Instant Payments Adoption Meets Challenges In the US

Commerce stands on the brink of widespread access to instant payment solutions — or so it hopes. The potential of instant payments to animate a fundamentally more agile and responsive financial ecosystem has businesses and consumers eager to reap these benefits. However, while financial stakeholders — including banks, FinTechs, credit unions, brokerages, payment processors and service providers — also recognize the advantages, they confront ongoing operational, technical and regulatory barriers to instant payments implementation. Despite FedNow’s 2023 debut, adding reinforcement to The Clearing House’s RTP network, systemic challenges continue to pose hurdles to the adoption of these next-generation payment rails.

Despite Embrace of Instant, Traditional Payments Linger

Businesses and consumers are of one mind in favoring the adoption of instant payments, yet the enduring use of traditional payment methods hints at the challenges of this transition.

From healthcare to retail, instant payments capture the market’s mood for change.

Businesses across the board are embracing instant payment methods. A recent U.S. Bank study finds that more than 4 in 10 companies with revenues upward of $100 million are already harnessing the power of The Clearing House’s RTP network. Future use looks even brighter, with 68% of businesses forecasting their adoption of instant payments via RTP or the FedNow Service in the next two years. This trend cuts across multiple key industries, including consumer and retail (81%), hospitality and leisure (75%) and healthcare (70%), suggesting a strategic consensus that instant payments can help optimize liquidity management and customer/vendor engagement — musts in a digital-first economy.

Traditional payment methods persist in the face of instant — for now.

Despite the allure of instant payments, businesses are clinging to traditional methods for a substantial share of their business-to-business (B2B) transactions. PYMNTS Intelligence research spotlights a notable gap between potential use and practice. In 2023, checks still accounted for 15% of retailers’ and manufacturers’ B2B payments and 21% of those made by real estate businesses — regardless of concerns over the heightened risk of delayed payments and check fraud.

Consumers choose instant — when they can.

Consumers’ appetite for instant payments is undeniable when given the option to receive them. A recent PYMNTS Intelligence study revealed that 72% of consumers who were offered disbursements through instant payments opted for this method. This share rose to 77% for income and earnings payouts, peaking at 81% among respondents performing freelance, contract or consulting work — with 58% of freelancers even willing to pay a fee to receive instant payments. Among those who were not given a choice, 62% said they would have chosen instant had it been offered.

Instant Payment Rails Affirm the Method’s Strong U.S. Future

For financial stakeholders, the rollout of FedNow in addition to the RTP network is affirming the future of U.S. real-time payments, helping to popularize the method for use cases throughout the economy.

Instant payments are becoming increasingly woven into the fabric of daily transactions.

FedNow is helping the RTP network bring real-time payments further into the mainstream. FinTech Plaid, for example, partnered with Cross River Bank to showcase new offerings via FedNow’s platform, ranging from money movement to investment accounts, payroll to loan disbursements and even insurance claims disbursements. Instant microdeposits are now possible too, dramatically reducing the time needed for consumers and businesses to authenticate linked bank accounts — thus largely eliminating payment failures and fraud associated with the process.

Instant rails could fuel an explosion of innovation in the payments space.

Astra’s integration of FedNow showcases the versatility of instant payment rails. The company’s solution facilitates a unified payment experience by enabling instant payments across a variety of payment types, such as payments from debit cards to bank accounts or from bank accounts outside the FedNow network via automated clearing house (ACH) that may then be deposited in the destination accounts via FedNow. The model demonstrates novel ways in which financial institutions (FIs) and FinTechs can innovate using instant payments infrastructure to meet consumer and business expectations for fast, reliable money movement.

Could instant rails shatter the hourglass that dominates margin calls?

The application of instant rails to resolve margin calls could represent a dramatic improvement in the management of securities trading risk. A margin call is triggered when an investor’s account value dips below the broker’s minimum required threshold. Currently, settling a margin call can take hours or a day, amplifying the risk exposure for both investors and brokerage firms. An innovative solution that integrates FedNow, for example, could fundamentally improve the speed and reliability of settling margin calls.

