Fed says its instant-payments service FedNow will launch in July

“The launch reflects an important milestone in the journey to help financial institutions serve customer needs for instant payments to better support nearly every aspect of our economy,” Tom Barkin, the president of the Federal Reserve Bank of Richmond and the executive sponsor for the FedNow Program, said in a Wednesday statement.

The Fed said in that release that there are “many early adopters” who have “declared their intent” to start using the payments service when it rolls out in July. These include “a diverse mix of financial institutions of all sizes, the largest processors and the U.S. Treasury.”

First, the Fed will begin a formal certification of participants in April, and then it will engage in “validation activities” with those participants in June to confirm that they are ready for the official launch.

Businesses and individuals increasingly are interested in moving money more quickly, and financial-technology companies have been catering to these needs. Visa Inc.
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operates Visa Direct while Mastercard Inc.
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runs Mastercard Send. Mastercard describes Send as enabling “near real-time payment transfers to and from billions of card, bank and digital accounts globally.”

There is also the Real-Time Payments (RTP) service run by The Clearing House, a banking association and payments company that’s owned by big commercial banks. TCH describes its service as “the nation’s newest real-time payments system.”

“We reiterate our view that FedNow will represent a material change in how consumers use electronic money,” TD Cowen analyst Jaret Seiberg said in Wednesday note to clients. “It provides for instant settlement, which eliminates clearing risk. And it will be less expensive than debit interchange.”

He believes that “nearly every bank and credit union will offer the service, with most coming on board over the next year.”

Bernstein analyst Harshita Rawat noted earlier this year that she was “watching” the risk presented to Visa and Mastercard by the impending launch of FedNow, though she viewed the threat as being on more of a “decade+ time horizon” than anything more immediate.

“There are numerous ‘nontrivial challenges’ FedNow implementations need to overcome to compete with card payments with respect to ubiquity (i.e., acceptance by all banks), chargeback capabilities, features such as request-to-pay, and solving the chicken-and-egg problem of creating payments acceptance and consumer habituation,” she wrote in a January note to clients.

Visa Chief Financial Officer Vasant Prabhu fielded a question about the expected debut of FedNow at a Morgan Stanley investor conference last week.

“Nobody really is a competitor,” he said, according to a transcript from AlphaSense/Sentieo. “Anything that makes payments more ubiquitous, anything that causes consumers to adopt digital forms of payment, anything that makes merchants accept digital forms of payment is a good thing because it expands the market.”

Mastercard CFO Sachin Mehra discussed the topic at an Autonomous Research conference back in September. He said that there are “multiple things which are required to drive scale in this business,” and while FedNow brings the “creation of [an] infrastructure capability” similar to what Mastercard’s Vocalink offers, he maintained that infrastructure isn’t the only thing that drives adoption.

“Utility is driven by who develops applications and what applications are developed to meet the use cases that consumers, small business owners and mid- and large corporates desire when they’re utilizing that faster payment capability,” he said at the time.