The U.S. is currently witnessing the rise of a robust real-time payment system, known as FedNow, introduced by the Federal Reserve. Built with the intention of speeding up digital transactions for businesses, banks, and consumers alike, FedNow aims to emulate the instant payment services people have grown accustomed to through platforms like Zelle and Venmo.
If successful, FedNow could potentially become the cornerstone for real-time payments in America. However, creating a new digital payments infrastructure is a mammoth task, and it may benefit the U.S. to turn its eyes to India, which has already pioneered a similar transformation with its Unified Payments Interface system (UPI).
The UPI Phenomenon
Introduced in 2016 by India’s central bank, the UPI system has quickly become the global leader in real-time payments. With the simple action of scanning a QR code, users can make swift transactions. The system accounted for nearly $2 trillion in payments in just a few years.
Some factors behind UPI’s massive success:
- Simplicity: At its core, UPI uses QR codes, making it easily accessible to anyone.
- Interoperability: The system seamlessly integrates various payment services, both local and global.
- Consideration of User Needs: UPI is tailored for a mobile-heavy user base, offering free transactions for consumers and merchants.
While UPI was initially met with skepticism, it has facilitated tremendous growth in bank account holders in India. Today, over 80% of Indians own bank accounts, up from 50% at the launch of UPI. The American policymakers have a goldmine of insights to gain from UPI’s journey, especially as they work towards realizing the full potential of FedNow.
Cross River’s Collaboration: Embracing Interoperability
Cross River Bank, in a recently announced collaboration, has taken significant steps towards promoting interoperability in the U.S. payment ecosystem. It has become one of the first financial institutions to offer routing options via either the FedNow Service or the RTP® network.
According to Cross River:
- Users can rely on a dependable system for tasks like fund management, bill payments, and receiving payouts.
- Interoperability brings about “more optionality and choice”, allowing instantaneous and efficient transactions.
- Partners of Cross River can choose their preferred payment rail, relying on both as necessary.
Miriam Sheril, Head of Product at the U.S. payments platform Form3, emphasizes the importance of interoperability for the mainstream adoption of instant payments. Especially in the context of cross-border payments, interoperability through application programming interfaces (APIs) can resolve potential challenges.
FedNow and the Future
PYMNTS recently delved into the rise of the FedNow Service and discussed the ongoing issue of interoperability. A report on central bank digital currencies (CBDCs) highlighted that the growing popularity of digital payments demands seamless compatibility across platforms. While interoperability remains a goal to be achieved in the U.S., linking the new FedNow service with the six-year-old RTP network of The Clearing House could pave the way for connecting faster U.S. payments with international systems.
While the potential benefits of FedNow and other real-time payment systems are immense, their successful implementation in the U.S. will require addressing several challenges. These include:
- Consumer and Business Education: The average user or small business owner needs to understand the advantages and functionalities of the new system. An informed user base will lead to a quicker adoption rate and more successful transactions.
- Security Concerns: With the rise in digital payment systems, there is an increased risk of cyberattacks and fraud. Strengthening security measures, ensuring data protection, and instilling confidence in users will be paramount.
- Infrastructure Investment: Upgrading the existing payment infrastructure to support real-time transactions at a nationwide scale will need significant investment. This includes both hardware and software upgrades.
As digital payments continue to evolve, it becomes increasingly crucial for nations to ensure efficient, secure, and interoperable systems. The U.S. stands at a pivotal juncture with FedNow, and by leveraging lessons from the Indian UPI system and emphasizing interoperability, as seen with Cross River’s recent moves, the country can solidify its position in the global digital payment landscape, ensuring that businesses, banks, and consumers alike benefit from instantaneous and seamless transactions.