A game changer in real-time payments

The ability to make real-time payments at any time and on any day is increasingly important to both consumers and businesses. And while some companies facilitate banks’ ability to offer real-time payment services to their corporate and retail customers, those options have been limited in their availability.

But when the Federal Reserve debuts its FedNow program later this year, the ability to conduct real-time payments is expected to expand exponentially.

“The Fed put its full weight and confidence behind real-time payments, and that opens up a whole new world,” says Chris Campbell, chief policy strategist at Kroll, a risk and financial advisory firm, and a former assistant Treasury secretary.

Consumers and businesses will benefit from FedNow in several ways. “Consumers could avoid the need to use expensive check-cashing services, engage in high-cost borrowing or incur overdraft or late fees,” says Jonathan Shiery, partner director of financial services at Guidehouse. “Immediate access to funds and the ability to instantly make bill payments benefit small businesses that may otherwise need to seek costly short-term financing. “

Additionally, the service is seen as a good complement to the Fed’s existing FedWire and ACH offerings. “The Fed has looked for several years for a product to sit alongside its other services,” says Craig Ramsey, head of real-time and A2A payments for ACI Worldwide.

FedWire is for handling large value payments, primarily from corporations, and ACH provides a service for consumer payments, but both require overnight settlement and typically are available only during business hours. “The Fed has long had a gap in the marketspace for instant 24/7 movement of funds,” Ramsey says.

Some private companies offer similar services, such as Zelle from Early Warning Services and The Clearing House’s RTP, Ramsey says. But EWS and TCH are owned by some of the largest banks, which may explain why thousands of community and smaller banks have held back from offering real-time services, he says.

And while the Fed’s involvement could compete with private initiatives to offer real-time payment services, many believe fintechs will benefit from the endeavor by developing additional channels and services to facilitate these payments.

“The launch of FedNow provides an opportunity for fintechs in the payments space to help enable financial institutions and/or their clients, both businesses and/or consumers, to gain access to such services, which can and will support a wide variety of use cases,” says Carl Slabicki, co-head of global payments and treasury services for BNY Mellon.

Use of FedNow will initially be restricted to depository institutions. But Shiery notes that the Financial Technology Association, which represents many fintech companies, is asking the Fed to make the service available without going through banks.

Fintechs with strong payment services should be “well-positioned to continue to gain market share and customer network strength, especially fintechs in the low-dollar, peer-to-peer payments space, where funds availability is already almost immediate even if settlement on the back end happens through ACH rails,” Shiery adds.

To participate in FedNow, banks will either need to make changes in their backroom operations or hire outside vendors that can do that for them.

“Banks in the U.S. have already and will continue to need to support their plans to integrate with either FedNow, RTP or both,” says Slabicki. “Further, banks will need to plan for how they manage interoperability between those networks by building such themselves or working with their service providers to do so, to ensure their account holders can effectively send and receive seamlessly between both FedNow and RTP.”

In addition to the technical changes, banks will need to educate the public about the service and market it, Ramsey says. Strong risk-mitigation systems will also be needed because instantaneous payments require additional scrutiny.

“Banking institutions must familiarize themselves with the operational risks associated with changes in payments infrastructure in tandem with conducting necessary product preparation and planning,” Shiery says. “Financial institutions should continue to follow how regulators view Regulation E’s scope and protection in real-time payments as this has been an area of intense discussion.”

Smaller banks may not be able to provide all of this on their own, but they should be able to find service providers that can perform risk checks and deliver transactions for them, says Ramsey. Some banks may also use their existing transaction processors to provide the necessary infrastructure and services to participate.

Lauri Giesen is a BAI contributing writer.

Explore what’s new in the payments space and where the sector is heading in the BAI Executive Report, “Banks are getting more personal with payments”