FedNow’s competitive value for smaller banks

The world of real-time payments is about to have a new heavyweight contender as the Federal Reserve rolls out its FedNow Service in 2023.

Brian Keefe from NICE Actimize joins us to tell us more about FedNow and how the new service stands to benefit smaller banking institutions.

A few takeaways from the conversation:

• • Along with offering the speed element, FedNow will also provide visibility into transaction information that wasn’t previously available.

• • Access to technology is a challenge for smaller banks, so FedNow could make smaller players more attractive to younger demographics.

• • Regulators are making banks more liable in the event of a scam, so institutions need a better education game to protect customers.

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INTERVIEW TRANSCRIPT

Brian Keefe, senior pre-sales consultant at NICE Actimize. Welcome to the BAI Banking Strategies podcast.

Thanks for having me.

So Brian, we’re here to talk about real-time payments. Start us out, if you could, by setting the scene in terms of where things stand with real-time payments? I’m particularly interested in how close is the average American to being able to conduct their financial transactions in real time.

Great question. So I think for the average American who banks with a major international or national bank, and that bank offers the services of, say, a Zelle, or Venmo, or PayPal or even their own homegrown platform, the answer is now. But I’ll caveat with there are still some delays in the background, depending on if all the institutions that they’re transacting with – say, I send you money, are they both in agreeing institutions for Zelle or Venmo? That’s where you may see some delay in the processing of the transaction, whether it be on the remitting side or the receiving side. But I think with that as well, and I think of real time payments being, say the RTP or The Clearing Houses of the world, where they are owned and operated by a consortium of banks. So that limits, I won’t say the average American, but some individuals with access to that. But I think with the looming release of the FedNow, it may rectify some of those issues.

You mentioned FedNow. FedNow is by all indications something that will be up and running probably by summer, maybe by fall at the latest. Tell us a little bit more about FedNow, including how you are looking at FedNow in terms of the impact that it may have on the real-time payments world?

With the introduction of FedNow, it will marry up with the other systems, whether it be the Zelle, the RTPs or The Clearing Houses of the world. It’ll provide the user, or the average American, or the banker access to a different payment platform. So it’s certainly going to expand the reach of the real-time payment, as well as even increase some of the risk that may be out there within the real-time payment world.

We’ll get to the risk part later here. But a lot of what we are hearing regarding FedNow, it sounds like a lot of the services that are already available in the market. The Clearing House, which you’ve mentioned before, probably being the most recognized name in that space. What are you expecting from FedNow that stands to make it different from what’s already out there and how will banks be able to benefit from those differences?

So I think with the FedNow, once it’s rolled out and trusted and tried by the average consumer, and this is going to incorporate businesses as well. It will certainly add an advantage to the consumer in the business world by speeding up the person-to-person transactions, the person-to-business transactions. But it’s also going to bring in the business-to-business, the business-to-consumer, where it’s going to make available funds immediately for, say, a small business that wants to expand into certain areas. Instead of waiting days to have a payment clear or a payment clear on the sending outside, they’re going to have that funds available immediately. So it’ll allow them to expand their infrastructure, maybe to branch out to different products that they couldn’t do before because of liquidity problems. It’s going to provide visibility of transactional information that they wouldn’t have had before. And those are just a few examples of the benefits of the FedNow system.

On the availability side that you were talking about here, do you mean this in the sense of being more accessible to smaller bank institutions in a way that might enable them to be more competitive offering RTP? Access to the latest tech is often a challenge for smaller community banks and credit unions, so is the Fed creating a more lowercase-D “democratic” system that might also be beneficial to smaller businesses, as well as to retail customers?

So with the FedNow system, it’s certainly going to be accessible to the larger banks, the mid-size banks and the smaller banks. It’s going to give them access to a system they didn’t have  before, because the RTPs, the Zelles, being run by a consortium of banks, large international banks, maybe these smaller banks didn’t have access to that because of price range or technical challenges. But now with the FedNow system, it’s going to make it available in the Federal Reserve. So rather than being you needing to utilize your Fed Reserve account in the particular bank, it’s going to go directly to the Fed. So it’s going to open up a lot of different channels for these smaller banks and the credit unions to utilize that money, to draw in maybe those clientele that wanted to use it, didn’t want to go to a larger international national bank – they wanted to stay local, so now they’re going to have that option with this FedNow system being rolled out. The Fed has over 10,000 banks as part of their consortium where the RTPs and The Clearing Houses of the world maybe had a few hundred. So it’s certainly, you can see just by those numbers, it’s going to expand the demographics exponentially.

It’s no secret that banks collectively make a decent chunk of change from what is politely known as processing time, what is more commonly called “the float” – that is, the day or two or three between when a transfer leaves the sending account and when it is credited to the receiving account. So of course the amount of money and float status these days is much less than what it was before widespread digitalization. But with FedNow, and RTP more generally, what does the future look like for the float and the revenue that it generated?

We always look at the float being the consumer and having our money tied up in their system for even a day, say, having them utilize these funds to do other things within their institution. But I think what people don’t realize with that float account, there’s a lot of other expenses that the institution needs to put out in order to maintain that float account. So I think with the absence of the float account with the RTP being rolled out, it’s going to make those funds more available for other things to maybe expand on certain projects or avenues or things they want to do within the institution. So they may be even saving money by reducing that or eliminating that float account.

It’s called real-time payments, but how real-time? I mean, how fast is fast? And from what you see, kind of like the idea of Moore’s Law on microprocessor speed, is there an outer speed limit at which banks and nonbanks can process transactions, and something that will still keep the millennials and the Gen Z crowd happy?

