FedNow vs. RTP: Make the Right Decision for B2B Payments
This year will mark the emergence of FedNow, the second real-time payment network and the public sector alternative to The Clearing House’s (TCH’s) RTP® network. The Fed and TCH have historically operated public and private sector payment neworks for both low-value batch payments (i.e., FedACH and ACH) and large value payments (i.e., FedWire and CHIPS) for decades to achieve ubiquity and resiliency. FedNow should support the same core objectives.
FedNow and RTP® are both domestic low-value payment systems that enable instant account-to-account payments using ISO 20022 messaging standards on a 24x7x365 basis. However, there are several differences between the two systems that banks and end users, including corporates, will have to deal with as they chart their path for adoption.
1. Underlying Payments Technology
The Clearing House leveraged Mastercard’s 2016 acquisition Vocalink as the basis of the RTP® network. This is the same core technology that powers real-time payments in the UK, Singapore and Thailand. The Fed has not been public about FedNow’s underlying technology, but it has noted that the system has been developed using agile methodology. We do know that FedNow will be accessible through the upgraded FedLine network, which will enable sending and receiving messages for customer transfers, liquidity management transfers, transaction-level reporting, and fraud mitigation tools.
What does it mean to corporates?
To use RTP® and FedNow, corporates need to go through a bank. Although the underlying network’s technology is important, the way banks approach it matters more for corporations. Banks have taken different approaches to enabling APIs for RTP®, and this is expected to be the case for FedNow as well. These differences in bank APIs will make it difficult for businesses, especially those with multiple bank relationships, to adopt real-time payments. Therefore, solutions that aggregate bank connections will be important for encouraging corporate adoption.
2. Payment Messages
Interoperability has been one of the biggest reasons for ubiquity and ever-increasing payment volumes on the ACH network. Unfortunately, there is no clarity on how interoperability will be achieved between FedNow and RTP®. Just being on the same ISO 20022 standard does not mean that payment messages can be seamlessly exchanged between the two networks. A different approach for adopting ISO 20022 by the two networks has led to differences in terms of message flow, amount of data, and message structure.
TCH prioritized speed and ease of adoption and went for shorter messages. The Fed on the other has prioritized utility, allowing messages to carry more data relative to TCH. These differences drove the Fed’s decision to not prioritize interoperability for FedNow’s impending launch. This likely means that FIs and technology providers will have to build interoperability on their own. Some banks may be more equipped to deal with this complexity and move faster while others may take longer.
What does this mean to corporates?
This means that adoption of FedNow will most likely be slower than what we all were hoping for. Like RTP® , FedNow will be enabled both via FTP and APIs by the banks. If a corporation intends to use one bank for its real-time payment needs, then they should inquire whether the bank’s smart routing capabilities can route their payment instructions to the appropriate real-time payment network. Customers seeking to use more than one bank may be better off relying on a provider that is able to manage API and host-to-host connectivity on their behalf and route payments to the appropriate bank based on bank readiness and other business rules.
Given the complexity, corporations that directly manage multiple API connections and payment formats will have a hard time building a business case for such an investment. Therefore, corporations looking to benefit from real-time payments should consider working with an expert payment platform provider to outsource such increasing complexity.
3. Transaction Limits and Coverage at Launch
The Fed has chosen to launch FedNow at a relatively lower transaction limit of $500,000 vs. the current $1,000,000 limit for RTP®. The limits for the two networks will align in the long term. However, in the short to medium term, the difference would remain. The RTP® network has a five-year lead time over FedNow in terms of adoption and will likely maintain that lead for some time. The network has over 280 participating FIs, but less than 30 banks have both send and receive capabilities. The large banks are likely going to enable both networks, while the smaller banks that are not already on their path to enable RTP® may choose to prioritize FedNow.
What does this mean to corporates?
To get paid in real-time from payers that may be using either or both payment networks, corporations will need a bank that is receive-enabled on both networks or need at least two banks that are each receive-enabled on either networks. Those seeking to pay using real-time payments may have to assess their payable needs and whether connectivity to either or both networks is necessary. Corporations that are able to meet their payable needs with RTP® may defer FedNow; others may want to leverage the broader reach enabled by the two networks to maximize the benefit of real-time payments.
Transaction limit differences present different choices for corporates based on where they are in their real-time payments journey. For example, corporations that are using real-time payments to replace wire payments at or under $1 million tend to make payments that are closer to the $1 million transaction limit. Such customers may find the lower transaction limit for FedNow to be regressive and may choose to wait until the two networks are at par.
Even after real-time payments ubiquity is achieved in the U.S., it is likely that only a subset of FIs will support both networks. It may therefore be advisable for corporations to seek advice from their bank or payment provider to better understand the cost-benefit and timing of when and how to leverage the two networks to meet their business needs.
4. Payment Settlement Models
I have covered the technical details of the differences in settlement models in my previous blog and implications on FIs in terms of earning interest, reserve requirements, intraday credit and liquidity management. In short, the RTP® network follows a prefunded real-time gross settlement (RTGS) model, which means participating FIs have to provide upfront funds that are held in joint accounts at the Fed. In contrast, FedNow’s settlement model does not involve pre-funding as it relies on participating FIs’ master accounts with the Fed.
As a consequence, FedNow has chosen to align its business day with Fedwire. While FedNow will be operating on a 24x7x365 basis, transactions after the FedWire closing time of 7:00:59 ET PM until midnight will get a cycle date which is a day after the calendar day.
What does it mean to the corporates?
While the cycle day has implications on the accounting and reporting of transactions at the FI level, the transactions are settled and funds become available to payees in a matter of seconds. For operational purposes, there should not be any impact to the downstream business processes for corporations (e.g., early payment discounts, interest calculations, etc.).
An Exciting Moment for U.S. Payments
In conclusion, the launch of the FedNow instant payments network is an exciting development for the U.S. payments industry. While FedNow and RTP® share many similarities, there are important differences in underlying technology, payment messages, settlement models, transaction limits and coverage at launch. These differences will have implications for banks, technology solution providers, and ultimately, corporates who will need to navigate the disparate approaches before they can fully leverage the benefits instant payments bring to them.
Despite these challenges, I have no doubt that the adoption of real-time payments is expected to increase as corporates seek faster, more efficient payment methods, and banks and solution providers innovate to meet such needs. Book a meeting with our payment experts to review your payments process and find out how Kyriba can enable seamless real-time payments experiences for you across FedNow and RTP®.