FedNow is live…now what?

FedNow is officially live. With the launch comes the potential for financial institutions to expand and provide different products and services that they are just touching on today.  

Brian Keefe from NICE Actimize joins us to tell us more about how FedNow can be safe and efficient, all while allowing for a wider range of innovative instant payment services in the near future. 

A few takeaways from the conversation: 

• FedNow provides small and mid-sized financial institutions with advantages, not the least of which is the potential for increased customer satisfaction. 
• FedNow can also come with challenges, especially for institutions that are still utilizing antiquated, legacy systems. 

• In addition, security and fraud prevention play a key role in implementation and adoption. Building a behavioral-based fraud prevention solution is an important consideration. 

INTERVIEW TRANSCRIPT 

FedNow is just getting started. With its launch this summer, it has the potential to expand and provide different products and services that it’s just touching on today. Brian Keefe, a veteran financial crimes investigator and senior pre-sales consultant for NICE Actimize, says FedNow can be safe and efficient, all while allowing for a wider range of innovative instant payment services in the near future.  Brian, welcome to the BAI Banking Strategies podcast.

Thank you for having me, Holly. 

Absolutely. So, now that the Federal Reserve has launched its realtime payment system, FedNow, can you give a high-level overview of the system? 

FedNow is an instant payment rail, not so much a payment system per se as a Venmo or PayPal, and it was developed in that manner so it could utilize those realtime payment products, or those others that maybe an institution develops on their own that they can extend to their customers utilizing the FedNow payment rail, which they’re able to send instantaneous payments or receive payments 24 hours a day, seven days a week, 365 days a year. 

And you mentioned Venmo, some of those other payment systems, can you talk a little bit more about what’s new and different about FedNow versus the other platforms that have been around for a while? 

FedNow is more of a rail, so it’s not something that a consumer would have direct access to. It would be something that their institution would utilize in bringing in, say, a PayPal or a Venmo or Square sort of solution to be able to offer those fast payment or instant payment options to their customers. It’s going to help them route payments and guide those payments in an instant manner, so it’s a little different than people compare it with the Venmos and those others out there, it’s more of a, an underlying architecture. 

And why is FedNow important to the overall ecosystem? 

FedNow was designed and developed to be a foundation for a broader payment network. It’s going to allow the development of a wider range of modern and innovative, and hopefully safe, instant payment services, which is supported by realtime settlements. Which is a huge factor. Building on that, the premise was to allow those to be very innovate, perhaps offering a different way of doing things with a new trusted payment rail such as the FedNow. They’ve taken a proactive approach in that sense and started user groups, those that are participating in the- the pilot program and those that are involved in it live now, to give their feedback and help them develop and modernize the functionality of the FedNow service, developing additional use cases for the FedNow system. So, we can just imagine over the next year or years that you’ll see a lot of expansion and different products and services that the FedNow service will be able to offer that it’s just touching on today. 

And Brian, building off of that, how does FedNow give banks and credit unions a competitive advantage? 

There’s a lot of incredible benefits that the smaller banks and the credit unions would be able to capitalize on. It’s first about considering both the customer satisfaction angle and the monetary incentives of being able to offer the RTP services. Say if they’re not a large bank like the large global ones that we know of, they may not have had access to realtime payment platforms such as FedNow, so they may not have been able to offer and expand their products and services to, say, people or to businesses, be able to utilize the back and forth, whether it be business to business, consumer to business, or the variations of that, to be able to utilize bill payments, prepaid card reloading, mobile wallets. I know I do it all the time for my son, he’s always asking for money on Greenlight, so being able to- 

(laughs). Sure. 

… to offer those services that maybe they can’t offer now on a different scale. Because we know that some institutions, even the larger ones, may not have those particular products or services offered, but now the smaller and mid-market banks are going to be able to bring that technology and capabilities in to include immediate payroll, or you talk about the needing relief from a particular disaster, being able to give those funds when you need them is going to certainly go towards the customer satisfaction side.

