Instant is Coming, but with a Catch

Can the stark divide in adoption between FedNow and RTP be overcome?

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Sep 27, 2023

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Unless you’ve been hiding under a rock, you’ve heard the hype around instant payments. With the launch of FedNow this July, the US has a new Federally operated payments system for the first time in decades⁽¹⁾.

Most account-to-account payments in the US typically travel over the ACH network, and can take anywhere from a few hours (for Same Day ACH credits) to a few days (for Next Day ACH debits). So, account to account transfer in 10 seconds or less is a massive improvement.

But FedNow isn’t the only game in town.

The ClearingHouse (TCH), a consortium owned by the large banks, has been operating a near identical payment system called Real-Time Payments (RTP) since 2018⁽²⁾. Only around 300 of the 4800 banks and 5000+ credit unions in the country are connected to RTP, but it covers over 50% of bank accounts in the US, since the biggest banks in the country are included in those 300.

So, why do these two similar entities exist?

RTP vs FedNow

In some ways, RTP and FedNow are indistinguishable. They both use the same messaging format (ISO 20022) on the back-end, so core messages to send a payment or request a payment look almost identical. And they both offer instant availability of funds in your bank account within seconds of pressing that send button.

With both RTP and FedNow, funds are available instantaneously, they are on 24/7/365, and both offer real-time confirmation. Their differences are less about their functionality, and more about who controls what.

Back in 2012, NACHA, the payments body that controls ACH voted not to speed up payments in the US. The Same Day ACH measure had near universal support from community banks and credit unions, but the large banks that control NACHA thought otherwise. Same Day ACH payments would heavily impact their lucrative business processing wires.

Many observers were appalled; the US was already behind other countries like the UK, which launched faster payments in 2008, and the big banks were blocking incremental improvements to the existing system. The Fed responded by setting up the Faster Payments Task Force in 2014.

At the time, I was working on my first startup, the neobank Simple, and was incensed by how the big banks were using their control of NACHA to slowdown the entire nation’s progress. I joined the Faster Payments Task Force, but found the pace of deliberations glacially slow for somebody used to the startup world. I ended up quitting the Task Force when I took a job with BBVA, the bank that acquired Simple in 2014.

A Closer Look: Big Banks vs. Community Banks

Big banks saw the writing on the wall with the Task Force deliberations. Progress was coming, whether they liked it or not. Same Day ACH went back to the NACHA board and was approved and launched in 2016. The big banks got together and launched RTP through the ClearingHouse (TCH is a bank owned consortium) in 2018.

The Faster Payments Task Force acknowledged the launch of this new payments system, but eventually ended up recommending that the Fed build a publicly operated and owned instant payments network.

Which means that today, there is a pretty stark divide in adoption between FedNow and RTP.

Most community banks and credit unions have refused to sign up to RTP for the last 5 years. It's no surprise that the list of FedNow early adopters is dominated by small banks and credit unions. At the same time, big banks are the main adopters of RTP. Their size and scale means that RTP already covers over 50% of US bank accounts.

But adoption has plateaued over the last 2 years, as smaller banks refused to sign up, and insisted on waiting for FedNow. The ideal end-state here? Interoperability.

Given that both FedNOW and RTP operate on ISO 20022, you’d think it would be easy to build a back-end connection between the two to route messages. The real-time nature of the systems and the differences in the protocols and settlement systems make it slightly more complicated than routing ACH messages, but nothing that can’t be overcome.

A standards organization could iron out the differences and ensure connectivity in a matter of months.

Interchange > Instant

But the real blocker boils down to control.

The big banks are well aware that instant pull payments, whether on RTP or FedNow, could be a real alternative to card payments. Both payment systems support a method for pulling payments from a bank account remotely, called Request For Payment (RFP).

The big banks that control RTP through the ClearingHouse don’t mind speeding up ACH and check payments, but they want to ensure that the $100B annual stream of interchange revenue from card payments doesn’t vanish. So, they are fighting tooth and nail to ensure that ecommerce and merchant payments in general stay on the card networks, and don’t get replaced by “pay by bank” options.

Where are we going?

As payment systems, both RTP and FedNow are still in their infancy. RTP is 5 years old, and FedNow is barely 2 months old. Both will grow rapidly in volume, but they have a very large mountain to climb. ACH processes over $73 Trillion every year.

At RTP’s current growth rate, it will take 13+ years for it to catch up. Even with FedNow in the mix, it will be well into the 2030s before instant payments overtake ACH in the US.

I sometimes have nightmares about a world where most of the community banks and credit unions sign up to FedNow, while the large banks stay on RTP. That could mean that we plateau at 65% of US bank accounts covered by RTP, and 45% covered by FedNow, with some banks and Credit Unions on both. If either of them reach 80%+ they could dominate the ecosystem, but that doesn’t seem likely at this point.

A common standard for RTP and FedNow will enable interoperability and promote usage and adoption, just like it did for ACH. But the Federal Reserve says that it can’t impose that standard on everybody unilaterally, and the community banks and credit unions are not signing up for another big bank dominated system. So far the big banks aren’t interested in any payment system that threatens their card interchange revenue.

Unless Congress decides to step in, it looks like we are going to be stuck with two separate instant payment systems that don’t talk to each other for a while longer.

—

Shamir Karkal, Co-Founder & CSO of Sila, Empire Startups Contributor

—

The last new national payment system was actually Check21, which launched in 2004 and allowed checks to be processed electronically on the backend between banks. It really did nothing for retail users until the rise of mobile check deposit a few years later.
RTP uses a Vocalink switch while the Fed doesn’t. And there are technical differences in the implementation of ISO 20022. But the two networks are functionally identical.

Empire Startups Contributors are a community of experts providing unique perspectives and insights on the latest in FinTech. Our model is is merit-based and does not offer monetary compensation.

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