How Can FedNow Recruit More US Banks? Lessons From BrazilWith Only 90 Early Adopters, Federal Real-Time Payments Program Faces Challenges
In the dynamic world of modern finance, the launch of the Federal Reserve's FedNow payment rail in July this year made a big media splash, but the reaction became subdued when only 57 financial institutions and service providers signed on to the real-time payments program. By Sept. 1, only 90 had joined, leaving industry observers wondering how long it will take the organization to convince 10,000 financial institutions to join.
Unlike other countries that have moved their economies into the faster payments realm, the United States does not require banks to use the new payment rail. Experts say the Federal Reserve could take some lessons from Brazil's Pix system, which was mandated by the government.
Currently, FedNow service allows payments of up to $25,000 to be made in real time from one bank account to another. The Clearing House's RTP network recently announced that it had processed more than 60 million transactions each quarter with a milestone of 1 million transactions in a single day on Sept. 1. But this volume pales in comparison with Brazil's Pixnetwork, which handles 2.5 billion transactions per month.
Pix’s Meteoric Rise
Launched by the Central Bank of Brazil in late 2020, Pix recorded an impressive 8.1 billion transactions for Q1, while credit cards and debit cards hit 4.2 billion and 3.8 billion transactions, respectively. According to data from the central bank, analyzed by Matera, Pix accounted for 35% of all transactions in Q1, a significant increase from 23% a year ago.
Pix’s adoption has fueled a positive response for other financial products. A paper published last year shows that Pix significantly improved deposit and lending markets. Checking deposits grew as customers were required to open a bank account to use Pix.
"It is quite evident that instant payment systems created by central banks especially benefit small banks. In the U.S., large banks currently dominate deposit markets - partly because they offer payment convenience," said Peter Tapling, board member of the U.S. Faster Payments Council.
The same disparity has surfaced in other countries. For example, Swish, Sweden's faster payment service, was originally offered only by six large banks, so it became more convenient to have checking accounts with these banks rather than others. Closer to home, Zelle, which is owned by seven largest U.S. banks, is used by less than 40% of all commercial banks.
Driven by the Market
Both Brazil and India, the top two countries in the world in adoption of faster payments, made it mandatory for banks to adopt Pix and UPI, an instant payment system developed in India by the National Payments Corp. of India. As a result, India too has seen a massive increase in faster payments over a short period.
The U.S. banking landscape is vastly different than Brazil because of the sheer number of financial institutions. "Historically, the Fed has demonstrated the preference to maintain two systems for each payment rail in the U.S. I refer to this internally as 'one public, one private.' For instance, between the Federal Reserve and The Clearing House, we tend to have one public option and one private option for each rail," said Sam Aarons, CTO and co-founder of Modern Treasury, one of the companies that built products for Pix. For example, the U.S. uses both Fedwire and CHIPS for wire transfer and FedNow and RTP for instant payments.
The U.S. regulatory system culturally is less likely to mandate a program. “The U.S. has always been driven by market needs, rather than regulatory needs, meaning that regulations are often introduced as a reactive response to the market instead of proactive,” said Carlos Kazuo Missao, head of innovation in the Americas at GFT, which supported the development of Pix. "The 2008 financial crisis, for example, brought on several new regulations regarding how much money can be transacted outside of the country - and the types of reports that banks were required to submit to the Federal Reserve."
But the market-driven approach could mean slower adoption for FedNow, which means the new service needs to offer a good customer experience to increase market share.
While Brazil witnessed widespread adoption of Pix, the central government faced significant challenges on its path to success. Security concerns arose throughout the implementation of Pix. To address security issues, the Central Bank of Brazil adopted a proactive stance by collaborating with banks, solution providers and tech vendors to identify and resolve these major challenges. "To mitigate these, the Central Bank of Brazil took a somewhat aggressive approach to bringing banks, solution providers and tech vendors all into the same room to discuss these issues and come up with solutions," Missao said.
"These companies were able to offer market-level perspectives that the Central Bank did not have and were already thinking ahead about new use cases the Central Bank could introduce," he said.
Once convinced, the Central Bank then communicated this information about what decisions had been made and how it planned to address any problems to all Pix participants.
"There was an effort by the government to open it up for other innovation," he added. "During the implementation of Pix, the Central Bank also made calls directly to service providers to round out their technological expertise of topics that weren't directly related to instant payments but could cross paths with it in the future, such as open banking. The government leveraged the infrastructure around it to further develop the adoption of Pix."
From an infrastructure standpoint, the Central Bank of Brazil leaned heavily on modern architecture when building Pix, basing it on common standards such as HTTP APIs. "This made it easier for participating banks and financial institutions to integrate with the service quickly and efficiently. They also centralized the Pix rail under their own parameters, rather than a public data center, so it's inherently more protected than a public infrastructure," said Missao.
But the program still had to overcome many obstacles - not in performing instant payment transactions but regarding new capabilities introduced on top of Pix, such as paying with a QR code. "Merchants were given the ability to generate encrypted keys that they could provide directly to payers for them to make a payment, which was too complex a process for many to adopt right away. These new use cases weren't communicated clearly from the beginning, so it took some time before Pix users first understood them and were then comfortable enough for them to become second nature like they are now," MIssao said.
In Brazil, the success of Pix was closely tied to the Central Bank's strategic marketing efforts. Through extensive outreach and communication campaigns, the bank conveyed the benefits of Pix to the general public, transforming it into a recognizable and trusted brand. In fact, the term "instant payment" is rarely used in Brazil; instead, people simply say, "I'll send you a Pix."
The U.S. Federal Reserve is in the unique position of learning from these experiences and getting ahead of similar barriers to adoption now. Perhaps, insights from programs in other countries could make for a smoother transition into the world of modern payments.