So I think with those factors involved, it’s certainly going to bring them up to a level playing field, if not exceed what we see today in the larger and- and mid-sized banks. I will say last but not least, but it’s one of the biggest crucial factors, is giving them access to the liquidity and cashflow they haven’t had before, allowing them to expand their footprint, and broaden the spectrum of products and services they’re able to offer to their clients, which, again, is going to give them that level up they don’t have today. But last in this, they need to understand that with these emerging use cases, there’s always challenges involved with coming on board with, say, a FedNow or offering an RTP service. 

Let’s talk a little bit more about those challenges. You’ve certainly given some compelling benefits for banks and credit unions to jump in, but what are some of those potential internal challenges that might come up as a result of adopting FedNow? 

Yeah, first and foremost I think that the smaller and mid-market institutions, credit unions and banks, are probably working on legacy systems, those that run off of servers and the-the antiquated systems that we see today.

Sure. 

They will need to implement something that’s going to be able to keep pace with the technology, the faster payment piece, so it’s going to be an investment in technology, infrastructure, staffing. Again, doing away with those legacy systems that may be incompatible with the FedNow system, and integrate something more complex. 

Consumer adoption I think is some of the challenges we see where people aren’t familiar with particular products and services, or with the FedNow platform. That’s going to have some work involved with it, whether it be investment in education or outreach, to have their consumers understand the benefits of this. It’s not as scary as people think it is, it’s education-wise. And I think bring in the fact that they need to have some sort of a solution in place, say, a fraud prevention solution, that’s going to be able to keep up and monitor the activities 24/7, because with FedNow and the RTP services that are out there, there’s no sleeping. It’s 24/7, seven days a week. I know many of us have probably done this, you’re up at night, you forget about a bill, I wanna pay it, or I forgot to give somebody money from a dinner we just had, it doesn’t stop with the 9:00 to 5:00 traditional banking services we had in the past. 

To build off that a little bit more, you know, in terms of risk, this accelerated velocity of payment definitely raises the risk for banks and credit unions. What are some of those steps that organizations could take the thwart the fraudsters? 

Yeah, I think the first one, certainly coming from my perspective as an ex-investigator both on the government side and the private side, is having the right solution in place, something that is going to be able to keep up with the realtime pace of the activity they’re seeing. We talk about cloud a lot, where the cloud ability and transitioning to a cloud service is going to provide them with added benefits on the protection side, the interdiction side. 

You also want to look at a particular, say, a solution, again, back to the fraud solution piece, that includes digital identity services, so the ability to verify who this person is above and beyond traditional MFAs we see today. And multi-factor authentication, I’m referring to email address, mobile addresses, because we know that fraudsters have ways of circumventing those particular safeguards. 

You also want to build in a behavioral sort of solution that is not a stagnant rules based, where rules become old in a day, in a minute. The way these fraudsters work, you want something that’s going to be able to adjust and analyze a particular customer’s behavior, and pick out the anomalies from that, because it’s important to be able to see Brian Keefe has a different banking pattern than Kim does, or the others within your institution. So you want a sort of a solution that’s going to pick out those anomalies in a behavior, and trigger those and bring those to the surface to investigate. 

The behavioral analytics and behavioral protection, it’s such an interesting area, and you scratch the surface a little bit. Could you give us an example of how that works in more detail? 

The behavior side, you look at it where a solution should be able to look at a particular person, every aspect of their dealings in your institution, say from login to logout after doing mobile banking, to say, “What is the usual IP address this person comes in from?” Or, the particular browser version, time of day, their velocity in transactions, the accounts or the individuals that usually send or receive money from. Being able to pick out those particular changes in a behavior are much more accurate than applying the transaction to a rules-based piece.

Because we see that, again, where the fraudsters, they don’t know our behavior, and they can’t trick that behavioral model that was specifically developed for that particular client in that channel. It’s amazing the technology that’s out there today, from the digital online banking and the way that people log in, and the authentication practices they choose, to the behavior of the individual and being able to pick out those anomalies, so that’s a huge factor within any solution on that behavioral analytics and protection side of it. 

