Federal Reserve Launching FedNow Instant Payments

THE COWEN INSIGHT

We believe FedNow could change consumer payments by providing an instant payment alternative to existing payment rails. This could reduce counterparty risk, give consumers and merchants faster access to their funds, and be less costly than existing alternatives. Getting consumers to change behavior is challenging, but we believe the Federal Reserve’s support makes FedNow worth watching.

WHY FED NOW IS GRABBING OUR ATTENTION

We believe the Federal Reserve’s launch of FedNow next year will jumpstart the adoption of real-time payments for peer-to-peer, consumer-to-merchant, employer-to-employee, and consumer-bank-account to consumer-bank-account transactions.

We are shining a light on what we see as an underappreciated risk and opportunity for financials. It is rare for the government to back a new payment option. That makes this worthy of attention.

A THREAT TO BOTH THE STATUS-QUO & OTHER ALTERNATIVES

FedNow and Real-Time Payments may represent a threat to those dependent on the existing payment rails and those seeking other alternatives to the current system, such as:

• Payment networks that process debit transactions
• Banks that collect debit interchange and overdraft fees
• Fintechs that rely on debit interchange fees
• Stable coin and other crypto-based consumer payment alternatives
• Businesses that rely upon inefficiencies in the existing payment networks such as check cashers and payday lenders

WHAT’S NEXT FOR FED NOW 

1. The Federal Reserve is conducting a system test now with a limited number of banks. The result of that test should tell us late this year how close FedNow is to being deployed.
2. FedNow is scheduled for launch in 2023. The Federal Reserve has not provided more clarity, though we believe it could be as soon as next summer. We expect to get an update late this year or into Q1 2023.
3. The number of banks and credit unions that sign up for FedNow at launch and in the months after launch will be critical. Absent near-universal adoption, FedNow could take much longer to take hold. 
4. How aggressive will technology providers be in rolling out the software and hardware that might be needed?
5. Does the Federal Reserve expand its marketing campaign for FedNow from financial institutions to merchants and consumers?

POTENTIAL RISK

It is challenging to change consumer payment behavior. Risks to our thesis include:

1. Does the Federal Reserve launch FedNow on time?
2. Are consumers willing to use instant payments?
3. Will merchants accept instant payments?
4. Could a decline in debit interchange rates dull interest in instant payment alternatives?
5. Do technology providers roll out interfaces needed to make instant payments easy to use?
6. Will banks push the use of instant payments?