With the real-time payments compared to today. Today it may be a few seconds. That’s not guaranteed on, say the receiving side. If I send someone a Venmo payment, it may take two or three days for it to clear. So that’s not the real-time. With the real-time, as in the Fed real time, it’s going to be instantaneous, two seconds time a delay between the processing and receipt of that information, along with all the other information you get with that particular payment now that’s going to be pushed through, be it transactional information, more robust customer information. So the millennials, I think, and the Gen Zs are going to be very happy with the rollout of the FedNow, just for those purposes alone.

The thing about speed is that it comes with an inverse relationship to security, that trade off that we hear so much about. The trick has been to find a balance that everyone can live with. What are the key speed versus safety concerns for banking institutions regarding real-time payments that are front and center for banks these days, based on the conversations that you are having with your customers and your prospects?

Yeah. So you can understand with the speed of payments that are going to be instantaneous, the money can’t be taken back. So institutions are taking that into consideration to see where safeguards can be put up, whether it be at the FI or with the platform they’re utilizing to ensure that both parties have adequate monitoring capabilities for, say to ensure that the person that is doing the transaction is really the person. Now they need to look at to understand to ensure that even if the transaction is an unauthorized transaction or unauthorized, that they have safeguards in place, whether it be the onboarding piece or other facets or technologies in place to ensure that the transaction itself is as valid and genuine as possible.

You make a good point about the guidance coming out of Washington about regulators redefining what is an authorized payment versus what is an unauthorized payment, and that redefining is being done in a way that has the potential to shift considerable liability to the bank. So if real-time is the target for payments and transactions more broadly, is there a complementary set of rails on the fraud protection side that is going to provide more comfort for institutions as the fraudsters inevitably get more aggressive and more creative?

Yeah. I think with the conversations that are going on today, whether it be at the government side or the FI side, or a combination of both, they’ve come up with some great suggestions for these particular challenges that they’ll face. Whether it be looking at the digital identity adoption, where instead of just looking at verifying with a mobile phone number, or account number, or user ID, they want to get more personal with the individuals, as well as investing in behavioral and device biometrics. I know you look at the behavior biometrics of an individual goes beyond you getting an MFA challenge. It goes to the keystroke cadence that you may do, the way they handle the mobile phone, the angling, the voice identification, as well as ways to detect anomalies in a transaction in real time. Because when this gets instituted, it is certainly real-time. There’s no segue or a lag where you have time to go back and review it and make a determination. The institutions are being suggested to partner with fraud prevention platforms that ensure that what they offer is what they need with the wealth of transactional data, because the behavior side of the suggestion has to come with transactional history. So the institutions know what Brian’s behavior is when he’s using an ACH transfer, or wire transfer, or Zelle transfer. That’s all crucial information that an institution needs to know in order to get ahead of these fraudsters. They also want to look at the IP monitoring, because you know that there’s malicious domains out there that utilize stolen credentials, perhaps – that if the institution has the ability to make a list of these particular nefarious IP addresses, they’re able to better identify and stop the money before it goes out the door. And I think last, but not least, is their suggestion to migrate to a cloud. Because we know with any institution that has a platform in place, a fraud-prevention platform, you don’t have the time to make a call to the IT people to get in the door to upgrade the software. Being on the cloud allows the provider to upgrade the platform itself overnight or instantaneously. They can institute those new fraud risks that were identified so that you know that your institution has the greatest protection they need.

The payment apps and services like the ones you mentioned – Venmo, Zelle, PayPal – they’re all ripe targets for the growing number of thieves and scammers that are operating out there. And each of them has had their challenges on the security side, though it seems like the worst headlines we see these days tend to involve Zelle. What is the industry learning from its Zelle experience being part of that consortium that it can use to make the service safer? And do banks have the technology and the operational processes in place to put whatever lessons they’re learning to good use?

Number one, I think what we’ve learned from the P2P scams, whether it be Zelle or the others, is that first and foremost, they have to educate the consumers and the small-business customers about these particular scams and how they were perpetrated, because we know that everybody responds to an email that says “urgent”, click on this link, or some other sort of urgent request, or even an email you get from somebody requesting information you think is perhaps someone of a kind nature, but they’re actually a nefarious actor trying to solicit information from you to gain access to your account, whether it be an account takeover or a fraud such as that. So I think number one is the education side. And I think on the technology side, the institutions, with the fraud that’s going on today, are looking at specifically that technology and the operational processes that they have in place to ensure if we’re subpar to the standards, they’re certainly going to make the adjustments, whether it be financially or with the individuals in their bank to bring them up to that level, if not exceed that to make sure that their institution is ahead of the curve when it comes to instituting these real-time payment products in their institution.

To wrap us up, Brian, let me ask you the consequences questions for banks, particularly community banks and credit unions as well. What’s at stake in getting the real-time payments thing right in all of its facets? The availability, the experience for the customer, security, the whole nine yards, as digital becomes ever more the channel of choice for Americans doing their banking.

That’s a million dollar question, a trillion dollar question in this regards. The availability, I think with what we see today in the millennials, the Gen Zs and the others out there, they want to have transactions posted today. So I think having that fine line between the availability adds to the customer experience, but you can’t forego the security. We need some sort of friction between the client to ensure that they know that the FI is doing the right job. So I think with all that, in consideration with the accessibility of, say, the FedNow, where it’s bringing that accessibility to these smaller and mid-market banks, I think that will make it a better experience for everybody when these things are rolled out.

So Brian Keefe, senior pre-sales consultant at NICE Actimize, many thanks again for joining us on the BAI Banking Strategies podcast.

Terry, thank you for having me today.