Prepare for the impact of FedNow on transaction fees and more
The Federal Reserve System is preparing to offer real-time payment and settlement services to all financial institutions through its upcoming FedNow service. It is a 24x7x365 real-time payment network that is expected to be fully implemented in 2023.
FedNow will give new entrants and existing institutions a way out of traditional payment rails. This will translate into benefits for payment users and adjustments for payment providers.
Large retailers, e-commerce, restaurants and gas stations will see FedNow as a boon for cost savings, reducing transaction fees from debit card transaction fees by 1.5% to 3.5% and credit. Many large retailers are looking to link real-time ACH to rewards programs, creating increased customer loyalty and lower transaction costs.
Fintech leaders like Chime and giants like Apple – which has significantly extended Apple Pay to online retailer payment systems – have the ability to reduce credit and debit charges by using FedNow.
FedNow Service, currently being tested by a number of financial institutions, is a technological leap forward, allowing individuals and businesses to transfer funds in seconds.
More than money will move:
Real-time payment rails also enable end-to-end communication. Historically, communication flowed in one direction: from payer to recipient. If the two parties wanted to exchange information, they had to do so outside of the payment system – not anymore.
Compare today’s payments with FedNow
Real-time payments instantly link payment to payment data in a single transaction. In contrast, transactions today take hours, if not days.
Additionally, the United States lags much of the world in this regard. Dozens of developed and even developing countries already operate their own real-time payment infrastructures. The clearinghouse – a collective comprising most of America’s largest banks – launched its own real-time payment platform, known as RTP, in 2017. This system has not been universally adopted, though. that it experienced a growth spurt in 2020.
As a result of the expected adoption of FedNow by many, the largest US banks, all members of the clearinghouse, are expected to lose huge interchange fees. Clearinghouse member firms have spent over $ 1 billion to create their own real-time, closed-loop ACH system, but are losing their fight to prevent the Fed from giving that strategic advantage to all banks and everyone the details.
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How Various Players Should Prepare for FedNow
To protect future profit margins, banks must start adopting new strategies now, especially payment technologies and retail partnerships.
1. FedNow as an equalizer. Small and medium-sized banks and credit unions will have the opportunity to play on an equal footing with regional banks and large banks.
Small and medium-sized banks could benefit from access to infrastructure for faster real-time payments and to expand their retail partnerships, which in turn would benefit the communities they serve.
2. Competitive advantage. Financial institutions have lost market share to private money transfer companies and remittance services that offer real-time remittances for lower transaction fees. These services are often subject to fraud. Banks and credit unions can use the FedNow real-time transfer service as an opportunity to regain market share.
3. Saving gig. A rapidly growing concert economy, such as performers, delivery people, and drivers, may be more eager to receive funds in real time. Providing such services could provide opportunities for financial institutions to remain competitive and gain new market share.
4. Major preparation needed. As banks integrate with retailers and FedNow’s real-time payment transfer infrastructure, there will be costs associated with joining multiple networks, including IT infrastructure spending under -joining financial institutions. Establishments should prepare in advance. Major changes and the implementation of such systems will take from months to years.
5. Balance ahead. To compensate for the costs and lost revenue associated with transaction fees, large banks must strive to reduce costs through a combination of automation, channel development, branch reduction and optimization strategy.
The demand for faster payments became more pronounced during the pandemic. We don’t come back as before. The launch of FedNow will modernize the US payments system, providing instant payments to individuals and businesses across the United States