By Patti Murphy
Getting U.S. financial institutions to adopt new, faster, better ways to facilitate payments is a bit like turning around a giant ocean liner. It will get done, eventually. But it requires a lot behind the scenes work, and a lot of moving parts.
We've seen this show before. Back in the early 1990s, the Federal Reserve (and Nacha) wanted the ACH to be fully electronic. After all, it wasn't uncommon at the time for financial institutions (FIs) to deliver floppy disks or large mag disks containing payment information to their local Fed office for ACH processing. The idea was to get all FIs to send transaction information using computers (typically PCs). It took almost the entire decade to accomplish that feat.
Hopefully, that will not be the case with FedNow, the instant payment network the Fed rolled out in July 2023.
Clearly, there is a groundswell of support for instant payments. A survey undertaken by Glenbrook Partners in 2023 revealed that 90 percent of FIs, payfacs and other businesses were implementing FedNow, or at least planned to do so within the next two years.
And the website Pymnts.com reported that real-time payments are proving to be a game changer for small restaurants. Those accepting instant pay-by-bank and platforms like PayPal reported higher net profit margins than those relying on traditional payment methods. All SMB restaurants surveyed are not on board, however, with 34 percent of non-adopters citing concerns about implementation hurdles and 32 percent expressing concerns about fraud.
"Until the U.S. reaches the point where consumers can pay using their bank accounts at the point of sale, it [instant payment usage] is going to remain stagnant," said Ronald Herman, Founder and CEO at Atlanta-based Sionic, which specializes in pay-by-bank commerce services.
Clearly, participation in the two main instant payment networks (FedNow and RTP, launched by The Clearing House six years ago) hasn't come close to meeting its full potential.
As of late August, TCH counted 700 banks and credit unions using RTP. FedNow is said to have about 800 FI users. According to published data, just over 5,800 FDIC-insured U.S. banks and 5,733 NCUA-insured credit unions are operating in the U.S.
"We haven't made much progress on either network," Herman said. He pointed to other countries where instant payments are going gangbusters, such as India and Brazil. Pix, the instant payment network that went live in Brazil in 2020, was being used by 66 percent of the population (nearly 145 million people) as of December 2023, according to the central bank of Brazil.
India's mobile-based instant payment network (known as the Unified Payments Interface) handles about 75 percent of consumer-to-merchant payments in that country.
There's a major difference between the experiences of Brazil and India and what's occurring in U.S. FIs, however. Both of those countries moved to instant payments in response to government mandates, said Keith Riddle, senior vice president of business development at the digital banking platform Tyfone.
Heman Daswani, principal consultant at the software company Temenos, said the seemingly slow pace of FIs migrating to instant payments is not a technology issue. "A lot of financial institutions are not seeing this as a necessary step," Daswani said. "With [availability of] same-day ACH they don't seem to feel there is a need to offer a better solution to customers."
Riddle suggested the FI participation numbers for FedNow and RTP, considered by themselves, can be misleading. "There is broad participation at the large FI level," he said. At least four of the largest FIs in the country operate on both networks: JPMorgan, Wells Fargo, US Bank and BNY Mellon. And a fifth, Capital One, already on RTP, revealed plans to integrate to FedNow as well, Riddle noted.
TCH reported that 68 percent of FI accounts in the United States have access to instant payments over RTP, and better than 90 percent of RTP participants are smaller FIs (those with assets under $10 billion). Over 20 bank technology providers (for example, Jack Henry & Associates, FIS and Fiserv) are the conduits for the smaller FIs. But according to Herman, many of those smaller FIs can only receive payments via RTP; they are not set up to send payments through the network.
RTP reported in July that 250,000 businesses and over 5 million consumers were originating payments through the network.
Many credit unions use digital banking platforms to connect to both FedNow and RTP -- about 370, Riddle noted. "Financial institutions want their service providers to embed instant payments into their digital banking platforms," Riddle said.
In a Q&A posted by the Federal Reserve, Mark Gould, chief payments executive for Federal Reserve Financial Services, said the Fed's "goal is nothing short of making instant payments ubiquitously available and widely used in the United States.
