Finastra, a global fintech company, will offer the FedNow connectivity through its cloud-based payments hub, called Payments to Go, and later through its Global PAYplus solution.
FedNow will present both technical and operational challenges for banks, said Michelle Bateman, Finastra’s director of product management for U.S. Payments. It is a new payment rail and the U.S. hasn’t seen the adoption of a new interbank clearing system, outside The Clearing House’s RTP, in 40 years.
Michelle Bateman, Finastra’s director of product management for U.S. Payments
Some of the challenges are around how is the bank operationally ready to support the 24×7 operations of FedNow such as exception management, operational management, client support and services. How does a bank onboard customers, do they have to sign an agreement, how will the bank control risk management and fraud prevention.
Banks will need to integrate the payment application with their core banking systems so they can check balances and record payments. If they are doing a credit send, they have to develop the user experience for mobile or digital channels. And they have to make sure they know the identities of users.
Banks are learning from Zelle, the real-time personal payments platform which has experienced fraud and disagreement over who is responsible for losses.
“I think banks are learning and taking matters into their own hands when it comes to fraud and the need for more controls during payment initiation. They might have to step up their authentication,” said Bateman.
The Fed in June published a list of 57 early adopter organizations that had completed formal testing and certification on the FedNow Service. The list included 41 financial institutions, 15 payment processing vendors and the U.S. Department of the Treasury. Finastra is certified for sending and receiving payments and is working on certification for request to pay.
Cloud has become a popular choice for payment hubs, said Gareth Lodge principal analyst covering global payments for Celent.
In the USA and Europe, almost every single RFI has a cloud-based solution as the preferred deployment option, he wrote in an August 2022 report “The Future of Payments is Cloud.”
“While Celent has long advocated the adoption of payment hubs, where a single solution can process all payments on a single platform, we have also stated that a big bang approach of moving everything simultaneously is generally not the best approach. A phased, considered approach is likely the best solution for most banks.”
Banks should also have a payments strategy, although Celent is still surprised how few do.
“Even just describing a sense of what products might need replacing or what triggers might cause the bank to change its approach would be useful,” he added. “To misquote Kipling, if you don’t know where you’re going, any road will take you there. In turn this may lead to a choice of solution that may take you forward but not where you want to go. A phased, considered approach is likely the best solution for most banks.”
Finastra’s Payments to Go is aimed at mid-tier regional and larger community banks, banks with roughly $15 to $20 billion in assets, she said. The banks’ response to FedNow is mixed.
“We’re seeing come excitement from smaller banks, that weren’t willing to take advantage of The Clearing House,” Bateman said. “Some banks are really comfortable being first in adoption, and others will take a wait and see approach.”
Businesses are driving a lot of demand for real-time payments, she added.
“We have indications that 90% of businesses expect to be able to send/receive in real-time within 12 to 18 months.”
That will motivate banks because they can make money from corporate payments. The Federal Reserve has managed the FedNow program very well and has set stringent requirements for vendors, including on the user experience, Bateman said. It wants the recipient of a payment to receive the money and an alert within 60 seconds of the time it is sent.
“They don’t want a lot of exceptions. From an API perspective, if I want to send you money and my bank is participating and your bank isn’t, the API will send back a message saying the other banks isn’t participating. The Fed wants fast notification that the payment was completed or not, immediate feedback like Zelle or Venmo.”
“Payments as a Service solutions and payments hubs, being much more accessible than ever before, are key to the success of community banks, credit unions, and other financial institutions as they work to remain competitive against the larger banks and fintechs,” said Erika Baumann, director, commercial banking and payments at Aite-Novarica Group, now renamed Datos Insights. “It is important that financial institutions modernize their payments systems to meet customer demand for access to faster payments, accelerate their time to market and to help reduce their risks and overall operational costs.”
Celent’s Lodge said that smaller banks often get big bank security from a cloud provider, since the cloud vendor has to satisfy the requirements of larger banks, and presumably can spread the security costs across a number of customers.
