With Instant Payments Surging, Why Are Thousands of Banks Still Sitting on the Sidelines?
By Justin Estes, Contributor at The Financial Brand
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Executive Summary
- On a recent episode of the Banking Transformed podcast, host Jim Marous spoke with Bernadette Ksepka, senior vice president and deputy head of product development for the Federal Reserve’s FedNow service, about the real state of instant payments adoption, the myths holding banks back and why a receive-only strategy may be costing institutions more than they realize.
- FedNow reports strong growth, 1,500 participating institutions and rapidly expanding transaction volume — yet full ubiquity remains far off.
- Fraud fears are overstated, with FedNow seeing minimal fraud compared to slower rails like checks, and offering built-in tools such as velocity thresholds and emerging network intelligence capabilities.
- Banks risk losing customers and competitiveness if they don’t adopt both receive and send capabilities, as instant payments increasingly drive consumer expectations, operational efficiency and new revenue opportunities.
Q: It’s been over two years since FedNow launched. What does the adoption curve look like with real numbers?
BERNADETTE KSEPKA: So, we’re two years in, and we are right about where we expected to be, and we’re quite pleased with it, both in terms of volume and adoption. So, in terms of the transactional volume, we saw a 63% increase from Q2 to Q1. And then in Q3, we actually increased our transaction limit in June.
Even with an increase in our transaction limit from 500,000 to 1 million (which is where we currently stand), we expect to report a healthy double-digit increase. We’re extremely excited about that. We now have 1,500 financial institutions on the service, which reaches approximately 40% of demand deposit accounts. (so those are DDA accounts), which is really the number of end consumers that we can reach across the country, and it continues to grow.
We also have 41 certified service providers on the network. And why that’s important is that it’s these service providers who can help small and medium-sized banks enable FedNow. We need the remaining 7,000 or so institutions to adopt FedNow, because the goal with FedNow is to achieve ubiquity.
Q: Why did smaller banks embrace instant payments faster than large banks initially?
KSEPKA: So, we aren’t the only instant payments player in the market. So, you have The Clearing House, which offers RTP, which is owned by some of the largest banks in the U.S. And ultimately, it comes down to the smaller banks wanted the same access to instant payments as the large banks so that they can offer safe, efficient payment options to their customers, just like the large banks can, and that they can stay competitive.
The Fraud Myth Holding Banks Back
Q: One main concern we hear is that faster payments equal faster fraud. Is this real or a myth?
KSEPKA: So, this is definitely a misconception that hits a nerve. In reality, our customers have reported seeing very little fraud on FedNow to date. The irony here is that our slowest payment rail (which is check) is the one that experiences the most fraud right now. It’s not digital; it doesn’t have the controls built in. But with that said, fraud is something that no payment rail (instant or not) can ignore.
Keeping the network safe and secure must be our top priority. Ultimately, it will involve multiple layers of safeguards. So, you want to prevent the fraud before it even happens, but if it does happen, you want to be able to detect it. And then you want to mitigate the financial and reputational impacts of that fraud.
Q: What fraud prevention tools are actually built into FedNow?
KSEPKA: Let me just maybe quickly touch on, because I think this is important and it’s a differentiator for FedNow — we have some tools that are built into our service to really help our participants bolster their defense against fraud.
We have a feature called Account Activity Threshold functionality. And this is configurable value velocity thresholds by customer segment and by time period.
For example, a credit union might set a higher limit for its business customers within a 24-hour period. However, for all new accounts they open, they should set a much lower threshold, as the risk is higher in these cases.
Additionally, we are piloting another initiative, known as network intelligence tools. This provides the sender with more information about the receiver. So, I can get information like, “Is this the first time the receiver is getting a payment?”
Because that might imply that there’s a higher risk with this transaction, overall, fraud is a pervasive industry-wide problem. It’s not unique to instant payments. We’re offering a number of tools here to help our participants combat that fraud.
The Invisible Attrition Problem
Q: Are consumers actually making banking decisions based on instant payment availability?
KSEPKA: Yes, most definitely. So, the reality is that your average American doesn’t know FedNow by name. What they know is that they want to send and receive their money safely and securely, and they want to make payments at the speed they need. And they’re going to do that either through their financial institution, or they’re going to do that through a non-bank provider if that financial institution doesn’t provide it.
