Faster payments and faster payment technologies are big issues – and opportunities – for payment processing. Recently, the Federal Reserve announced it is ready to join the fray. FedNow is coming – with a launch target date somewhere between 2023 and 2024 – continuing the payments landscape transformation that many businesses and banks began with the introduction of The Clearing House’s (TCH) Real Time Payment (RTP®) product in 2017.
In a press release issued by the Board of Governors of the Federal Reserve System, the Board stated that: “The rapid evolution of technology presents a pivotal opportunity for the Federal Reserve and the payment industry to modernize the nation’s payment system and establish a safe and efficient foundation for the future. The Federal Reserve believes faster payment services, which enable the near-instantaneous transfer of funds day and night, weekend and weekdays, have the potential to become widely used and to yield economic benefits for individuals and businesses by providing them with more flexibility to manage their money and make time-sensitive payments.”
Why FedNow, and Why Now?
So, what is FedNow? The Fed is going for true real time gross settlement transaction services with integrated clearing functionality through FedNow. This will be a real time, 24/7 payment and settlement service for faster payments in the United States. To the average person, current faster payment services seemingly offer similar services to end users, however aside from TCH RTP, there is bank to bank settlement float involved so we’re often not quite in real time yet.
FedNow is an effort by the Federal Reserve to build a safe transaction network, spur even more innovation around faster payments and operate alongside existing faster payment technologies.
In the same way TCH RTP offers universal financial institution accessibility with transparent technology, standards and pricing, FedNow will also be open to financial institutions of all sizes. The Federal Reserve believes FedNow creates a pathway for smaller banks in rural and remote areas to offer faster payment services to their communities, delivering true nationwide reach.
Why Interoperability is Needed
All good, right? A discussion about interoperability is needed though. The Fed is making interoperability a goal for FedNow, but it is not a central feature, at least not at launch.
Let’s face it, five years is a long time. FedNow may be simply too late to the faster payments market. Looking forward at what the faster payment landscape could look like five years from now, here are ideas for consideration by banks currently grappling with customers demanding faster payments, proliferation of TCH RTP adoption and a future that includes FedNow.
- He who enrolls, controls. User base is key to any modern conversation about payments. In order for any payment to be successful, users must be able to reach as many other users as possible. TCH RTP® already reaches more than half of the demand deposit accounts in the country through just the TCH ownership group. Taking into consideration their vast customer base as well, it is positioned to already be the de facto standard for faster payments. By the FedNow release date, TCH RTP will have access to pretty much every account holder in the US with transactions possibly measured in the billions.
- Ubiquity matters. From the perspective of the end user, true universal payment access will mean that there is no need to worry about which network the payment is traversing. Think about the first ATM machines and the early reality of using a debit card. Remember driving around town to find a machine that matched your debit card? Today, you can bank almost anywhere at any time through pretty much any ATM. Interoperability ultimately means a better user experience and that leads to more real time transactions.
- Five-year head start. Product managers across the nation are already busy formulating business plans centered on TCH RTP. Imagine a table of bank customers at dinner talking about how they can instantly transfer money from PayPal, a product enhancement recently announced by PayPal and JP Morgan Chase. For the rest of the table, that same transfer can take days. How long will that customer wait for the same capability? Can financial institutions really take the risk their customers are willing to wait for FedNow to come to market and be widely adopted?
- Speed of adoption. The introduction of a second real time payment network doubles the amount of resources for corporations and banks to move to it. Since it’s not likely that banks and corporations will be able to double their resources to adopt and manage two separate systems, adoption of FedNow will be slow. There will be a focus on core, required capabilities to operate on dual platforms, pushing aside the ability to investigate and embrace innovations offered by the new platform. The real work will just be making sure both systems work. For FedNow to instantly catch up and be competitive and a true alternative to what already exists (and what will exist in 2024), interoperability must be included from the start. Interoperability by the Fed will keep the momentum that TCH RTP enjoys while still making the alternative much easier to adopt.
There’s a five-year window to plan and strategize. And within that same window, financial institutions must explore emerging faster payment systems and the innovations still to come between now and 2024. What are your thoughts, concerns, aspirations for FedNow?
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The public comment period for FedNow is open through November 7, 2019.