US· 9min July 12, 2023
The discussions and preparations are all but over. The Fed’s instant payment service, FedNow, goes live this month, seeking to fill the gaps in the existing real-time payment infrastructure in the US.
Of all the other payment rails in the US, the only existing true instant payment service currently in operation is The Clearing House’s RTP. FedNow adds another platform to this list, as a real-time gross settlement system that moves money between banks with instant availability.
Of course, there are services such as Zelle that feel like an instant payment platform to consumers, but these have limitations. Zelle might be connected to more than 1,700 institutions, but it doesn't involve any real time settlement between banks, so there are limits that banks set on these transfers such as dollar amount, volume and use case.
Banks obviously have to protect themselves, and without any settlement between banks for Zelle payments they could potentially be out of pocket by vast amounts if this activity wasn't strictly limited. The knock-on impact this could have on the wider economy would also be very severe. FedNow, like RTP, has a much higher limit – as the settlement happens in real time – so banks can use it to provide a much more comprehensive instant payment service to customers, reducing the risk.
The whole purpose of FedNow and instant payments for that matter is to provide a 24/7 365, always-on service for customers. In this day and age, consumers are used to being able to get what they want instantly, and they expect the same from their banking services.
Therefore, any outages are going to be problematic. With banks using cloud-based systems to process instant payments due to their flexibility and scalability, they could find themselves with a major headache if their cloud provider suddenly has an outage or is compromised for some other reason. This is why we'd recommend moving to a multi-cloud model – it offers superior resiliency compared to using a single cloud, virtually eliminating the possibility of any down time, and will make things like system maintenance a lot simpler too.
They aren't entirely like-for-like and FedNow certainly isn't going to be a replacement for RTP. The two services will sit alongside each other. FedNow owes a great deal to RTP, which has effectively pioneered the instant payment market in the US since launching in November 2017. RTP has already built a network of some 300 banks, reaching 65% of all US direct deposit accounts, and set the standards by which FedNow will be judged.
As such, RTP has been one of the forces behind educational efforts for the US banking industry, participating in industry workgroups such as The Faster Payments Council. This workgroup has produced a great deal of helpful and insightful materials for banks that want to prepare to join the instant payment revolution.
The arrival of FedNow is likely to spark a wave of innovation in the fintech market. With two consumer-focused instant payment platforms in the shape of FedNow and RTP, there's a chance for an ecosystem to develop around these payment rails. All sorts of innovative services will pop up, taking advantage of the real-time nature of RTP and FedNow, in the way that an ecosystem developed around the ACH networks. It's effectively an open space to go and build for fintechs.
As fraudulent activity evolves over time, and new platforms will inevitably find themselves the target of criminals, banks need to continue to educate themselves about fraud prevention. The landscape is constantly shifting, so finding a partner that can build fraud checking systems into your instant payment services is a must. Our fraud prevention solutions use machine learning technologies to identify and stop scams, constantly refining its approach as the threats change.
Banks need to consider a number of questions very carefully. How will you handle exception processing? What are your liquidity needs and how might connecting to FedNow impact them? It would be very easy to fall into the trap of just assuming that you could use the same processes and procedures as for Fedwire or ACH. FedNow is an entirely different proposition and will require a new approach.
The technical burden of connecting to FedNow is high. It's not as simple as maintaining a connection to Fedwire or ACH and the messaging ISO standard is different. The best way forward for banks that want to connect to FedNow is to look to a third-party service provider such as Form3 that has deep experience of connecting to real-time payment services in the US and other markets. Building these connections for yourself will involve a massive investment in terms of time and money, so finding a partner that can do all this for you – and maintain the connections over time – makes much more sense.
Banks that aren't yet set up for FedNow shouldn't be too concerned at this stage. It's likely that adoption will be slow initially. However, when FedNow reaches the tipping point – in terms of the numbers of banks connected and consumers utilizing FedNow-enabled payment services – you don't want to miss the boat.
It will take time to implement connections to FedNow, so the time to act – if you haven't already – is now. Initiate conversations with service providers that can help you connect to FedNow and begin putting your plans in place. If you're not ready to move onto FedNow and your customers are, you can bet your bottom dollar that these customers will be moving to a competitor.
Miriam Sheril is the Head of Product in the US at Form3 with responsibility to build out and enhance Form3’s product capabilities in the US, focusing real time payments and other rails such as the Federal Reserve’s FedNow service and The Clearing House’s RTP service. Miriam comes with more than 13 years’ experience in financial services, where she focused on product and software development and management. She joins Form3 from the Federal Reserve Bank, where she was most recently the FedNow Core Product Manager Lead AVP, responsible for the design and build of the FedNow product since its inception.