PYMNTS Intelligence breaks down how this could work and why it would be impactful:

1. Instant notification: Brokerages could leverage an instant request for payment (RFP) feature such as FedNow’s to instantly notify investors of a margin call requirement, minimizing the lag between the identification of the margin deficit and an investor’s awareness of the need to add funds.
2. Instant funds transfer: Brokerages’ integration of services such as FedNow could ensure that investors can respond to margin calls with instant payments to settle the calls immediately, avoiding the delays associated with traditional payment rails.
3. Market risk: By settling margin calls nearly instantly, the market risk associated with the time gap in traditional fund settlement processes would be largely eliminated. This matters because the faster that margin calls are resolved, the sooner the required margin levels are met, thereby protecting both investors and brokerage firms from further market volatility and regulatory noncompliance.

Instant Costs: Assessing the Financial Hurdle to Implementation

Assessing the technical and operational requirements for the integration of instant payment rails offers a window onto the practical complexities of deploying these next-generation payments platforms — a crucial view for financial stakeholders evaluating their payment innovation agendas.

The allure of instant payments meets the hard truth of upgrading technology.

Adopting instant payment rails, including FedNow, requires that banks and FIs overcome a complex matrix of technological and operational challenges. More specifically, building interfaces that support both sending and receiving instant payments and reliably managing the processing of these transactions is highly technical and difficult, usually requiring a reconfiguration of banks’ core technology stacks. Layered with the requirements for advanced fraud prevention mechanisms, these challenges shed light on the cautious pace at which FIs are integrating FedNow and other instant payment rails.

The cost of innovation weighs heavily in the decision to move to instant payments.

FIs and businesses alike are confronting these barriers to adopting instant payments. PYMNTS Intelligence research finds, for example, that 82% of smaller insurance firms are deterred by the steep costs of updating their technology stacks to be compatible with instant payment rails such as FedNow. In addition, 48% worry about potential fraud and data theft risks. These challenges underscore the pressing need for scalable inter-industry turnkey solutions that address head-on the dual challenges of heavy technical lifting and the need for compliance.

Operational hurdles test FinTechs’ drive to adopt instant payments.

For FinTechs, too, the integration of FedNow poses significant challenges. According to a recent survey, 69% of FinTechs fear that delays in adopting FedNow could harm business operations and customer satisfaction, yet this sense of urgency is overshadowed by operational hurdles. Seventy-eight percent report inadequate staff training as a primary barrier, and 34% note a specific shortage in anti-financial crime expertise. Meanwhile, 65% cite limited collaboration with regulatory authorities. These findings highlight a serious dilemma: While there is a collective recognition of the critical need to adopt instant payment rails for enhanced operational efficiency and customer satisfaction, internal deficiencies and external regulatory challenges pose formidable obstacles to doing so.

Strategies for Unlocking the Potential of Instant Payments

Businesses’ and consumers’ enthusiasm for instant payments contrasts starkly with FIs’ and FinTechs’ hesitancy over operational and compliance hurdles. FedNow’s launch in the footsteps of the RTP network has the potential to help drive forward instant payments momentum, but the tempered pace of adoption reflects the depth of infrastructural change required. Consequently, we anticipate that the next phase in the instant payment rails saga will be characterized by a surge in strategic partnerships among traditional FIs, FinTechs and other technology innovators and that artificial intelligence (AI) tools will play an outsized role in facilitating a more accelerated transition.

To remain competitive and responsive, financial stakeholders must embrace strategic changes that go beyond surface-level tweaks. PYMNTS Intelligence prescribes the following actionable roadmap for these technology partnerships:

• Simplify integration processes: Provide step-by-step technical integration guides to assist financial stakeholders of all sizes. Offer technical support and showcase successful integration for varied use cases to demystify potential applications and adoption processes.
• Initiate a dual-pathway innovation program: Introduce a program encouraging both collaborative and independent innovations in instant payments. Such a program could fast-track the adoption of instant payments by providing sandbox testing environments, technical workshop series and a collaboration platform for sharing best practices. The aim is to unify and equip all stakeholders for a smoother, more accelerated transition.
• Build modular implementation options: Develop and promote modular, scalable instant payment solutions that bolt on to existing technology stacks and allow for phased adoption. This strategy lets financial stakeholders begin with basic features and expand functionality progressively as their systems are modernized.

Effectively implementing these targeted strategies will empower financial stakeholders to overcome the structural barriers currently hampering the adoption of FedNow and other instant rails, paving the way for truly innovative instant payment products and services.