As technologies and innovations create new opportunities for corporates and customers, a new payments landscape is developing to meet their evolving needs. At the core of this transformation is the development of real-time payments.
Introduced by The Clearing House in 2017—following the launch of the innovative Real-Time Payment (RTP®) service—instant payments are becoming the new reality in the financial industry of the United States. And this journey is set to take another significant step forward in 2023, with the scheduled launch of the FedNowSM service (FedNow), the Federal Reserve’s (the Fed’s) proposed real-time payments network.
FedNow aims to enable financial institutions (FIs) to deliver end-to-end faster payments services to their customers by incorporating interbank liquidity transfers, which will significantly extend the reach of real-time payments to include a wider range of FIs, credit unions and consumers.
But despite improving the overall reach of instant payments in the US, the addition of a second network could create a two-tier payments ecosystem. While reach is an important part of the puzzle, interoperability between the two networks will be equally critical—and organizations should look to support both networks to ensure that they and their customers are ready for the new real-time world.
The real-time payments journey began in May 2015 in the US with the creation of the Faster Payments Task Force—a group that sought to identify what real-time payments solutions could be offered in the US. It comprised more than 300 diverse payments experts who, through collaborative and iterative processes, started mapping services and functionalities. They eventually developed a set of criteria split into six categories: ubiquity, efficiency, safety and security, speed, legal and governance. Since 2015, depository institutions and non-bank providers have used the Task Force as the launchpad for developing solutions that connect all providers and end-users in the market. And this included the precursor to FedNow: the RTP® service.
Taking advantage of the momentum set in motion by the Task Force, The Clearing House launched the RTP® service in November 2017—incorporating all of the Task Force’s criteria for a successful US real-time payments system. RTP® is a 24/7/365 payment and messaging system, providing real-time messaging and settlement.
The network enables FIs to provide consumers and businesses with the ability to send payments directly from their accounts, as well as to receive and access funds sent to them over the network. Likewise, FIs using the service benefit from the real-time final interbank settlement, along with the ability to create unique offerings for their retail and corporate customers.
FIs can, for example, leverage the request for payment (RFP) messaging capabilities available through the RTP® service to support new digital commerce services, including the issuing and paying of e-invoices and e-bills. Using an e-bill solution, a customer would receive a notification from his or her bank presenting an electronic bill. Then—using either the bank’s online or mobile banking application—the customer would be directed to review the e-bill. If the customer approves the payment, the biller receives the credit transfer almost instantly. This is helping to transform the inefficient, manual processes that handle around 15 billion bills paid annually in the US, many still via check, and have historically led to long settlement delays.
Recently, BNY Mellon and Citibank collaborated with Verizon to become the first company to send RFP messages to consumers who bank with Citi. The service, which leverages the RTP® network, allows Verizon customers with Citibank accounts to pay bills immediately and with full control, authorising and scheduling payments at their convenience.
As The Clearing House ramped up the rollout of its RTP® service in 2018, the Fed issued a request-for-comment; it gathered responses from approximately 480 banks and credit unions throughout the country to the question of whether the Fed should set up a real-time payments system. A year later, once this feedback had been collated and accessed—and with the support of the majority of FIs—the Federal Reserve announced its decision to create the FedNow service; however, it remained in discussion with stakeholders regarding what shape the new service should take.
As the RTP® service has grown in popularity since its launch, it is hoped that the addition of FedNow, which can leverage the Fed’s relationships with more than 10,000 different financial institutions, will broaden the reach of faster payments in the US, specifically for smaller regional banks.
Flash-forward to 2021, and over 100 participants have been sharing lessons and knowledge from their experiences with the RTP® network as part of FedNow’s pilot programme. BNY Mellon and other working-group participants, for example, validated the message flows and implementation guidelines—an exercise that has helped the Fed understand the functionality of the service and its potential for interoperability across the new payments ecosystem.
Broadening the reach
In combination, RTP® and FedNow have the potential to broaden the reach of real-time payments in the US significantly, unlocking the developments for all—from consumers and small businesses to midcap businesses, large corporates and the entire banking community.
While RTP® and FedNow will be different, due to their structure and usage, both services will be able to execute 24/7 instant payments, credit transfers and requests for payments. However, this does not mean the systems are interchangeable, nor that gaps will not exist.
With this in mind, the role of FIs and large corporates will be to bridge the gap and provide their clients with access to the entire payments ecosystem. While there is still a long road ahead, supporting both networks and facilitating interoperability between the two will be important in ensuring the journey to real-time payments is as smooth as possible.
The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute Treasury Services advice or any other business or legal advice, and it should not be relied upon as such.