A few lines Buried in the legal terms of the FedNow service, which is now live, creates an important opportunity for digital wallet and payment app providers. While the new FedNow legal regime creates significant business opportunities for all players in this space, emerging non-bank payment service providers may have the most to benefit from this change.
Startup founders and early-stage investors in particular should take note. These provisions allow non-bank providers to access FedNow under a remarkably open approach, imposing only a few requirements on their customer and back-end bank relationships. The impact is to allow non-banking providers to increase their reach beyond their own user base (as they are limited today) and perhaps also enable payment flows across apps, wallets and other payment networks.
Instead of orienting their business around customer acquisition and user base growth, early-stage startups will be able to leverage their strengths and focus on building innovative software solutions – solutions that identify new opportunities and deliver a better and more secure customer experience for instant payments.
Payments are on the cusp of change
We rarely see brand new digital wallets or payment apps launched by non-banking startups today. Instead, the largest payment app providers tend to grow larger: their app becomes more useful as more customers use it. This is because the payments that non-banking providers are able to process within their own system are limited to transfers between their customers only.
The potential reach of non-bank payment providers that take advantage of this provision in FedNow’s legal terms could be significant.
As a result, the broader the user base of a particular wallet or app, the more likely it is that the payer will be able to use it to make a payment to the payee, increasing the functionality and value of that system. Because of this Network effectsHowever, the barriers to entry for new non-bank payment systems are high.
But what if there was some way for startups to launch a wallet or app that would allow their users to do just that? also Want to send money directly to a bank account or to a wallet with a completely different non-banking provider – cheaply and within seconds?
This possibility means that the usefulness of this payment solution will no longer depend on the size of the non-bank provider’s customer base. Alternatively, even emerging payment solutions can reach non-users who are customers of banks and perhaps other non-bank service providers.
A new payments application can be launched with easy access to a wide network of payers and beneficiaries. Both emerging payment providers and today’s dominant providers can expand their reach.
This possibility is real with the FedNow service and, in particular, its legal terms for non-bank providers.
FedNow Legal Terms
FedNow is a new instant payment infrastructure developed by the Federal Reserve. Launched on July 20, 2023, the service enables consumers and businesses to send and receive money instantly through their banks, around the clock and every day of the year, with the funds immediately available to the recipient.
And most importantly, the Fed Design FedNow To enable fintechs and other non-banking service providers to integrate instant payments into their more innovative and customer-focused services. This goal is evident in how different the Fed’s approach to non-bank providers is from that of The Clearing House (TCH), operator of RTP, an instant payment service in the private sector.