Instant payment transaction volume expected to skyrocket as FedNow enters year two

The Federal Reserve’s instant payment network–FedNow–turns one year old July 20, and if usage and adoption was a bit slow out of the gate, that is no longer the case.

The Fed had enrolled about 300 financial institutions in its first six months of operations, but that number has now risen to more than 850 with at least 1,000 more in the pipeline.

A spokesperson this week said the Fed has not yet published transaction volume data.

But Jeff Voss, managing partner for consultancy Artisan Advisors, said the demand for instant payments is expected to continue to increase dramatically in the coming years.

Voss said estimated volumes of those transactions are expected to grow from 1.8 billion in 2023 to nearly 9 billion for 2026. That would include transactions handled by both FedNow and its primary competitor, the RTP network, which is operated by The Clearing House and owned by multiple large banks.

“Steady growth in the adoption of both payment systems by financial institutions should be expected as financial institutions study both alternatives available and make strategic decisions to meet the needs of its clients,” Voss said. “While collaboration between the two networks would likely help in the growth rate in adoption, there are no plans currently to do so.”

Voss told Tyfone the primary reasons for the expected growth includes the ease of use by both parties to the transaction, lower costs to both parties and improved fraud prevention.

“Other payment rail volumes, like the use of checks and wire transfers, are expected to decline as the use of digital payments rise,” Voss said. “FedNow and RTP will undoubtedly contribute to the transformation of retail payments, and their continued adoption and expansion will shape the future of U.S. payments for many years to come.”

Minal Gupta, SVP of Operations at Star One, said the beauty of FedNow is not only its low cost, real-time capabilities and adaptability, but also its potential to be harmoniously integrated with other solutions.

“Whether it’s combining FedNow with Zelle or incorporating it with services like PayPal, the sky’s the limit when it comes to possibilities. FedNow’s flexibility enables institutions to switch from the ACH rail to the FedNow rail with ease,” Gupta said.

But there is still work to be done.

Tim Scholten, founder and president of the credit union and community bank consultancy Visible Progress., told Tyfone most financial institutions are thinking of or have plans to receive only on FedNow because sending requires sophisticated fraud screening.

“The process needs to be fully automated,” Scholten said. “Many [FIs] are not set to send in the near future and, as a result, adoption is still limited.”

One of those institutions that seems ready to join FedNow is Fairmont, West Virginia-based MVB Bank.

Jeremy Kuiper, EVP and Fintech President of the $3.5 billion-asset bank, said that is because the company’s adoption and utilization rates have increased.

“And based on our commitment to a full suite of capabilities and services to support our fintech partners, we are looking to add FedNow along with the other payment modalities we already support, including RTP,” Kuiper said.

Voss from Artisan Advisors said FedNow has already made a huge impact in the instant payments landscape by offering an alternative to the RTP network and has surpassed RTP in number of users.

Because FedNow is part of the Federal Reserve system, the ability of a financial institution to take part in the system only requires a relationship with the Fed and following the requirements for offering the service to its banking clients.

Conversely, the ability of a bank or credit union to connect to the RTP network depends on it being part of the Clearing House or its correspondent bank’s relationship to the Clearing House.

“The rapid connectivity or adoption rate by FedNow demonstrates that real-time payments are a priority for banks of all sizes,” Voss said. “FedNow has successfully expanded real-time payments connectivity to small and mid-size financial institutions, a crucial step for widespread adoption in the U.S.”

While specific volume data isn’t available yet, experts believe that FedNow’s transaction volume is currently a small fraction of the 1 million daily transactions handled by the RTP network. Like RTP, the FedNow growth in volume will take time, Voss said.

RTP currently has access to more than 65% of the demand accounts in the US banking system because of RTP being adopted by the largest banks in the country.

Voss believes FedNow must increase the number of originators on its network to substantially grow its volume.

At the same time achieving a balance between originating and receiving banks is essential for broader adoption.

Some financial institutions may hesitate to join as originators due to concerns about sending irreversible payments over a relatively new system. As FedNow matures, it will need to address those challenges, he said.

“While FedNow has progressed in its adoption rate among banks, it still has room to grow. Its impact on real-time payments will depend on continued growth in adoption, the ability to have more banks become originators, and parity in future product terms and pricing with RTP,” Voss said.

Portland, Oregon-based Tyfone, a digital banking company, is the third largest originator on the FedNow network. Tyfone offers a comprehensive, end-to-end extensible gateway that has attracted clients including the $10 billion-asset Star One Credit Union in Sunnyvale, California. In fact, Tyfone partnered with Star One to initiate the first-ever transaction on FedNow, just moments after the platform’s go-live. Star One has now completed nearly 12,000 member transactions with FedNow totaling more than $16 million.