And Brian, earlier you brought up the cloud, we know in talking with bankers that many financial services organizations are moving their core systems to the cloud. Can you talk a little bit more about how that’s an advantage when participating with FedNow? 

I think FedNow in the broader spectrum of things, it’s certainly going to give them access to specific services quicker, it’s going to make it more secure even perhaps compared to their legacy on-prem systems, to include the transaction monitoring and the fraud monitoring solutions. It’s also crucial for those smaller institutions because they may not have the ability to host their own data center, so it’s going to give them that flexibility not just with storing the data, analyzing the data, but expanding as they grow, and hopefully grow with their footprint with the FedNow service, who’ll give them access to different areas. That’s going to allow them to expand without needing to maintain onsite hardware, be it maintenance side, management, or deployment of particular services. 

It’s also going to help them on the side of the authentication and authorization standpoint. So again, it’s giving them a more secure and faster avenue for those particular areas, and in regards, regardless of, say, it’s a solution or a service they use internally, it’s going to help them with system troubleshooting and upgrades for those particular services. 

So there’s a lot of different advantages to the cloud, and I just mentioned a few just to touch on what we see the crucial factors are for any small or medium institution contemplating going to the cloud, whether it be for the FedNow or the realtime payment services as a whole. 

When talking about realtime payments, it’s important to talk about legislation, that’s a key part of it. Brian, I’m going to ask you to look into your crystal ball a bit, do you foresee any new legislation that may impact an institution offering realtime payment solutions? 

My crystal ball is going to take me back to the ’70s a little bit. 

(laughs). 

You can see from when it was first implemented, the Electronic Funds Transfer Act in the ’70s, it’s manifested itself and adjusted to the changes in technology, the changes in the payment capabilities that are out there. We see with the new amendments to the Reg E, bringing in the liability, pushing it further onto the institutions or to the realtime payment services. Whether it be Venmo or Zelle, they’re now sharing that responsibility of it could be an authorized push payment or an unauthorized payment, they’re sort of bringing those under one roof to say, “Hey, you need to put controls in place to be able to thwart that fraud. If not, you will either share the responsibility or you’ll be solely responsible, even if you’re not able to claw back the funds that were lost.” 

So you can certainly anticipate additional controls being put in place in interest of the consumer, because these faster payments are instantaneous, once they’re out the door, they’re hard, if not impossible, to claw back. Because these fraudsters are very sophisticated in money movements from the initial account to accounts where we can’t see or they’re shielded by legal ramifications. I wouldn’t be surprised if new legislation comes out each and every week, or with the evolving changes in the technology.

Yeah, interesting. Definitely more to come there. And, you know, you mentioned earlier consumer adoption, and we know that any time a new tool or technology is introduced, there could be some trepidation and slow adoption on the consumer side. Brian, as we close out our conversation, can you share what the adoption rate has been so far, and what banks can do to increase adoption? 

When we first had looked at the FedNow and the individuals that were part of that in the early adoption piece, we saw in excess of 35 banks and credit unions that were already preparing to utilize this in that pilot program, as well as 16 services providers in excess of that, and those would be the Zelles and the others that see some use for the FedNow system and want to understand it better. And it certainly has expanded upon that when it did go live late last month in bringing in many more institutions that may have some in trepidation and really wanted to feel the waters first, or have others do it for them. 

But I think it goes back to educating the consumer to the capabilities that FedNow offers their institution, again, whether it be a solution such as Zelle or Venmo, or even a solution or a product that their particular institution has developed on their own to be able to capitalize on the FedNow service. So, again, education I think is a big thing, being able to curb people’s fears about the fraud they hear out there today, and understand it is a very safe and instantaneous sort of solution. 

Great points. Education will definitely be a key factor in the adoption of FedNow. Brian Keefe from NICE Actimize, many thanks again for making time to be with us on the BAI Banking Strategies podcast, really appreciate all the valuable insights that you’ve shared with us. 

Thank you again for having me, Holly.