With all the noise around the impending opening up of the newest payment rails in the US, we ask “What is the difference between the Federal Reserve’s new instant payments service, FedNow, and the Real-Time Payments (RTP) network?”
When FedNow, the Federal Reserve’s new instant payment platform, begins in July it will be the first new rail since Real-Time Payments (RTP) launched in 2017.
Backed by the Fed and offering instant money movement, FedNow might at first glance seem similar to real-time payments (RTP) in that they both clear and settle US domestic payments 24/7. But comparing RTP vs. FedNow directly shows that each method offers unique advantages for different use cases.
What is FedNow
FedNow is an upcoming instant payment platform designed to safely and efficiently provide access to funds in real time, 24/7/365. This new rail will move money between sending and receiving banks instantly, so the receiving party has access to the funds within seconds.
FedNow guarantees this will happen within 20 seconds, and often much faster.
FedNow will also settle and clear online payments 24/7/365 including nights, weekends, and all holidays.
The banks on both sides of the transaction instantly exchange the necessary information to immediately move the money between customer accounts, and interbank settlement happens after the receiving bank has confirmed the recipient’s account information.
Both the sender and receiver are notified whether the payment was successful.
What’s more, the backing of the Federal Reserve means FedNow can immediately ensure both banks are made whole: When money is sent it comes out of the sending institution’s master account at the Fed, and it’s deposited into the receiving bank’s Fed account.
Compare with RTP
Real-time payments (The RTP Network) is a system introduced by The Clearing House in 2017.
True to its name, RTP processes US domestic payments 24/7/365 with immediate settlement.
That sounds pretty similar to FedNow, but RTP works differently in how it accesses interbank liquidity and confirms settlements.
Financial institutions have to opt in to become part of the RTP network, but most customers have access: The Clearing House estimates it’s accessible to institutions that hold about 90% of US demand deposit accounts (DDAs).
The process is pretty seamless for customers: The person sending the payment initiates the transaction (as a credit push), and the RTP network processes the payments individually in real time.
To do that, the RTP network requires participating funding institutions to hold a separate, pooled account for liquidity purposes at The Clearing House.
Interbank settlement happens immediately, before the receiving bank confirms details of the recipient’s account.
As with FedNow, both the sender and receiver of RTP transactions get payment status updates instantly to confirm success and the amount paid.
To recap the similarities, both FedNow and RTP offer: 24/7/365 payments processing, instant and irrevocable settlement, access for customers with accounts at institutions that have opted in, confirmation of transactions for both senders and recipients, and transaction limits that are lower than that of ACH and wires.
RTP has the jump on FedNow here, as RTP offers transactions up to $1 million. At FedNow, the default limit will be $100,000 with financial institutions having the ability to increase that to the network limit of $500,000.
Here, FedNow has the advantage. One of FedNow’s biggest differentiators is its integration with the Federal Reserve’s larger network, which means it will be accessible to smaller local banks in communities across the US.
RTP is also widespread, as The Clearing House estimates it’s accessible to institutions that hold about 90% of US demand deposit accounts (DDAs), though the network currently reaches only 62% of DDAs as not all institutions with the access have chosen to opt in.
The thousands of institutions currently integrated with RTP can be found on The Clearing House’s website, and some customers may find that their local community banks aren’t on the list.
Between the launch of FedNow and the existing availability of RTP, opportunity abounds for businesses in search of making the promise of faster payments a reality.
Having both in the US financial system will certainly lay the groundwork for a more efficient financial future.
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