Moody's: FedNow won't cannibalize debit card use

A new report from Moody's Investors Service explains why FedNow is no big threat to the card networks. True, FedNow will enable financial institutions to offer real-time payment products that will compete with legacy debit products. But the impact will be minimal, researchers found. "[T]he service's impact on the two big card networks is several years away and will largely depend on broad consumer adoption, which remains uncertain," Moody's wrote.

FedNow, which officially launched in July 21, 2023, is a real-time payment network capable of moving money instantly between consumer and business accounts at financial institutions 24/7/365. It joins RTP, a real-time payment network operated by The Clearing House, in supporting broad access to instant, account-to-account payment exchanges in the United States. (FedWire, the wire transfer network operated by the Fed, is fast, but it only operates between the hours of 9 a.m. and 7 p.m. Eastern, and not on weekends or national holidays.)

Mastercard and Visa have entrenched leadership positions when it comes to consumer-to-business and business-to-business card payments. The Visa network handles about 25 percent of U.S. debit card traffic; debit cards account for 16 percent of Mastercard's volume, Moody's estimated.

Tough to replicate card network advantages

The card networks provide value to consumers and businesses that would prove difficult to replicate or replace, Moody's added. "These include ease of use, global acceptance, dispute resolution, ability to make returns, dual messaging, zero liability and enhanced security."

Similar advantages need to be incorporated into FedNow, however, if the service is to displace debit traffic on the card networks. "Consumers would likely need additional incentives, such as price discounts, to change their habits and switch," Moody's wrote. And that will take time. For now, the most obvious use cases for FedNow include those that have lagged in the transition to electronic payments, like checks and B2B payments, Moody's suggested.

The incentives for merchants to use FedNow are clear: at 4.5 cents per transaction, the cost of moving value across FedNow drastically undercuts card interchange. According to the Fed's most recent data, the average dual message debit transaction costs 39 cents, and the average single message transaction price is 25 cents.

"Lower costs and the immediate availability of funds will win over merchants to FedNow. But we expect they will enable FedNow in addition to, rather than as a replacement for other payment types as consumers demand more options," Moody's concluded.

Consumer adoption mixed elsewhere

FedNow joins a growing base of real-time payment networks: 70 worldwide that moved 195 billion payments in 2022, according to a recent report by ACI Worldwide. Adoption, however, has been mixed.

PIX, launched in Brazil in 2020, and UPI, launched in India four years earlier, have made great strides in capturing A2A activity, especially among consumers. The Central Bank of Brazil, for example, reported transactions on PIX doubled in one year, from 1.2 billion to 2.4 billion a month between 2021, and 2022 C2B transactions were the fastest growing group.

UPI, in India, charted similarly impressive growth, with transactions ballooning from 2.2 billion in December 2020 to 7.8 billion in December 2022. Both India and Brazil were cash-heavy economies with a large number of unbanked consumers before their respective real-time payment networks gained favor.

Meanwhile, in the UK, where nearly all adults have bank accounts, and which was a pioneer in real-time payments with its Faster Payments System launch in 2008, there were just 4 billion real-time payment transactions in 2022, ACI reported.

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