What’s Ailing Faster Payments Adoption in the U.S.?

Economic hesitation, legacy concerns and escalating fraud fears have hampered the adoption of a payment rail touted as the next big thing in the U.S. payment landscape, with government backing and technological promise of clear benefits to consumers and the financial sector.

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The U.S. Federal Reserve introduced FedNow two years ago as a national “leading-edge payments system” designed to modernize payments by offering an instant, always-on alternative to traditional systems. Proponents argue that FedNow is not only beneficial, but ranks among the top faster payment alternatives available. But enthusiasm among banks has been lackluster.

“The biggest hurdle has been creating a financial motivation for banks to join faster payments networks. Without coverage, volumes are low. At low volumes, prices will be high and even then it’s hard to make an ROI work,” said Peter Tapling, managing director of PTap Advisory and a member of the Nacha Conference Planning Committee. This financial equation potentially keeps many financial institutions from fully embracing FedNow despite its capabilities.

A critical factor holding back adoption is not the technology itself, but rather the absence of compelling market incentives. Tapling said that while legacy infrastructure is often blamed for delays, “service providers have significantly mitigated technological limitations.” He added: “Technology is not the reason banks are not offering instant payment services: a given bank may not like the service provider options they have, but the solutions exist.”

Security concerns play a pivotal role in the slow uptake. Fraud and scam risks are amplified by the nature of real-time payments, which lack the built-in delays of traditional payments. Tapling said banks already manage risk through their “wire” systems – payment transactions that are irrevocable and settled in real time under separate agreements. “Financial institutions should be looking at this as a model for becoming active as send participants on RTP and FedNow,” he said. “To protect people from scams, we are going to have to slow them down.” Even a brief delay in processing can help mitigate scam risks, he said.

The regulatory landscape is “drastically” shifting too, he said. A recent presidential order injected fresh impetus into the push for instant payments, he said, adding that although the immediate beneficiary is the ACH system, the government is expected to encourage banks to adopt FedNow as part of a broader move toward modernizing payment infrastructure.

Internationally, lessons from established real-time payment systems offer a useful comparison. Jason Costain, head of fraud management services at NatWest, draws parallels with the United Kingdom’s approach.

He said that the most effective real-time payment solutions have been those developed at a national level with robust government support. The U.K.’s Vocalink Faster Payments network, rolled out in 2008, has become a model for success due to clearly defined standards, response times and membership criteria.

In contrast, FedNow’s recent launch places it behind commercial systems such as Zelle, which have garnered significant consumer traction. Costain said that in the United States, many consumers were unable to access these commercial solutions simply because their banks did not participate.

Costain said the broader ecosystem needed to support a secure and robust instant payment environment. In the U.K., concerns about fraud and scams have led firms to call on sectors beyond banking, including telecoms, social media companies and law enforcement, to play a role in safeguarding the system. He said that regulatory measures, such as one introduced by the Payment Systems Regulator in October, have forced firms to share liability for fraud losses. “The recent regulations … have caused some smaller receiving firms to raise concerns about whether this is economically viable for them,” Costain said.

Despite the concerns, real-time payment adoption rates in the U.K. have been robust. Costain cited data showing that a majority of U.K. consumers rely on remote banking services, with the volume of faster payments reaching 4.9 billion transactions in 2023. The level of activity, driven in part by both consumer and business demand, shows there is potential for well-supported instant payment networks when combined with effective fraud mitigation measures.

Compliance, interoperability and the high fixed costs associated with these new systems are challenges as well. Costain said that smaller banks and credit unions face disproportionate burdens due to fixed participation costs, and as a result, these institutions often de-prioritize investments in fraud and anti-money laundering defenses in favor of functionalities that can immediately boost market share. This scenario forces regulators to balance the goal of increasing competition with the need to maintain rigorous financial crime safeguards.

The balance between speed and security is not easily achieved. FS-ISAC’s Linda Betz, executive vice president of global community engagement, said it is all about adding “smart friction.” For example- banks could introduce temporary delays during transactions to make it harder for fraudsters to proceed without creating too much disruption for legitimate customers, she said.

The most successful institutions are those that have established a “tone from the top” that encourages collaboration across departments of payment journeys, internet and mobile banking, data science and fraud, Costain said. These firms pioneer fraud strategies that incorporate unified identity and authentication standards, customer segmentation for key functionalities and the phasing out of outdated verification methods such as phone and SMS OTPs. It also takes investments in vast data lakes and the development of machine learning models to enhance fraud detection accuracy.

“Primary developments at individual bank level are in building large data lakes and using artificial intelligence and machine learning to develop more accurate models for use in fraud defense systems, reducing false positives and increasing fraud find,” said Costain.

Artificial intelligence and machine learning are emerging as pivotal tools in this fight. Banks are using AI to sift through vast quantities of transaction data in real time, enabling them to spot anomalies and potential fraud more effectively than traditional rule-based systems.

The contrasting experiences of the U.S. and U.K. also serve as a reminder that national strategies matter. The U.K.’s Vocalink network succeeded because it was born out of coordinated government support and industry-wide collaboration. In the U.S., where market forces dominate, the recent presidential order might serve as a turning point by nudging banks toward greater participation in FedNow. But until the necessary financial incentives and robust fraud prevention measures are universally embraced, FedNow’s full potential may remain unrealized.