The world of payments moves quickly, and if you happened to miss a few key headlines this summer, you may not have noticed the debut of a major advancement in payments technology: FedNow. What makes FedNow so important? It’s the first new payments rail that the Fed has launched in 50 years. But for all the talk about this government-backed innovation, there’s still not a lot of clarity for the general public about what this means for both businesses and consumers. We sat down with our own payments expert (Head of Payments and Product here at Branch), Ahmed Siddiqui, to break down what FedNow is and how it’s impacting the future of payments.
Can you describe what FedNow is and how it works to a layperson?
Ahmed: FedNow is a new way to move money between two banks instantly. For those of us in the U.S. as regular consumers, we don’t actually have access to a way to get money paid instantly directly from one bank to the other. FedNow is designed to address that so that anybody with a FedNow-enabled bank account can send money instantly to another person with a FedNow-enabled bank account.
FedNow is different from some of these other services that a lot of us are familiar with, like getting paid instantly to CashApp or getting paid instantly to a Venmo account or PayPal, because in those models that money movement is happening within a digital wallet. FedNow, however, is money movement from Bank A to Bank B.
Is there a specific importance to why the U.S. is doing this now and the fact that this is our federal government behind this initiative?
Ahmed: Honestly, I think the U.S. is a little behind in that regard. We move trillions upon trillions of dollars on a daily basis all through a system called ACH [automated clearing house]. Like our direct deposits that we're getting for our paychecks and whatnot, most of that is running through the ACH network, which isn't instant—it’s a batch process.
At best, if you need to move money in the morning, you might get it at the end of the day. But for most people, it's usually the next day or even two days after. The system works, don’t get me wrong—it’s just not fast. You have PIX in Brazil and UPI in India, which is just exploding because there are actually mandates by their governments to use this system.
With FedNow, this is now federally backed and recommended in the U.S. It’s enforcing this notion that faster payments can potentially be a great equalizer. As we talk about at Branch all the time, changing the pace of pay can be super impactful on someone’s life—whether it’s a small business owner, or simply getting money to a friend.
How do you see FedNow impacting the future of payments in general and the future of faster payments specifically?
Ahmed: I think it's going to grow over time, but it's going to take a while. Right now it’s just 35 banks out of close to 5,000 major banks in the U.S.—so we’ve got a long way to go before it becomes completely ubiquitous. But in general, the fact that we do have the federal government behind it is really important—it’s more or less saying that the U.S. is moving towards faster payments.
And that’s something that we do here at Branch already. It’s beyond getting paid out daily, it’s getting paid out multiple times a day. For a lot of the Uber drivers that we support, for example, it could be anywhere from 30-60 times that they’re getting paid per day. We want to make sure that everyone can have this faster payment capability. We offer it today through our wallet. So, do we need to wait for a FedNow before this happens? Not really. Companies can use Branch and have access to this technology right away.
Are there specific pros and cons to using FedNow?
Ahmed: I think the big benefit is that the federal government is behind it. They’re going to be watching it very closely and there will likely be a lot of regulation created around it on how it will work. The rail they’re using is solid and scalable. Effectively, what they’re doing is enhancing the ACH rails to support something that’s real-time.
The other thing I will call out is that it’s actually real money movement. There’s no delayed settlement process.
For people who are not familiar with card-based transactions, what happens is that the moment you swipe a card, it’s referred to as an authorization. It’s basically like a hold that’s put on your account, but the money actually doesn't move until typically the next business day.
What's interesting with FedNow is that the money itself is actually moving instantly between the banks, meaning you don’t have to wait for another signal before it clears.
If we think about drawbacks, it’s just going to take a long time for FedNow to really be used ubiquitously. Because again, it's going to require all these banks to subscribe to it.
How will the business use and consumer use of FedNow differ?
Ahmed: At its core, FedNow uses account and routing numbers. If I were to send a peer money, I wouldn’t necessarily send them my account and routing number. The other thing to keep in mind is that FedNow is a push-only mechanism. Because the money is moving so fast, there’s no way of calling it back.
For example, if I send you money by using your account number and input that information incorrectly, it could go to someone completely different and I wouldn’t be able to call it back. So I think there are some security mechanisms that need to be put in place to protect people from that. That’s why I think the adoption will be higher initially with business to business payments.
Are there going to be any fees for the consumer?
Ahmed: Your bank will ultimately be able to set the pricing for this, so it could vary quite a bit. ACH today is quite cheap, especially at volume. Depending on how the banks decide to price FedNow, the question is will there be a cost that’s passed on to the consumer or is it something that the banks just end up eating? We’re still a little far away from having those answers. But generally speaking, if you want to get money fast, the consumer is typically paying for it. The key examples of that are using Cash App or Venmo: if you want your money instantly sent to another bank account, you’re paying a fee. If you’re okay waiting for a few days, you may get it for free.
I suspect we’ll see something similar with FedNow, where we will probably be paying as consumers paying for faster payouts through any of these mechanisms.
How do you see Branch complementing FedNow?
Ahmed: As we’ve talked about, FedNow isn’t universally available right now. And people want faster payments. Branch very neatly fits into this equation because we can offer faster payments to anybody through the digital wallet right now. We also have ways of doing it through push to card or RTP already. FedNow would essentially be another rail that we would incorporate in.
We've talked a lot about the momentum that faster payments are gaining, and how it’s something that’s becoming more ubiquitous with the federal government getting behind it. But is there anything else you want people to think about as we look towards 2024 from a payments technology perspective?
Ahmed: I think 2024 is going to be a lot of fun and we should all think about how we’re getting ready for these changes. FedNow is going to happen, and who knows—maybe next year there are a ton of banks that band together and they say they’ll start offering FedNow right away.
At Branch, we need to make sure that we have all the capabilities in place and we're building towards all those rails. The other piece of it is making sure we can offer flexible options to everyone. I think this is where it kind of completes the picture for us, of making faster payments available to everyone.
Ahmed Siddiqui is the Head of Payments and Product at Branch and the author of Anatomy of the Swipe. This interview has been edited down from its original length for brevity and clarity.
