July 20, 2024, will mark exactly one year since the Federal Reserve announced the launch of the notable FedNow Service, which has allowed customers at participating financial institutions to make payments that can be sent and received at any time, immediately available to use.
The one-year anniversary marks an important inflection point, a time when instant and accessible payments are needed, yet bank adoption of this service has been relatively slow and minimal. In fact, just ~600 banks and credit unions joined the FedNow network as of April 2024 out of the more than 9,000 banks and credit unions in the U.S.
James Fry, Senior Vice President of Product at Worldpay, has shared informative insights with CI that are focused broadly on the payments technology space.
James Fry touched on the impact FedNow has already had on both consumers and financial institutions, as well as the entire payments space.
He explained why FedNow adoption has been comparably minimal in its first year of launch, especially given banks have been grappling with instant payment challenges.
Our conversation with James Fry is shared below.
Crowdfund Insider: Can you please give us a brief introduction of your role?
James Fry: I am the head of Strategic Expansion at Worldpay. I manage a global team of product experts – we are focused on increasing where and how we help our merchants take payments, whether that be expanding into new geographies through domestic acquiring licenses/strategic partnerships, across channels with things like omni-channel or marketplaces or via new and localized payment methods.
Our philosophy is to enable payments wherever and however our merchants’ customers want to pay, so we can support their growth ambitions.
Crowdfund Insider: Why is the one-year anniversary of the FedNow launch a significant milestone in the payments space?
James Fry: The one-year anniversary of the FedNow launch is significant because it marks a critical period of evaluation for this instant payment service in the U.S. financial ecosystem. Developed by the Federal Reserve, and thus backed by the nation’s central banking institution, FedNow presents an opportunity for Open Banking to find more sure footing in the U.S., which has been behind other countries and regions of the world. One year on, what we have seen is adoption among hundreds of financial institutions and banks, mostly more regional players.
Clearly, the service is fitting a need of smaller banking institutions that look to bring advanced capabilities to their clients—as more players enter the real-time payments ecosystem, whether via the FedNow service or some other RTP provider, then we’re going to see open banking grow in the U.S.
Crowdfund Insider: What has been FedNow’s impact on both consumers and financial institutions?
James Fry: For consumers, there has been increased convenience. The FedNow service enables instant, real-time payments, allowing consumers to transfer funds quickly and efficiently, anytime, any day. In addition to the convenience of not needing a third-party application to do these kinds of exchanges, there’s also enhanced privacy as users don’t have to share data with even more providers along the chain.
It has also given people immediate access to funds that can help them manage their finances better like avoiding overdraft fees and penalties associated with delayed payments. What’s more, as this is a centrally backed system, this can create a greater level of trust for consumers by trying new and varied payments methods.
Financial institutions who are adopting it see it as a competitive edge in a highly challenging market. Financial institutions offering FedNow services can attract and retain customers looking for modern, fast payment options, and, especially for more regional players, level up their offerings to match or exceed larger competitors. The FedNow service can also bring operational efficiency through reduced reliance on legacy payment systems, streamlining operations and reducing costs associated with payment processing. Further, by offering new services, banks can uncover new revenue streams around value-added services for instant payments.
Crowdfund Insider: What are FedNow’s strengths and weaknesses?
James Fry: Its speed, availability, high level of security and broad accessibility are all key components of its value for banks and consumers alike. With 24/7/365 access, moving money is no longer gated by holidays, weekends, or odd hours—people can rely on the service whenever they need it.
And because it’s backed by the U.S.’s central bank, it has the confidence and heightened security one would expect from such an institution. It’s connection to the Fed also ensures it’s wide-scale availability for any U.S.-based banking institution to plug into it and begin offering its services to their client base.
However, while there are hundreds of early adopter financial institutions, the rate of integration may have underwhelmed some observers. As use cases become more robust, such as for loan payments, payroll, or other functions where instant delivery of funds is highly coveted, we should hope to see further adoption into the financial ecosystem in the U.S. Even more, it takes time for consumers, banks, and businesses to learn about new systems like the FedNow service to understand what it’s capable of and how it could fulfill some needs they currently have—as awareness grows, so too should adoption and use.
Crowdfund Insider: How successful has FedNow been in its first year? What are larger banks looking for before they get on board?
James Fry: While the rate of adoption may have been lower than anticipated, there continues to be a steady flow of financial institutions and businesses integrating the FedNow service into their operations, showing there is growing demand.
However, larger banks are stymied by a few factors—firstly, with a lack of API standardization, there’s no one-size fits all method of implementation, which is challenging for big banks that worry about their ability to integrate such a new service into legacy systems with minimal-to-no service interruptions.
There are also still lingering regulatory and ethical questions around how sensitive customer data is shared among the bank, the Fed, and those who are conducting the exchange of funds. Once a more robust, clear regulatory framework is in place from the federal government, we could see an easier path to adoption from the larger financial institutions, but until then, implementation may remain more locally-oriented and experimental as banks look to understand how the FedNow service could benefit their business and customers.
Crowdfund Insider: Are you seeing any competitors to FedNow rise in the space?
James Fry: In the U.S., there are essentially three other major players in the space that the FedNow service competes against: Automated Clearing House (ACH), which offers next-day and same-day services; Wire Transfers, which can be expensive but delivered within minutes, and a real-time payment service from The Clearing House, which has been operating since 2017. All of these services are essential components of the modern financial landscape, catering to diverse payment needs depending on the situations and the parties involved.
Crowdfund Insider: Where is FedNow heading these next few years? Where is there an opportunity for it to grow?
James Fry: The FedNow service will continue to expand its features and offerings to accommodate and address emerging use cases, especially as adoption ticks up among financial institutions and consumers alike. Further, one would expect that they continue to refine the ease of integration to make it as easy and seamless for banking providers to weave the FedNow service into their systems and enhance their portfolio of products for their clients.
We could potentially see the FedNow grow to incorporate cross-border payments as it connects into other open banking systems across the world, reducing costs, friction and speed to transfer funds from the U.S. to someone in another country.
There’s also the potential for the FedNow service to play a role in tacking issues around financial inclusion and the digitalization of the economy—with the rise of digital payments and e-commerce, the FedNow service could be an essential partner in ensuring equal access to digital marketplaces and payments for those who are currently limited or incapable of participating.