FedNow and RTP: Understanding the Issue of Interoperability

Below is an excerpt from the latest in our series of webinars discussing the key aspects surrounding the upcoming launch of FedNow, and the US's move into the next stage of their real-time payments journey. We were lucky enough to be joined by speakers from BNY Mellon, Wells Fargo and Bank of America who provided key insights into how the issue of interoperability should be approached, and what steps banks need to think about in their move to real time.

Since the launch of RTP in 2017, the adoption of real-time payments in the US has increased rapidly, with over 200 banks now using the system. Fast forward to today, and the upcoming launch of FedNow is set to be another major milestone in the continuing adoption of real-time payments.

But how these two systems will coexist is another matter. At this stage it is not certain when – or even whether – FedNow will eventually interoperate with RTP, particularly in light of a recent communication from the Federal Reserve. So how will the two systems interact? Which system should be used in different scenarios? And what are the options for banks wishing to take advantage of both systems?

As of 2022 up to 72% of the world has a live or upcoming have real-time payments infrastructure. The US first stepped into this arena in 2017 with the introduction of RTP, the real-time payments system from The Clearing House – and with the arrival of FedNow expected in the summer of 2023, there’s no doubt the US is moving forward rapidly with its adoption of real-time payments.

But questions continue about what the existence of the two systems will mean for banks and their clients. Adding to the complexity, in September 2022, the Federal Reserve released Operating Circular 8, which specified the following:

“A FedNow Participant may not send a payment order through the FedNow Service identifying an originator or beneficiary that is not either (i) a FedNow Participant or (ii) a holder of a deposit account on the books of the FedNow Sender and FedNow Receiver, respectively, in the United States.”

In other words, the FedNow service should not be used for onward remittance to other faster payment systems. This is perhaps unsurprising, given that FedNow and RTP will not interoperate. But why would this be the case, given that both systems handle real-time payments, and both are based on ISO 20022?

In a nutshell, explains Irfan Ahmad, Managing Director, Head of US Payments, GTS at Bank of America, “When you’re on ISO 20022, you’re speaking the same language – but you may not be speaking the same dialect.”

When TCH was developing RTP in 2015, the broader ISO community had not yet pinned down how the ISO message set would be adopted for instant payments. Indeed, the development of RTP was arguably part of the process that helped to shape how this question was addressed. But that also meant decisions had to be made before the ISO committee had defined what the standard would mean for instant payment systems.

In practice, ISO 20022 has considerable scope for variation when it comes to the flow of messages that are sent and received, as well as the structure and amount of data included in messages. And given that FedNow is a later development than RTP, the Fed has had more time to explore how to implement ISO 20022 in a more globally compliant way.

FedNow, for example, allows for more information in its messages than RTP – an approach which comes with some challenges as well as benefits. “For example, when you’re a bank, and you suddenly have all this remittance information, do you choose to display that remittance information?” comments Ahmad. Other implications of longer message sets include practical questions about online channels and databases, and how to deal with fraud.

At the same time, the lack of interoperability between the two systems presents something of a challenge for banks – but what does it mean in practice?

Interoperability has a number of facets, as Ahmad explains. “There’s the interoperability between the networks, which isn’t there,” he says. “There’s the interoperability between banks – how do you get something from somebody who’s on RTP to someone who’s on FedNow, which clearly wouldn’t be allowed here? And how do you then facilitate some sort of forward remittance or correspondence on the network as well?”

In practice, it’s likely that the outcome will be similar to the world of wire payments. As Ahmad predicts, “Your reach is really going to start depending on those banks that are originating into both networks. So you’ll have the receive-only banks dependent on the banks that are originating from both sides, similar to how things work with CHIPS and Fedwire.”

For banks, the question will be at what point the incremental reach offered by FedNow will represent a clear value proposition in terms of originating to both networks. For banks that proceed with FedNow, much of that decision will be driven by the network’s value proposition, and by the reach the network offers for customers.