The race to real-time: Why instant payments matter
The financial services industry is experiencing a pivotal shift with the rise of real-time payment systems.
Demand for faster, more secure financial transactions has never been greater. Consumers and businesses alike expect immediate access to funds, and financial institutions are responding by integrating real-time payment systems into their service offerings. FedNow, recently introduced by the Federal Reserve, and RTP (Real-Time Payments), developed by The Clearing House, are leading the charge, enabling instant payments that settle within seconds, any time of day, every day of the year. This article offers guidance for financial institutions preparing to adopt or expand their use of instant payments by providing a comprehensive overview of these systems, their regulatory frameworks, use cases, and the compliance considerations institutions must address.
Meet the platforms: FedNow and RTP in focus
FedNow is the Federal Reserve’s instant payment system, designed to facilitate real-time transactions between participating institutions. Since its launch in 2023, it has seen rapid adoption, with approximately 1,400 institutions onboard as of mid-2025. Notably, the majority of these are small to mid-sized financial institutions, reflecting FedNow’s accessibility and appeal to community banks and credit unions.
In contrast, RTP is a private-sector solution developed by The Clearing House, a consortium of large banks. Launched in 2017, RTP has attracted over 1000 participating institutions, with a strong presence among some of the nation’s larger banks. While both systems offer similar functionalities, such as instant settlement and 24/7/365 availability, they operate on separate rails and are not currently interoperable. This distinction has led some institutions to adopt both systems to maximize connectivity and flexibility.
Rules of the road: Navigating the regulatory terrain
The regulatory frameworks governing FedNow and RTP are distinct but share common elements. FedNow, being a government-operated system, is regulated under Subpart C of Regulation J, supplemented by Operating Circular No. 8 and the FedNow Service Operating Procedures. Consumer transactions processed through FedNow are also subject to Regulation E, which provides protections for those consumer electronic fund transfers. For non-consumer transactions, the Federal Reserve applies its own version of UCC Article 4A, ensuring consistency across jurisdictions.
RTP, as a private network, adheres to its own RTP Operating Rules, which are updated periodically and made publicly available on the RTP website. Like FedNow, RTP transactions involving consumers are subject to Regulation E, while non-consumer transactions are governed by the many state-specific versions of UCC 4A. Institutions must carefully navigate these regulatory nuances to ensure compliance and mitigate risk.
Beyond speed: Use cases that drive value
Both FedNow and RTP offer real-time settlement and continuous availability, making them ideal for a wide range of applications. For example, for financial institutions that want to enter the instant payment space cautiously, both systems allow the institutions to limit their support to only receiving transactions. Both systems also allow institutions to support sending and receiving payments and include a “Request for Payment” feature that enables users to solicit payments from others. This functionality is particularly valuable in gig economy scenarios, allowing workers to request and receive immediate compensation. Other emerging use cases include merchant and digital wallet cash-outs, expedited payroll access, and real estate or commercial closings. The ability to transfer large sums instantly is seen by some as a more secure alternative to traditional methods like cashier’s checks. While FedNow recently increased its transaction limit to $1 million, RTP supports transfers up to $10 million, making it more attractive for higher-dollar or large commercial transactions.
Fighting fraud and risk: Mitigation strategies
The irrevocable nature of instant payments introduces new challenges in fraud prevention. Recognizing this, FedNow recently implemented several risk mitigation features, including customizable account activity thresholds. Institutions can set transaction limits and frequency caps based on account type or user profiles, allowing for tailored risk management strategies.
Additionally, FedNow requires institutions to report suspected fraud and maintains a negative list of known bad actors. It also encourages the use of the FraudClassifier and ScamClassifier models, which help institutions categorize and respond to fraudulent activity more effectively. These tools support a proactive approach to fraud detection and prevention, emphasizing the importance of customer or member education and strong authentication protocols.
Contracts and clarity: Compliance through agreements and disclosures
Institutions adopting FedNow or RTP must consider the implications for service agreements and consumer disclosures. A well-crafted service agreement should clearly explain the system’s functionality, address the primary risks associated with instant settlement, and outline any limitations or security procedures. Having an agreed-upon security procedure is especially critical for commercial accounts governed by UCC 4A, where documented security procedures can shift liability in cases of unauthorized transfers.
From a consumer protection standpoint, when a new electronic fund transfer service is added to a consumer’s account, Regulation E requires new disclosures – unless the new service is subject to the same terms as other existing services for which disclosures were previously provided. When new disclosures are required, they must be provided either at the time of sign-up or before the first transaction.
For institutions offering receive-only functionality, Reg E may not trigger a redisclosure requirement if previously disclosed terms remain unchanged. However, institutions should consult legal counsel to confirm their obligations in this scenario. In cases where fees or terms differ, updated disclosures are necessary.
More than a memo: Communicating with account holders
The rollout of instant payment systems presents a unique opportunity for institutions to engage with their customers or members. By proactively informing account holders about the availability and benefits of FedNow and RTP, institutions can position themselves as forward-thinking financial partners. Educational efforts should focus on the speed, security, and convenience of these systems, while also addressing fraud awareness and prevention.
Financial institutions may deliver disclosures and service agreements electronically, subject of course to any required consent under the E-Sign Act. Also, because these instant payment systems are likely to be integrated into online or mobile banking platforms, electronic delivery will surely be the preferred delivery method. However, paper delivery remains a viable option, particularly for reaching all consumer account holders. Regardless of the method, obtaining acknowledgment of receipt and agreement to the terms is a best practice for creating a binding, enforceable, contract.
Conclusion: Looking ahead and strategic recommendations
FedNow and RTP are reshaping the payments landscape, offering unprecedented speed, access, and availability. Financial institutions must carefully evaluate their options and balance competing factors such as customer or member expectations, costs, lack of system interoperability, maximum transfer limits, regulatory requirements, risk tolerance, and fraud mitigation strategies. By adopting a thoughtful, strategic, approach to implementation and communication, institutions can not only ensure compliance but can also strengthen account holder relationships and enhance their competitive position.
