September 18, 2023
Unlocking instant: How FedNow changes the payments game
Every company that moves money is getting excited about FedNow, but why? They expect instant payments for every use case, but the reality is that the market isn’t quite there yet. However, there are three reasons why everyone involved in payments should be getting excited about FedNow.
1. More real-time payment coverage: FedNow has the capability to expand real-time payment coverage to every eligible financial institution, which gets us closer to ubiquitous, 100% availability—although we are not there yet.
2. New network: This is the first new major payment rail since Real-Time Payments (RTP) was released by The Clearing House in 2017, and the first new payment rail from the Federal Reserve Banks since FedACH, which goes back to the 1970s. It’s not often that a new rail gets released, not to mention one that holds the promise of instant bank payments.
3. More instant liquidity: What people are most excited about is the ability to send and receive instant payments at a scale never seen before. The true promise of FedNow is to turn bank accounts into something like electronic cash—instantly liquid value always at your fingertips with no settlement delays.
The best way to utilize FedNow alongside other rails
While FedNow is officially out and available on Plaid Transfer, it will take time to grow into a widely accepted payment rail. In the meantime, companies will need to adopt it alongside other bank payment rails, including ACH and RTP.
This doesn’t mean you need to have three different service providers, one for each rail. Plaid Transfer offers a single integration that can connect your business to all three rails, offering the best available coverage for ACH (both same-day and standard), Real-time Payments (RTP), and FedNow.
The other advantage is that you only need one authentication for all three rails. Users connect their bank accounts through Plaid Link, which offers a fast and familiar user experience (1 in 3 US adults has connected an account this way). Once connected, Plaid routes payments to the most accessible instant payout rail between RTP and FedNow; or you can choose to send a payment via ACH.
The current state of instant payments
The current state of instant payments in the US is that payouts (credits) are available but payins (debits) aren’t quite here yet.
While RTP has request for payment (RfP) capability, it hasn’t seen widespread adoption yet due to limited financial institution coverage and a high-friction user experience. This means that ACH is currently the only practical solution for debit transactions like account funding, bill payments, or e-commerce.
If a business wants to send instant payouts, Plaid Transfer offers this today through both FedNow and RTP. Using instant payouts for use cases like payroll, gig payments, loan disbursements, and peer-to-peer payments gives your customers more flexibility and can improve their financial well-being through faster access to much-needed funds. With Plaid, you don’t need to be concerned about whether you’re using FedNow or RTP, as Transfer provides access to both and will automatically route instant payouts to the most accessible rail.
Bridging the gap: Instant ACH with Signal
For companies that want instant payin/debit payments today, Plaid has a solution that will work until RfP functionality becomes a practical solution. We call it ‘Instant ACH’. In other words, it’s a synthetic real-time rail on top of ACH.
Here’s how it works. Plaid’s ACH risk reduction product, Signal, provides payment risk scores based on 1,000+ risk factors. As much as 90% of transactions—especially those from trusted regular customers—will end up in the ‘low-risk’ bucket. Since they are low-risk, you can pre-fund the transaction (i.e. provide instant funds availability) as if it were an instant payment and be confident it will settle.
For the smaller percentage of transactions that are not low-risk, you can create dynamic payment flows to respond to each level of risk. That means you’ll either place a hold until funds are cleared, perform step-up verification to mitigate risk, or use Plaid Balance to check the account balance for available funds.
So how is this similar to a request for payment via FedNow or RTP? The benefit of RfP is that you dramatically reduce the risk of a return because the transaction happens in real time. If the funds aren’t there, the transaction won’t take place. Plaid’s Instant ACH solution provides the same benefit through its risk-scoring model.
You get to provide a real-time experience as much as 90% of the time while benefiting from the low costs that ACH provides. This provides as much protection against fraud and returns as you can get without a true instant transaction.
The future: instant payins and payouts for all
The future of modern bank payments is being built as a collective between companies like Plaid, our customers, and payment rails like RTP and FedNow, but we are still in the transition phase. We expect a world where instant bank payments—both payins and payouts—are available to everyone in the US, 24/7/365.
As we build this modern bank payments future, we hope to partner with as many companies as we can. Our goal is to align with our customers and work together as thought partners toward the best and most promising solutions as this transition unfolds.
We invite you to upgrade your infrastructure with Plaid to both bridge the gap in instant payins with Instant ACH and prepare for the future of instant payments for all.