For many years, I’ve been heavily involved in the world of FinTech, leading teams to integrate global payment solutions. We’ve developed integrations for clients to seamlessly transfer funds across a massive number of platforms.
Handling direct wire transfers, SEPA transactions, Debit Cards, Credit Cards, Mobile Wallets, PayPal, and Alipay has never been without issues. These challenges often kept our tech team busy for months on end. Among the collection of protocols, ACH has notoriously stood out as an exceptionally challenging one to support. It’s an older system with an extended refund window and functions as a PULL mechanism rather than a PUSH. Integrating ACH always posed a question: is the risk worth the reward?
But a massive change is finally coming. Yesterday, the Federal Reserve dropped a groundbreaking announcement: a brand new protocol, FedNow, has been launched. This represents a massive shift. For the first time in 51 years, the US is witnessing the introduction of an instant payments protocol that works across banks and credit unions.
ACH - the hero we deserved
For all its shortcomings, ACH has served its purpose quite well. In an era where rapid financial transactions were nothing more than a futuristic dream, ACH became the backbone of the US payments system. Despite its age, it managed to handle billions in transactions, proving its resilience and adaptability.
But like all great heroes, ACH has its limitations. Its long transaction windows were cumbersome, the pull mechanism made it vulnerable to fraud, and its batch processing nature meant it couldn’t keep up with the real-time demand of today’s digital world. In addition, for most developers the old ACH protocol was as alien as taking an afternoon to work on a large COBOL project.
FedNow - The Dawn of a New Era
With FedNow, the landscape is poised to undergo a seismic shift. Here’s why:
Instant Transactions: FedNow promises real-time payments, which means transactions will be processed within seconds. No more waiting for batches or prolonged clearing times.
New Protocol: FedNow is using ISO 20022, a universal financial industry messaging standard for electronic data interchange between financial institutions. It is far more straightforward than the NASCHA protocol used in ACH.
Enhanced Security: Leveraging modern security protocols and using a PUSH mechanism, FedNow aims to drastically reduce the risks associated with fraudulent transactions, transaction delays, and fraudulent refund requests, offering businesses and consumers increased peace of mind.
Interoperability: Designed to be universally compatible across banks and credit unions, FedNow bridges the gap between different financial institutions, allowing seamless transactions no matter where you bank (in the US).
Economic Opportunities: The speed and efficiency of FedNow could very well trigger new economic activity, making transactions more fluid and reducing the friction associated with moving money.
While ACH is likely here to stay in the long run, FedNow is finally giving us another option for a modern and secure cross-bank payment protocol in the US. For those of us in FinTech, this isn’t just another development—it’s a game-changer.
The landscape of payments in the US is about to be rewritten, and with FedNow, everything is set to change.