So, if you’re a financial institution that’s not on the FedNow service, this is the time to get on board so that you can retain your customers, you can keep your deposits within your bank, and your customers can then also receive federal disbursements, for example, that are going to only grow in availability.
Dig Deeper
Let me just share one more with you. So, my mortgage servicer changed. They just got bought out, and they sent me mail. I know I missed the new payment details. So, by the time I realized it, I was already at risk of being late with this payment. Of course, that has real implications.
Typically, ACH is perfectly suitable for mortgage payments. And most of us use ACH to make our mortgage payments. You authorize it, you forget it. But in this situation, I needed an instant payment option. And with instant payments, that stress disappears. You can move and settle money instantly, and it could be outside of your traditional banking hours, and you can make those time-sensitive payments.
The Defensive And Offensive Playbook
Q: If you were walking into a mid-size bank that hasn’t implemented FedNow, what would be your strategic approach?
KSEPKA: So, I equate this to it’s hard to win a football game here if you don’t have an offensive and a defensive strategy. And payments are no different. Therefore, you need to implement defensive measures to retain your customers and avoid losing the game. However, you also need offensive moves to differentiate yourself and attract new customers. Ultimately, that’s what’s going to get you the W on the books and get you to the playoffs.
Therefore, it requires a strategy, and it can begin with the defense. At a minimum, banks need to implement receive functionality, which will give their customers immediate access. As we discussed throughout this podcast, banks need to evolve to meet growing customer expectations, or they risk losing those customers.
You don’t want to lose your business customers because they value the ability to improve cash flow. They aim to reduce operational and administrative costs, as well as manage their liquidity more efficiently. And those are all things that FedNow can offer.
And then on the offensive, banks want to gain a competitive advantage. And FedNow, we’re that platform for innovation. We don’t restrict use cases. And this is where banks can solve real customer pain points. The best way to identify customer pain points is by talking with your customers, conducting focus groups, and engaging in conversations, among other methods.
Q: What’s the biggest challenge you see when talking to financial institutions about adoption?
KSEPKA: So, I don’t like the answer “it depends,” but it does. There are numerous institutions out there; there are approximately 9,000 of them. And each of them faces their own challenges. In some cases, it may be a question of prioritization and ensuring the budget is allocated effectively. There is a lot happening in the payments industry right now.
FIs need to communicate their value proposition to their stakeholders effectively. For example, their executive committees. Ensuring that everyone in the organization understands the benefits of instant payments is crucial. And getting that buy-in will help with budgeting and prioritization.
However, the key is to demonstrate how instant payments will benefit their customers, including opportunities for increased efficiencies, customer retention, and enhanced satisfaction. Additionally, there are revenue opportunities here that are also critical.
The Next Two Years
Q: Looking ahead, where do you see instant payments and FedNow evolving?
KSEPKA: So, the next two years are all about getting to ubiquity. We aim to deliver instant payments to all consumers and businesses. In terms of use cases, as I said, we are a platform for innovation; there are no use cases. The trends we’re seeing are digital wallet defunding, with numerous different wallets. Think like brokerage, for example, we’re seeing off-cycle payroll.
So, if an employee needs to be terminated, for example. Features like real estate escrow and instant payments don’t restrict you to banking hours. You don’t need to get a cashier’s check. The last time I visited a physical branch was when I bought a car and needed a cashier’s check. Auto loan disbursement is a growing use case that we’re seeing. If you have ever bought a car on a weekend, you know how inefficient the process can be.
Instant payments can dramatically enhance that customer experience. As I mentioned earlier, it’s exciting that the U.S. Treasury has announced the addition of the FedNow service for instant disbursements to federal agencies, with FEMA being the first to participate in this digital payout program. We expect to see more and more agencies come on board.
And this is a game-changer, especially in a disaster emergency situation. That’s where speed really matters. Over the next few years, we’ll continue to see the payments pie grow, with numerous innovations making payments easier, whether through a request for payment or a QR code. However, it will ultimately take the industry coming together. So, payments is a team sport, and it’s going to take the industry coming together to continue growing instant payments.
