Modern Treasury Sees ‘Tectonic Shift’ of Private Innovation From FedNow Launch

In the run-up to the launch of the FedNow real-time payments platform, financial industry insiders are anticipating what the Federal Reserve’s new baby will look like when it arrives sometime in summer 2023.

Among them is Sam Aarons, co-founder and chief technology officer of Modern Treasury, who told PYMNTS that once the real-time payments system is unleashed, there will be a wave of innovation.

“It’s going to be a really tectonic shift in payments,” Aarons said. “The idea of receiving payments 24/7, 365 days a year is already a huge shift from what most American consumers are used to, so being able to have a system that is in real time, that works all the time, and with few restrictions is going to be a dramatic shift.”

Shift in Consumer Payments

Given that consumers already have many ways to digitally move money, Aarons said he doesn’t foresee FedNow replacing any one payment system as much as it will further the shift in how consumers use them in the future. Whether it’s wire transfers, automated clearing house (ACH), peer-to-peer (P2P) payment apps, or even digitally converted paper checks, each will still have their place and favored use case within the payment ecosystem.

“Payment systems never die, they just change and find the niche they are really good at,” Aarons said. “However, [real-time payments are] going to pull a lot more use cases from ACH that are less cost sensitive.”

Wire transfers will continue to be the preferred method of payment for large sum transactions, such as real estate dealings, that cannot be rescinded and require verification, he said.

While the use of paper checks continues to decline, they’re still the standard in several huge categories, such as payroll or government disbursements, but FedNow may spell their practical end.

Then there’s eCommerce, a domain that is currently dominated by cards and the protections most carry, including the relatively easy recourse they offer in the case of errors or returns. While Aarons said he does not see that dominance disappearing anytime soon, cards also have vulnerabilities that the impending real-time player will chip away at.

While such a change away from cards would clearly mark a shift for merchants and banks, it would also require a consumer mindset and habit change from something that is familiar and trusted. That will take time, with the first use of an alternative payment being the toughest, but likely not the last, as new habits replace old ones and legacy fee structures face growing skepticism.

“I think Venmo did a fantastic job pioneering the UX and UI around what instant payments could look like, and I think Zelle has taken that a little bit farther in terms of coverage, and FedNow is going to take that even farther,” he said.

The Education Gap

As much as Aarons said those services have done a “fantastic job educating consumers,” he also said there’s still more work to be done enlightening individuals and institutions about the availability and upcoming changes to the inter-bank systems like real-time payments and FedNow.

“I think consumers need a little bit more education about that, and then corporates will follow consumers,” he said, noting that corporates don’t really know that these systems are coming either because they tend to use ACH and wires and don’t have to implement them.

“I think when we see the consumer education go into FedNow and [real-time payments], we’ll see the same thing follow with corporates where they’ll say, ‘Oh, consumers know about this. Now I should investigate offering this into my product,’” he added.