September 1, 2023—Launched in 2017, The Clearing House’s Real-Time Payments (RTP) Network was the first payments network in the United States to offer near instant settlement and clearing. After six years on the market and having grown to more than 1,200 financial institution* users, this private network now has competition, the FedNow® Service, a public sector payments infrastructure built by the Federal Reserve and live as of July 20 of this year. Pitted by some as rivals, RTP and the FedNow® Service are perhaps better described as alternative solutions to a common problem—consumer and business demand for modern and ever faster payments. Each has the potential to expand and evolve the U.S. economy, and, while they offer some of the same functions, there are differences between the two.
Both platforms allow for interbank settlement 24 hours a day, 7 days a week, 365 days a year, for domestic, push transactions. These payments are irrevocable and clear and settle in under 20 seconds. The primary difference between these payments rails is, as mentioned above, their ownership. The RTP Network is owned by The Clearing House, a banking association and payments company that is itself owned by the nation’s largest commercial banks. Membership in The Clearing House is no longer required for RTP Network participation. But, while the network touts widespread adoption, real-time payments prior to the FedNow® Service launch accounted for only one percent** of all U.S. payment transactions. The FedNow® Service, due in part to the Fed’s existing customer service relationships and long-standing operational role in interbank settlement, and the low cost of entry, is better suited to reach and to provide equitable access to the more than 10,000 diverse depository institutions, and their agents, in the U.S.
Funding for the networks differs as well. The RTP Network settles payments on a private ledger with a joint account at a Federal Reserve Bank that is prefunded by network participants. Here, the FedNow® Service may have an edge. The RTP Network prefunding amount and funding structure are a barrier for entry for some, while the Fed’s system allows for intelligent liquidity management; settlement can occur through a financial institution’s Fed master account or via a correspondent bank.
Other differences include transaction limits— RTP’s $1 million cap vs. the FedNow® Service at $500,000—and current integrations. The RTP Network is interoperable with the popular P2P payments service, Zelle, which can use the network for settlement. Both systems operate on a transaction fee model and per transaction pricing is essentially the same for now (no surprise as the Fed aims for both nationwide reach and healthy public-private competition). And, while both networks utilize the global ISO 20022 messaging standard, there are differences in message flow, structure, and format that will require resolution before the systems are interoperable. Financial institutions can integrate either service with their digital banking and other payments platforms directly, through service providers, or through correspondents, and the cost and complexity of those integrations will vary depending on their legacy systems and processors.
As early adopters of the FedNow® Service with capabilities live today, we at Vertifi are here to help you understand the payments systems available today and their potential benefits to you and your customers.
* Data reported by The Clearing House, 2023. Most financial institutions are understood to be receive only.
** According to a July 2023 article by Payments Dive.