Why smaller FIs need both FedNow and RTP^®

When The Clearing House launched its real-time payments (RTP®) platform in 2017, all federally insured depository institutions were eligible to enroll—but at the time, many smaller financial institutions (FIs) opted to wait for the instant payments rail FedNow from the Federal Reserve (the Fed). As of July 2023, FedNow is up and running, and many smaller FIs are getting on board.  

However, as regional and community financial institutions face intensifying competition from emerging fintechs, big tech and megabanks on everything from faster payments to digital banking, these smaller FIs can derive key benefits from onboarding both FedNow and RTP.   

Key distinctions between FedNow and RTP 

First, FIs need to understand the differences between these two similar but separate instant payment offerings. Both FedNow and the RTP network settle and fund payments immediately. Both operate 24/7, 365 days a year, allowing account holders to complete instant transfers and payments on weekends and holidays—a significant advantage over traditional wires and Automated Clearing House (ACH) payments.  

In terms of how the two networks differ, RTP settles payments through the Federal Reserve Bank of New York, while FedNow settles them through the Fed’s master accounts with banks. Additionally, RTP’s current transaction limit is $1 million, and FedNow’s is $500,000.  

When adopting and implementing instant payments, banks may struggle to understand RTP’s intricacies, risks and best practices around originating and receiving payments. At the same time, marketing for RTP was less intensive than that for FedNow, which may have led to diminished awareness of RTP’s value proposition, particularly among smaller FIs. Thanks to its connection to the Federal Reserve and the fact that all financial institutions already have an account representative with the Fed, FedNow has been perceived as more familiar and more accessible. It was also launched later, when there was a broader understanding of the value of faster payments.  

While some distinctions exist between FedNow and RTP, FIs should not necessarily choose one over the other—in fact, many would be wise to adopt both. 

The benefits of adopting both FedNow and RTP 

In general, instant payment rails offer FIs a number of benefits, including fulfilling the requests of fintech partners, addressing pain points around the speed of traditional payments and unlocking new revenue opportunities. While FedNow has dominated recent industry discussions, onboarding with both FedNow and RTP can provide significant value to FIs. This is largely because the two payment rails do not work together.  

For example, say you need to send money to a family member quickly. Your FI only uses the FedNow payment rail, while your family member’s FI only uses RTP. This means your institution will have to resort to a slower payment method like ACH. As an account holder, you probably wouldn’t know or care that the two financial institutions are using different payment rails. But you do care that your family member has to wait longer to receive the money. This is the key problem faced by FIs that only onboard one of the available payment rails: their account holders expect to make account-to-account transfers via instant payment, and if the FI can’t use both FedNow and RTP, they may not be able to deliver.  

The above example is not the only scenario in which an FI’s account holders would benefit from their FI enrolling in both FedNow and RTP. Other use cases for onboarding both payment rails include facilitating payments to gig workers, who often need access to their paychecks faster than ACH can deliver the funds, as well as emergency insurance firm payouts, from a business-to-business perspective.  

As long as both FedNow and RTP exist, banks and credit unions are smart to adopt them both to exchange funds for their customers and members as efficiently as possible. FIs may be able to achieve some economies of scale by way of overlapping resources: most FIs will have the same team members managing both rails, and both sets of funds will be held in separate accounts at the Fed. In addition, smaller FIs that partner with technology providers to enable their connectivity to FedNow and RTP are likely to have access to discounted pricing when onboarding both systems. 

Action items for FIs ready to move forward 

The U.S. continues to lag behind other countries in adopting instant payments technology. With the introduction of both RTP and FedNow, smaller FIs in particular have an opportunity to help drive payments innovation and move the industry forward. These banks and credit unions can also leverage the current buzz around immediate payments to boost engagement as a complement to digital banking. 

FI leaders need to educate themselves on the benefits of both FedNow and RTP, while at the same time listening closely to their account holders to understand how these instant payment rails can help address their needs. Once an FI is ready to move forward with onboarding FedNow and RTP, they need to determine the best approach for their organization. While some FIs may opt for in-house connectivity, those seeking to benefit from instant payments without devoting significant resources to the infrastructure and operational overhead (particularly smaller FIs) may want to explore a simpler path forward and work with a technology partner to enable connectivity.  

Whatever approach an FI chooses, adopting instant payments via FedNow and RTP is critical to satisfying account holder expectations and staying competitive in the rapidly evolving financial services landscape.      

Jeff Bucher is senior product strategy manager for money movement at Alkami.