“Cash flow matters, but innovation should not come at the expense of consumer trust and protections,” she says. “Industry collaboration and responsible innovation can bring about even better features and fuel sustainable growth and customer satisfaction, which will be additive to the existing U.S. payments landscape.”

The $3.6-billion-asset Five Star Bank based in Roseville, Calif., is currently just receiving funds within FedNow and RTP, though customers can send payments via Zelle through the bank’s linkage with the app, says Lydia Ramirez, senior vice president, chief of operations.

“The majority of our customers using payments are churches, property management and repair companies,” Ramirez says. “These [payments] tools provide ease and flexibility in conducting day-to-day business, as well as meeting their own customers’ needs where they are at.”

Before implementing the “send” capability within FedNow and RTP, the bank’s team is waiting to further understand use cases—as well as the risk components, she says. While a handful of Five Star’s customers have asked about the sending capabilities of RTP and FedNow, there is not overwhelming demand for the service.

Overall, Zelle is currently more popular with the bank’s customers than FedNow or RTP because customers don’t have to gather a lot of information from the beneficiary, Ramirez says. However, if information tied to the transaction is found to be more important, the bank’s team can see potential use cases grow for FedNow after the expected ISO 20022 implementation in March 2025. The international standard is intended to unify compliance on messaging and data sharing for cross-border payments and cash management.

“Right now, Zelle is a known platform for consumers and small businesses, and we believe offering choices will help our customers determine for themselves what is more important for them and why,” she says. “Once the advantage for each platform is known, we do anticipate wider adoption among the different platforms. Like many financial institutions, we are working toward implementing a payments hub.”

‘Sending’ remains a barrier for some FIs

Indeed, many financial institutions adopting the faster payment rails are currently more focused on receiving real-time payments than sending them, says Jackie Toole, vice president, payments consulting practice lead at NTT Data, headquartered in Plano, Texas.

“The technology and business solutions required to enable institutions to send faster payments on behalf of clients are a bit more complicated than receiving payments,” Toole says. “For example, sending payments in real time comes with a higher risk and compliance burden, so implementation of the technology and business operations enablers require high investments of time and money. This has resulted in a lag in adoption on the send side of real-time payments.”

In addition, many use cases for sending payments are still well-served by existing solutions, such as payroll payments running through a scheduled process via the ACH batch processing rails, she says.

Customers may still opt for more than one solution

For real-time payments, person-to-person has the highest adoption in the U.S., given lower risk of entry for solutions providers and the number of options available for individuals, Toole says. Some small businesses may also benefit from these solutions, but she has not seen as much corporate-to-corporate use of the faster payment rails.

“As far as interoperability between the solutions, I’m not sure that will fully happen anytime soon because of the complexities of the technologies that are in place,” Toole says.

In the near term, institutions are either incorporating multiple real-time payment options within their internal ecosystems or achieving the value of real-time payments via non-real-time payment solutions for select clients, such as pre-settlement access to ACH payments, she says.

“Because the U.S. has multiple solutions in the ecosystem, there is some degree of hesitancy around which solution would be best for each use case,” Toole says. “I think it’s going to take some time for that to play out as consumers and businesses determine which solution is going to give them the best benefits, and for which use cases.”

Institutions will also need to assess which solutions will create the least risk depending on transaction, she says. There are significant fraud prevention measures to consider with real-time payments, as settlement happens immediately, and, in most cases, there are very limited recourse options for funds recovery. As such, there is a significant need to make sure controls are in place to manage the risk associated with real-time payments.

“The good news is, there are robust solutions either already in the ecosystem or entering it at scale that will provide options to leverage,” Toole says. “Many customers will likely not choose just one payment solution, but they’ll pick multiple solutions depending on the particular use case or their particular need for payment.”

Katie Kuehner-Hebert is a contributing writer for BAI.