{"id":811,"date":"2023-04-27T10:10:10","date_gmt":"2023-04-27T14:10:10","guid":{"rendered":"https:\/\/ifintechworld.com\/banking\/fednow-real-time-payments-are-here-what-should-banks-do-now\/"},"modified":"2023-04-27T10:10:11","modified_gmt":"2023-04-27T14:10:11","slug":"fednow-real-time-payments-are-here-what-should-banks-do-now","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=811","title":{"rendered":"FedNow Real-Time Payments Are Here. What Should Banks Do Now?"},"content":{"rendered":"
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OBSERVATIONS FROM THE FINTECH SNARK TANK<\/h2>\n

Years after other developed countries have had real-time payments in place, they\u2019re finally coming to America. The Federal Reserve recently confirmed that FedNow, the government\u2019s version of real-time payments (RTP), will launch this summer.<\/p>\n

Two big questions remain: 1) How will RTP evolve, and 2) What impact will it have?<\/p>\n

Real-Time Payments Confusion<\/h2>\n

It\u2019s clear that not everyone is clear what FedNow is. In an embarrassingly incorrect tweet, Democratic presidential candidate Robert F. Kennedy, Jr. referred to FedNow as a central bank digital currency (CBDC), and claimed that \u201cCBDCs grease the slippery slope to financial slavery and political tyranny.\u201d<\/p>\n

FedNow is not<\/em> a CBDC\u2014it\u2019s a payments service, not a form of currency, and it doesn\u2019t eliminate cash or any other current form of payment.<\/p>\n

There\u2019s also some confusion about who will adopt the new payment service.<\/p>\n

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A Forbes article on FedNow claims that the key factor governing its success will be whether consumers, businesses, and institutions adopt it or not. This isn\u2019t entirely accurate. Consumers and businesses won\u2019t \u201cadopt FedNow.\u201d In fact, they\u2019ll probably never know what FedNow is.<\/p>\n

The key factors governing FedNow\u2019s success are: 1) How many financial institutions will adopt and deploy FedNow? 2) What types of payments services (i.e., use cases) will they use FedNow for? 3) How successful will those institutions be in marketing those payments services to consumers and businesses?<\/p>\n

Bank Demand For FedNow and RTP<\/h2>\n

A study conducted by Cornerstone Advisors found that 13% of banks and credit unions have already deployed real-time payments and that another 30% plan to go live with them in 2023.<\/p>\n

Of the financial institutions that intend to launch RTP this year, 36% plan to use FedNow, 28% will go with both FedNow and The Clearing House (which has been providing real-time payments to financial institutions since November 2017), and 13% will opt to deploy just TCH\u2019s offering.<\/p>\n

Among the banks and credit unions who plan to launch RTP after 2023, one-third will use FedNow, but 60% have yet to determine their RTP strategy.<\/p>\n

FedNow Use Cases<\/h3>\n

What will financial institutions do with FedNow?<\/p>\n

Among banks\u2014who tend to have a higher percentage of businesses (vs. consumers) in their customer base than credit unions do, business-to-business (B2B) payments and account-to-account (A2A) transfers are the most popular use cases for RTP, followed by expedited payroll payments.<\/p>\n

Among credit unions, A2A transfers, expedited consumer payments, and recurring bill payments are the most popular use cases for real-time payments.<\/p>\n

What Do We Need Real-Time Payments For, Anyway?<\/h2>\n

To understand what banks need to know about RTP, I spoke to Peter Davey, SVP and Head of Product Innovation and Labs at TCH. Davey shared what he learned from TCH\u2019s rollout of real-time payments back in 2017:<\/p>\n

\u201cWhen we launched, we felt that B2B payments would be the primary use case to move over to the network. We were mistaken\u2014a lot of it ended up being B2C payments.\u201d<\/p>\n

Davey thinks it will be different in 2023, however:<\/p>\n

\u201cA lot of businesses are going through their own modernization processes. They’re looking for ways to make payments frictionless within their back office. They don’t want to do a lot of manual reporting and banks have to service those needs by creating API interfaces to ERP systems and third-party integrators.\u201d<\/p>\n

The Send-Receive Challenge<\/h3>\n

Do the banks that have already deployed RTP have a head start? Maybe not. Davey points out that most only have the ability to receive real-time payments, not send them. This is an issue because, as Davey explains:<\/p>\n

\u201cThe send-side products are what customers are going to want. If I just had a loss on my car or home, I can receive a payout from my insurance company in real-time. But if I need to make payments to companies covering my car or home repairs, how do I get money to them<\/em> in real-time? They will want immediate use of the funds to enable them to service me.\u201d<\/p>\n

Davey concludes that:<\/p>\n

\u201cIf banks don’t have the access or the tools to be able to send transactions, then they’re really just going to end up being net receivers of those transactions at the end of the day, so you’re not modernizing the full procure to pay process that you’d want to be able to do within the B2B space.\u201d<\/p>\n

How Will Real-Time Payments Evolve?<\/h2>\n

According to Davey, there are multiple ways in which RTP can evolve:<\/p>\n

\u201cThe Fed and TCH have been cooperators and competitors for a long time. We inter-operate fairly well today, whether it\u2019s on a technical side like the ACH Network or at the back office of a financial institution or through the banks\u2019 core providers. We\u2019ll see that same dynamic with FedNow, where the banks\u2019 core providers will provide the tools to connect to both networks. And in a real-time manner, they’ll decide whether to send it over the TCH network or FedNow. It could be more complicated if a bank gets a better rate for sending a payment over the RTP network versus FedNow.<\/p>\n

It’s going to depend on who has the endpoints. Right now, TCH has a network that’s five years old, we have the endpoints. When the Fed launches in July, how many endpoints will they have and how quickly can they grow those endpoints?<\/p>\n

As providers like Fiserv, FIS, and Jack Henry are successful selling RTP to their customers, if they’re able to easily turn on both networks, we\u2019ll see growth on both networks, as opposed to one outpacing the other. And then it’s going to come down to basic economics as to why a bank or credit union would use one over the other.\u201d<\/p>\n

What Banks and Credit Unions Need to Do Now<\/h2>\n

Growth in real-time payments needs to be looked at from a couple of perspectives:<\/p>\n