FedNow, the second real-time payment network and the public sector substitute for The Clearing House's (TCH's) RTP network will debut this year.
However, as you know, the USA already has a real-time payment (RTP) system in the US - TCL TRP. The Federal Reserve and The Clearing House, respectively, are attempting to reinvent payments via FedNow and RTP that deliver quickly and conveniently. Domestic low-value payment systems FedNow and RTP® both support instant account-to-account transfers using ISO 20022 messaging standards on a 24/7/365 basis.
Now a question arises? How are the two different, and which one is better?
Today, we will discuss the two real-time payment systems and everything you should know about them.
What is the FedNow service?
FedNow is a real-time payments infrastructure initiative introduced by the Federal Reserve in the United States. It aims to provide a safe, efficient, and accessible system for instant payments between banks and financial institutions.
The existing payment systems in the United States, such as Automated Clearing Houses (ACH) and wire transfers, have processing time and availability limitations. These systems typically involve delays of several hours or even days for funds to be transferred between accounts. FedNow seeks to address these limitations by enabling immediate payment transfers 24 hours a day, 7 days a week, and 365 days a year. The system will operate in real-time, allowing individuals and businesses to immediately make instant payments and access funds.
What is TCH RTP?
The Clearing House RTP is an existing real-time payment system introduced in November 2017. Since its launch, it has grown, and today it has more than 280 participants in its network that can receive and send real-time payments. The system supports both payer-initiated payments and request-for-payment-initiated payments. It has seen steady growth - it processed over 45 million transactions for a total value of close to $20 billion in Q3'22.
According to TCH, the RTP network spans 62% of all demand deposit accounts in the United States, and more than 20 technological solution providers, including Jack Henry & Associates, FIS, Fiserv, COCC, Finastra, and Shazam, provide technical access to the network to 85% of insured depository institutions.
What are the features of a real-time payment system?
Before we get into comparison, let us first understand how both these systems will bring advantages to the users. These systems will empower businesses to receive and send payments within seconds, granting quick access to their funds to the payees. The higher speed and control provide several potential benefits.
- Liquidity management: Uncertainty caused by payment delays can be reduced by instant payments. This would help boost working capital, helping businesses reduce the need for excess cash on hand to cover emergencies and strengthen liquidity management.
- Greater supplier and customer satisfaction: We can take any industry as an example - if the effort and time to receive funds are reduced, it will surely benefit the company. For example, when a company working with payments of insurance claims has features of instant transaction capabilities, it can improve its brand experience and provide an edge over the competition.
- Lowers the friction across the payment process: Faster settlement is only one side of the story - these payment systems also make invoicing, posting, deposits, and other accounting activities easier. Unlike cheques, there is less or no need for data entry to apply for payments.
Comparing the features: TCP RTP v/s FedNow
As discussed above, both services have many similarities, as the intent is for these two schemes to parallel each other and support resilience in the economy. However, there are some differences between the two services. Let us look at some significant differences:
- Governance: The FedNow service is operated by the Federal Reserve, a government entity. On the other hand, TCH RTP is operated by The Clearing House, a private entity owned by a consortium of banks.
- Accessibility: The FedNow service aims to provide access to all depository institutions in the United States, regardless of their size. It is being built to be accessible to banks and credit unions of various sizes. On the other hand, TCH RTP is currently accessible to financial institutions that are members of The Clearing House. It may be more readily available to larger financial institutions in the consortium.
- Features and Capabilities: While both systems offer real-time payment capabilities, there are differences in the specific features and capabilities they provide.
- Terms of Fees: There is no difference in the fee structure - both systems will be equivalent at 4.5 cents per originated transaction.
What are the main advantages of both systems?
FedNow has a definite edge over RTP - FedNow is owned by a government entity. Therefore, it will have an advantage for intelligent liquidity management, enabling banks to transfer funds between the Federal Reserve master account and their FedNow account.
Put another way, the liquidity management tool for FedNow enables real-time payment liquidity transfers between FedNow members and financial institutions. RTP has an edge regarding interoperability - the P2P payment service can use RTP to settle payments, and The Clearing House (TCH) has participated in cross-border payment initiatives such as Immediate Cross-Border Payments (IXB).
Will both exist, or will one replace the other?
As per industry experts, the competition between FedNow and TCH will push innovation forwards. Also, it will create downward pricing pressure. As discussed above, both systems will cost 4.5 cents per transaction. Compared to other nations where similar options are available, it is expensive. For example, there is no fee for real-time payment through UPI in India. In Europe, payment costs banks only 0.2 cents, less than a 20th of the equivalent cost in the USA.
Based on the current situation, both systems will continue flourishing in the US market and bring down costs.
Conclusion
For comparison, it is essential to review the functionalities offered by each system and assess whether they align with your specific needs. It could include payment limits, supported transaction types, integration options, and settlement processes.
The decision between the FedNow service and TCH RTP depends on your organization's requirements, preferences, and timeline. You may want to consider factors such as governance, accessibility, implementation timeline, and specific features to make an informed choice. Consult your payments expert, who can provide valuable insights to help you decide which option is better.
PayApt is a complete, plug-and-play solution that helps Financial Institutions and FinTech companies get RTP products to market faster. Users can also convert historical payment messages produced by your solution to the new ISO 20022 standard using PayApt without having to change the way things are currently set up. Try the PayApt solution right now!