Getting Ready for FedNow’s Impact on Transaction Fees and More

Banks and credit unions of all sizes must start thinking now about a sea change for U.S. business and consumer payments that's coming in 2023.

The Federal Reserve System is preparing to bring real-time payment and settlement services to all financial institutions through its upcoming FedNow service. This is a 24x7x365 real-time payments network that is expected to be fully implemented in 2023.

FedNow will give both new entrants and existing institutions a way to jump off traditional payment rails. This will result in benefits for payments users and adjustments for payments providers.

Large retailers, e-commerce, restaurants and gas stations will view FedNow as a boon for cost savings, shaving 1.5%-3.5% off transaction expenses from debit and credit card transaction fees. Many large retailers are looking to tie real-time ACH to rewards programs, thereby creating an increase in customer loyalty and a reduction in transaction costs.

Fintech leaders like Chime and giants like Apple — which has greatly expanded Apple Pay into online retailer checkout systems — have an opportunity to cut credit and debit fees by utilizing FedNow.

FedNow Service, currently being tested by a number of financial institutions, is a tech-enabled leap forward, enabling individuals and businesses to transfer funds in seconds.

More Than Money Will Move:

Real-time payment rails also bring end-to-end communication. Historically, communication has flowed in one direction: from the payer to the payee. If the two parties want to exchange information back and forth, they had to do so outside of the payments system — no longer.

Contrasting Today’s Payments with FedNow

Real-time payments instantly connect the payment with payment data together in a single transaction. By contrast, transactions today take hours if not days.

Moreover, the U.S. lags behind much of the world in this regard. Dozens of developed and even developing nations already operate their own real-time payments infrastructures. The Clearing House — a collective comprising most of America’s largest banks — launched its own real-time payments platform, known as RTP, in 2017. That system has not been universally adopted, though it had a growth spurt in 2020.

As a result of the expected adoption of FedNow by many, the largest U.S. banks, all Clearing House members, are set to lose enormous interchange fees. Clearing House member firms have spent over $1 billion to build their own closed-loop real-time ACH system but are losing their fight to keep the Fed from giving this strategic advantage to all banks and individuals.

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How Various Players Should Prepare for FedNow

To protect future profit margins, banks must begin now to adopt new strategies, in particular payment technologies and retail partnerships.

1. FedNow as equalizer. Small and midsize banks and credit unions will have an opportunity to play on a level playing field with the regional and large banks.

Small and midsize banks could benefit from gaining access to infrastructure for faster real-time payments and to broaden their retail partnerships, which would in turn benefit the communities they serve.

2. Competitive edge. Financial institutions have been losing market share to private money transfer and remittance service firms that provide real-time remittance for lower transaction fees. These services are often prone to fraud. Banks and credit unions can use the FedNow real-time transfer service as an opportunity to regain market share.

3. Gig economy. A rapidly increasing gig economy, such as artists, delivery workers and drivers, may be more eager to receive funds in real time. Offering such services could open 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 the expenses of financial institutions’ underlying IT infrastructure. Institutions must prepare ahead of time. Major changes and implementation of such systems will take anywhere from several months to several years.

5. Balancing act coming. To offset costs and loss of transaction fee-related revenue, large banks must work to cut costs through a combination of automation, channel development, branch reduction, and optimization strategy.

Demand for faster payments became more pronounced during the pandemic. We’re not going back to the way things were. The launch of FedNow will modernize the U.S. payment system, bringing instant payments to people and businesses across the U.S.

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