"We're seeing a variety of use cases where instant payments can solve pain points and offer efficiencies." This includes digital wallets, payroll and earned wage access, ecommerce, bill payments, real estate transactions and online marketplaces.
Rusiru Gunasena, senior vice president at TCH, offered a similar assessment regarding RTP. Common use cases, he said, include disbursements, account-to-account transactions, earned wage access, and person-to-person payments initiated through Zelle.
Gould said FedNow has the potential to replace low-value wire transfers, some ACH payments, and "even some cash transactions may move to instant payments over time."
Riddle agreed, stating that FedNow and RTP have the potential to siphon transactions from the ACH, wire transfers and even card networks. "All these payment streams will coexist," he said.
Although the Fed has not made pricing publicly available, experts have said FedNow is a low-cost option. "The low cost of FedNow empowers small organizations to offer real-time payment capabilities to their members," Tyfone wrote in a recent white paper.
"Moreover," Tyfone added, "FedNow is flexible and serves as a utility real-time payment rail," which means FIs can integrate FedNow instant payments into existing payment use cases like account-to-account external transfers.
Of course, it's a safe bet fraudsters have set their sights on these new networks. That means FIs must be especially vigilant since payments that clear and settle in a matter of seconds are impossible to reverse. "We need to collaborate as an industry to address fraud," Gunasena said.
Solution providers are on the case. According to Riddle, Tyfone's FedNow solution was built with heightened attention to fraud detection and prevention. For example, when a funds transfer request is received, the sending device is validated, and the system evaluates the activity patterns of the sender. "We employ a waterfall of risk tools," he said.
Riddle pointed to the experiences of Silicon Valley-based Star One, a $10 billion asset credit union, to illustrate the success of this strategy. Despite experiencing exponential growth in A2A transactions sent over FedNow, fraud losses are 60 percent lower than those experienced using the ACH for A2A payments, he said.
Some of the fraud prevention measures used are value restrictions on payments to new recipients; a negative list of bad actors; real-time inquiries against the U.S. Treasury Department's Office of Foreign Assets Control, or OFAC; and daily, weekly and monthly transaction limits for new and existing members based on the member's tenure.
Herman said Sionic found fraud-prevention tools available in the marketplace to be lacking. So the company teamed up with Google and Slalom, a global technology firm based in Seattle, to develop a unique approach to fraud detection and mitigation.
The Sionic fraud protection service is the final component required to make pay-by-bank transactions viable for checkouts, whether online, mobile or in-store, Herman said. It uses an AI model built by Slalom that is based in part on the real-time payment experience in the Indian market.
Herman added that it was critical for consumer adoption that its pay-by-bank solution be accessible with mobile devices, so the company is making the solution available on the Google Cloud platform. Additionally, it had to be able to access both FedNow and RTP.
"Sionic is addressing the largest use case for real-time payments by consumers using their Apple or Google wallet to pay for goods and services along with a Bank Perks pass and earn instant perks from participating merchants," the company said in a statement. "Merchants receive the digital direct deposits in seconds and bypass expensive credit card processing fees."
Sionic has been working with Jack Henry & Associates to integrate its pay-by-bank and fraud protection services with PayCenter, a proprietary hub that streamlines the sending and receiving of real-time payments through JHA's various core banking systems.
Herman stated JHA has about 800 FIs on PayCenter that can start offering customers a pay-by-bank solution this year. "We also have access to about 1,500 [Google Cloud Platform] sales reps" who can sell pay-by-bank to retailers," Herman said.
So, what about disputes? "Financial institutions aren't set up to handle pay-by-bank disputes, so we remove banks from that liability," Herman said. The consumer will have a disputes button in their digital wallet, which can be used to immediately notify a retailer of problems with their pay-by-bank transactions. Disputes get handled automatically based on each retailer's established business rules, he added, noting that "refunds can be credited in a matter of seconds." 
Patti Murphy, self-described payments maven of the fourth estate, is senior editor at the Green Sheet. She also co-hosts the Merchant Sales Podcast, and is president of ProScribes Ink.
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