FedNow, the US government's first real-time payments platform, launched in 2023 with much fanfare. It promised instant transactions, lower fees, and expanded accessibility. Yet, despite these advantages, experts like Felipe Izquierdo, a startup operator, fintech strategist, and angel investor, believe that FedNow faces a challenging journey toward widespread adoption.
Felipe Izquierdo's extensive background in consumer finance and payments offers a unique lens through which to evaluate FedNow's position in the competitive US payments landscape. Izquierdo has spent his career evaluating financial systems and payment innovations, with experience spanning consulting at Boston Consulting Group, investment management, and an MBA from Columbia Business School.
Felipe Izquierdo remains closely involved in the financial sector and has many concerns about FedNow's current adoption strategy.
What Are FedNow's Potential Benefits?
FedNow is designed to provide instant clearing and settlement, addressing a longstanding need for faster and more affordable payment options. Fednow will cut down on intermediary wire rates in the short run, but if its applicability continues to expand for P2P use cases and use by non-financial institutions (merchants), it has the potential of also cutting out the intermediary card networks like Visa and Mastercard. Overall, FedNow is the first step aimed at offering consumers and businesses a direct, low-cost way to transfer funds between banks.
FedNow's real-time transactions could improve cash flow and alleviate the delays that often accompany traditional wire transfers, enabling smaller enterprises to operate more efficiently. However, as Izquierdo points out, any potential benefits, including reduced processing fees, increased accessibility, and increased payment speed, are being sidetracked by the current US payment incentive system and procedural mishaps throughout the launch of the system. He also draws particular attention to the operational and regulatory issues that have overshadowed FedNow's rollout.
By solving these logistical barriers and if adoption is widespread, FedNow could foment competitive inclusion in the financial space for businesses and could provide tangible savings to consumers, as they avoid fees and as merchants pass on savings in instances where interchange fees could be skipped (drawing on merchant examples from Brazils PIX network)... Given that the US is home to some of the highest interchange fees on the planet, FedNow's model has the potential to drive significant savings by circumventing these fees.
The Major Barriers to FedNow's Widespread Adoption
Despite the anticipated benefits, Felipe Izquierdo argues that structural and regulatory factors could limit FedNow's adoption, as many US financial institutions derive significant revenue from card network fees. "The sinister incentive from financial institutions to promote high-fee structures that reduce competition and promote vested interest in card networks will ultimately create a failure at launch for this groundbreaking technology," Izquierdo explains, emphasizing that these relationships are a major obstacle to FedNow's adoption.
Additionally, unlike government-backed payment systems in other countries, FedNow lacks the legislative framework needed to encourage participation and boost confidence in the system. For instance, in Brazil, the Central Bank established clear guidelines to drive the adoption of the real-time payment system Pix, which soon became the country's preferred payment option.
For startups, in particular, the lack of access to a payment infrastructure as robust as FedNow can add a barrier to entry, particularly in the already competitive payments market. "Sometimes they have to operate on a prefunding basis, cash constraining their growth for clearance," Felipe explains, "and most importantly, they can't access the rails of accounts and wallets operated by banks." This makes it harder to achieve relevance, regardless of what benefits or products are offered to consumers or businesses.
In the United States, FedNow's rollout has been marred by logistical challenges, with some financial institutions expressing hesitancy to embrace a system that lacks robust regulatory support. This lack of mandated participation means that banks and businesses can bypass FedNow entirely, hindering the network's reach.
The Impact on Key Stakeholders
If FedNow does not achieve mass adoption, it could have significant repercussions for both consumers and small businesses. The lack of a widely accepted, no-cost payment alternative means consumers will remain subject to high transaction fees.
Merchants often pass this on to the customer directly in the form of higher prices, which means small businesses can be deprived of the cash flow benefits of real-time payments and must continue to rely on traditional wire transfers or card networks, complete with substantial fees.
Using Brazil's Success Story as a Learning Curve
When considering FedNow's potential path forward, the Pix system in Brazil offers valuable insights. Pix rapidly became popular for both personal and commercial transactions, launching government-mandated adoption by financial institutions. The use of Pix surged 74% last year to nearly 42 billion payments across the Brazilian economy.
By directly addressing the regulatory and institutional hurdles to adoption, Brazil's Central Bank fostered a robust environment where Pix can thrive by expanding its usability directly to users, including a feature for generating personal QR codes, allowing individuals and businesses to easily receive payments by sharing a QR code linked directly to their account. This QR code solution made Pix accessible for informal transactions and small merchants without additional infrastructure, boosting usage across various demographics.
Without similar legislative backing, FedNow could struggle to build the momentum required to become a mainstream payment method. Izquierdo highlights this as a missed opportunity for the US government, noting that regulatory frameworks can play a key role in shaping the payments landscape.
What Are the Potential Long-Term Benefits of FedNow?
If FedNow can overcome the initial adoption hurdles, there are promising long-term benefits for the US economy.
FedNow could encourage a shift toward open banking, particularly as it expands to include point-of-sale systems and online platforms. Open banking principles could benefit greatly from FedNow's underlying infrastructure, paving the way for more flexible payment options, such as by reducing interchange fees, which could introduce greater competition in the payment sector, pressuring traditional card networks to lower their rates. Since FedNow directly moves funds between banks, it bypasses intermediaries like card networks, which could reduce or eliminate the need for interchange fees.
For FedNow to achieve its potential, the US government and financial institutions must take a more proactive role in supporting the platform through greater legislative backing and addressing the systemic barriers currently preventing it from gaining traction. The adoption of FedNow could also catalyze innovation in the fintech sector, fostering the development of new financial products and services. FedNow could lower barriers to entry for startups and encourage established players to modernize their offerings, which could lead to increased competition in the financial services industry and potentially result in lower costs and improved services for businesses and customers. It could even significantly reduce the risk associated with payment transactions, enhancing overall financial stability.
In Felipe Izquierdo's view, the time is ripe for policymakers to consider the long-term benefits of a real-time payment system that operates outside traditional card networks. FedNow could offer a more equitable and competitive payment landscape that benefits consumers, startups, and established businesses alike.
