Thanks to contributors Matt Brazda and Sai Kailash.
Introduction
The demand for instant payment solutions has grown rapidly as businesses and individuals desire a faster and more convenient payment experience.1
Compared to countries including Japan, the United Kingdom, and China, the U.S. has been relatively slow in establishing a domestic network for instant payments. It was not until 2017 with the introduction of the RTP® Network (RTP®) that the U.S. established its first instant payment rail.
The Federal Reserve has just launched its own instant payments network on Thursday, July 20, 2023 – the FedNowSM Service (FedNow) – to expand the U.S.’ instant payments capabilities. We have introduced FedNow in our previous blog. In this article, we will compare the two major instant payment rails – RTP® and FedNow – in detail.
Existing Instant Payment Rails2
The two major channels that facilitate instant payments in the U.S. are: RTP®, launched in 2017, and FedNow, launched in July 2023. These two rails can initiate, clear, and settle money transfers in seconds, available 24/7/365. They are also open-loop systems, where funds can be withdrawn from customer accounts directly.
Besides these two rails, there are also other faster payments options including Same Day ACH, certain debit card networks such as Visa Direct® and Mastercard Send®. They are not instant payments in that settlements between the payer’s and the payee’s Financial Institutions might not happen immediately, but they serve the purpose of helping users transfer money to each other in a shorter time period compared to legacy payments.3
For the purpose of this article, we will focus on instant payments.
The RTP® Network4
RTP® allows for instant payments through enabling financial institutions to integrate their infrastructures with the network and settling transactions through a prefunded joint account held at the Federal Reserve Bank of New York (FRBNY).
A payment on RTP® is executed through a sequence of ISO 20022-formatted messages.5
Source: Introduction_to_the_RTP®_System_October_2020.pdf (azureedge.net). Pg 11
Payer initiates a payment request with Payer’s FI
Payer’s FI authenticates the instruction and availability of funds (or credit) in Payer’s account
The RTP® Network validates the transaction and routes this transaction to Payee’s FI
Payee’s FI responds whether this payment message has been accepted
Once Payee’s FI accepts a payment message, the RTP® Network settles this payment. It sends a response to Payer’s FI and a confirmation to the Payee’s FI.
Payer’s FI sends a payment confirmation message to the payer. Payee’s FI sends a payment receipt message to the payee and immediately make these funds available to him/her.
RTP® contributed significantly to the growth of U.S. instant payments. It has been integrated with 65% of U.S. demand deposit accounts (DDAs). Transaction volume and value are also increasing rapidly year by year.6
Source: Real Time Payments | The Clearing House
The FedNow Service
FedNow® is another instant payment system operated by the Federal Reserve Bank, which launched on July 20, 2023. FedNow® is similar to RTP® in providing instant settlement of money transfers 24/7/365, and FedNow offers better liquidity management capabilities to participating financial institutions.
Despite RTP® gaining adoption in the past seven years, the instant payments market still has a large untapped potential in the U.S. In 2022, only 0.9% of the total payment volume was accounted by instant payments. It is anticipated to grow by eight times in 2026.7
For more details on FedNow, you can read more in our Introduction to FedNow Service Guide.
The RTP® Network vs. The FedNow® Service
Let’s break down the various similarities between RTP® and FedNow®. Their transactions are both real-time, and executed payments are irrevocable. They also both incorporate Requests-for-Payment (RfP) to facilitate pull-equivalent payment requests (pending on receiver’s approval). Note: there are no debits (pulls) in either network due to increased inherent risk of fraud.
In the table below, we outline a comparison between RTP® and FedNow®:
|
| FedNow® | RTP® |
|---|---|---|---|
Basic Info |
|
|
|
|
|
| |
| Payment flow | Credit push only | Credit push only |
| Revocability | Payments are irrevocable | Payments are irrevocable |
| Operates on Good Funds | Yes | Yes |
| Speed of transaction settlement | Instant | Instant |
| Speed of funds availability to end customer | Instant | Instant |
| Cycle Day | FedNow® Service’s cycle will generally be 7 A.M. to 7 P.M. ET, the next day | RTP® Service’s cycle date will generally be 12 A.M. to 11:59 P.M. ET, the next day |
| Core capabilities | Send, Request for Payment, Request for Return of Funds and Liquidity Management Transfer | Send, Request for Payment and Request for Return of Funds |
| Max credit transfer amount | $500,000.008 | $1,000,000.009 |
| Where do transactions settle | To and from each bank’s FRB master account | Within a separate prefunded balance account owned by the Federal Reserve Bank |
|
|
|
|
| Prefunding required for financial institutions participating in the program? | No - as long as the bank has sufficient funds in its FRB Master Account to transact | Yes - currently this can only be done via FedWire
|
| Settlement Account accrues interest on the funds held within? | Yes | As of 7/20, Yes |
| Cost to send a single customer payment | $0.045 | $0.045 |
| Cost to send a request for payment | $0.01 | $0.1110 |
| Allows bank-to-bank funding? | Yes - via a Liquidity Management Transfer (LMT) | No |
| Allows correspondent banking? | Yes | No |
To highlight, there three major differences between FedNow® and RTP®:
They are operated by two different organizations. The Clearing House operates RTP® whereas the Federal Reserve operates FedNow®.
