“We have not launched a new payment rail since RTP, and the Fed hasn’t launched a new payment solution for a handful of decades. So this is a major shift.”
Eric Foust, vice president of banking partnerships North America at Trustly, told PYMNTS that once July’s launch of FedNow becomes official, there’s a roadmap ahead that will see a logical progression of adherents and use cases.
Asked by PYMNTS what the initial rollout may look like in the first weeks and months after the initial debut of instant transfers, Foust said that there will be a “large concentration of smaller regional banks, community banks, and credit unions.” These banks, he said, have had prior experience with The Clearing House’s RTP network, and will use some of that experience to scale into FedNow’s functionalities.
At present, there are two types of payment transactions enabled by the Federal Reserve’s FedNow: credit transfers and requests for payment.
“I’m willing to bet the farm that within the first 12 months of FedNow being live, we’re going to see the mass majority of transaction volume occurring through the credit transfer solution,” he said. And specifically within credit transfers, B2B transactions will find firm footing. It follows that account-to-account transfers will grow across FedNow — just as had been seen with RTP.
However, with FedNow, there is no debit functionality, which means that consumers will need to originate a request for payment to move money into their wallet account. According to Foust, “The consumer would go to the wallet provider. They originate that request to themselves, and then they have to go through and approve or push money from their bank into their wallet in order for that to take traction and really be part of the FedNow ecosystem.”
While FedNow is expected to revolutionize the way we manage our finances, it’s important to note that slower payment methods like ACH and wire transfers may still have a place in certain use cases or transactions. Foust contended that no one payment solution will be completely displaced by implementation of FedNow, although instant payments will cannibalize some of the current activities.
“I don’t think any one payment solution is going to be completely displaced by rolling out FedNow, but I do think it’s going to cannibalize some of the current activities,” he said. He noted that, generally speaking, if the payment is less than $500,000, and the payment is being sent domestically between banks that can leverage FedNow, the instant payments rail will be the cheaper option. Using FedNow for these high-value (usually commercial) transactions will grow once the Fed boosts the transaction limits from $500,000 to $1 million and more.
FedNow also may herald a watershed moment in the funding of digital wallets, said Foust. Historically, there have been two sides to managing those wallets, he illustrated: On one side, there’s the payout, where the consumer has money in their wallet, and may desire to “pay out” from that wallet, pushing funds to their main/primary checking accounts. That feature functionality will ride over the credit transfer rails.
The other side to managing a wallet is the “pay-in portion,” where consumers move money into their wallet account. With FedNow, he said, “there’s no concept of debit,” which means that users have to originate a request for payments (RFP). The consumer thus has to originate the request with their wallet provider and approve or push money from their bank into their wallet in order for that transaction to go through. Given the friction inherent in the process — where there’s the need to validate consumers are who they say they are (and the transactions are irrevocable) — there may not be much traction here, he said.
Trustly, he said, is on the RFP “working committee” with the Fed, in a bid to address the user experience concerns and to help make it easier to choose RFP over other payment options.
“If we can address these things,” he said, RFP will be a valid use case to really get traction and volume and funding of the digital wallets … we’re a couple of years away from that reality.”
Looking ahead, Foust predicted that in the future, there will be a fully funded and interoperable range of choices with intelligent routing in the mix. He believes that interoperability between financial institutions enrolled with different payment networks is an aspirational direction for the industry. Additionally, he said that payment limits on both FedNow and RTP will continue to increase as the networks mature and evolve.