The maximum transaction limit of FedNow is lower than that of RTP®: FedNow® allows for $500,000 whereas RTP® allows for $1 million.
Financial institutions can use liquidity management transfers (LMTs) through FedNow® to conduct bank-to-bank funding:
LMTs are instant large-value money transfers between banks or from banks into joint accounts for domestic private sector instant payment services, such as the RTP® prefunded joint account at FRBNY. They can provide financial institutions with greater control over funds and to efficiently tailor their liquidity management strategies.11 LMTs are only available for use outside of FedWire hours.
Conclusion
According to a survey conducted by the Federal Reserve in 2022, 28% of businesses highlighted slower payments being a major challenge. 45% of businesses responded that a faster payments method would lower their costs and make their processes more efficient.12 Access to a low-cost instant payments system would allow businesses to reduce working capital investment, time of business operating cycle, and payment failures.
While RTP® has shown its steady growth, processing almost $25 billion in payments during the first quarter of 2023, it still represents only a small fraction of the trillion-dollar U.S. payment market.13 The demand for instant payments brings significant potential for both RTP® and FedNow® to work together. Many financial institutions have already participated in the instant payment ecosystem. Currently, there are 338 participating banks on RTP® and 120 participants in the FedNows pilot program.14
The market has high anticipation for the newly live FedNow® network to scale, and we believe FedNow® will gain fast traction and become a dynamic to expanding the U.S. instant payments ecosystem. With its Federal Reserve backing, FedNow® opens doors for a greater number of financial institutions to more easily join, bringing instant payment benefits to a wider range of customers.
To explore Cross River’s FedNow® offering, click here.
Footnotes
1 Real-time payments are commonly referred to as instant payments.
2 https://www.usbank.com/financialiq/improve-your-operations/manage-payments/real-time-payments-the-next-major-treasury-disruptor.html, https://www.aciworldwide.com/understanding-real-time-payments, https://www.paymentsjournal.com/real-time-payments-everything-you-need-to-know/, https://www.alacriti.com/what-are-real-time-payments/
4 https://www.theclearinghouse.org/payment-systems/RTP®
5 Payer – Person making the payment, Payer FI – Financial institution that has Payer’s account, Payee – Person receiving the payment, Payee FI – Financial institution that has Payee’s account.
6 https://www.forbes.com/sites/tomgroenfeldt/2023/04/13/the-clearing-houses-RTP®-or-fednow-for-instant-payments-users-want-both/?sh=1daede17f5f0, Real Time Payments | The Clearing House
7 https://insiderealtime.aciworldwide.com/prime-time-report-23, https://www.pymnts.com/wp-content/uploads/2022/09/PYMNTS-Real-Time-Payments-Tracker-September-2022.pdf
8 https://www.frbservices.org/news/press-releases/012722-fednow-pricing-announcement
9 https://www.theclearinghouse.org/payment-systems/rtp/institution
10 $0.10 Payment Incentive Fee upon each successful RTP credit transfer sent in response to a RfP message, the participant that initiated the RfP will owe the incentive fee to the participant initiating the RTP credit transfer
11 Note: FedNow LMTs between banks and the RTP® prefunded joint account at FRBNY are not yet enabled. This requires TCH to integrate RTP® to the FedNow network. There is no timeline for this at this time.
12 Studies: Business, consumer appetite for faster payment options grows (frbservices.org)
13 https://www.theclearinghouse.org/payment-systems/rtp
14 RTP® Participating Financial Institutions | The Clearing House, https://www.frbservices.org/financial-services/fednow/blog/progress-update-fednow-pilot-program.html