Experts Discuss FedNow
By John San Filippo
On July 20, 2023, the Federal Reserve launched first version of FedNow, an instant payment network that allows true real-time money movement between participating financial institutions. FedNow represents a major step forward in the global trend toward faster, cheaper payments.
The August edition of the Finopotamus Industry Leaders Forum focused on FedNow. To provide our readers with additional perspectives on this important topic, we took a deeper dive with four industry experts:
Jeff Bucher, Product Strategy Manager at Alkami
Ron Herman, Chief Executive Officer at Sionic
Siva Narendra, Chief Executive Officer at Tyfone
Carl Robinson, Chief Revenue Officer at Dragonfly Financial Technologies
FedNow Uses Cases
At its heart, FedNow is simply another rail on which to move money. However, the fact that money is moved in real-time makes for some compelling FedNow use cases, ranging from the simple to the complex.
Alkami’s Bucher suggested that simple account-to-account (A2A) transfers represent a logical starting point for most institutions as they begin to deploy FedNow. “Everybody loves the idea of A2A as the first way to dip our toe in FedNow lake, so to speak.” He added that in addition to simplicity, A2A transfers offer a much lower perceived fraud threat, given that the consumer controls both the sending and receiving accounts.
The industry is, however, already looking toward more complex use cases. “Imagine doing payroll every day,” said Tyfone’s Narendra. “It's certainly possible with FedNow. which would lead to a much better GDP outcome for the entire nation.”
Dragonfly’s Robinson echoes this thought, pointing to the growing “gig economy” as an example. “With Uber and Lyft, those people have gas to put in the car, they have maintenance on the car. If they were on a standard payroll schedule – once a month or every or every two weeks – cars don't cooperate that way,” he noted. He said that FedNow can enable gig workers to be paid instantly at the completion of each transaction.
At Sionic, work is already underway to bring FedNow and RTP (the real-time payment network from The Clearing House) to the retail point of sale setting. “The most exciting product we're taking to market now is called the Verified Rapid Payments Gateway,” explained Herman. “What we're doing is bringing RTP and FedNow commerce to pay e-commerce transactions at the point of sale using bank accounts.” He said that this will eventually extend to brick-and-mortar retails settings, as well, noting that the payment will be facilitated via the consumer’s mobile phone via Apple Pay or Google Pay.
What About Credit Cards and Interchange?
As FedNow penetrates the point-of-sale space, any organization that derives revenue from legacy card interchange will see a decrease in that revenue. That could be a problem for both credit card companies and credit unions, among others.
Herman claimed that although that threat is real, it’s not imminent. “If I were a card network like Visa or MasterCard, I wouldn't be too concerned upfront,” he noted. “They're processing 108 million transactions per day today. RTP just released that since their inception (in 2017), they've reached the 500 million transaction mark. That's five days’ worth of card payments.”
As for the credit union industry, Narendra said that credit unions can still collect FedNow interchange. “There's no reason why FedNow can't have interchange in its use case,” he said. “What it would mean is the network costs are an order of magnitude cheaper. The credit union will end up having more margins for the same interchange, or they could pass some of that back to the community and still make their income without impacting their bottom line.”
“I do see it going that direction, that interchange is going to go away,” added Bucher. “Credit unions are just going to have to look at other revenue flows. We are recommending in our use case with A2A transfers that our credit union clients charge a fee for (FedNow-based) instant transfers.”
Fraud and Security
“That's something that's been brought up a lot: Is there going to be more fraud with RTP and FedNow?” Bucher posed. “I don't think there's going to be more fraud because of the way the rails are. The fraud you have to worry about is the social engineering, but I don't see FedNow being any more dangerous or any higher in fraud levels than wires or ACH.”
Herman noted that FedNow-based point-of-sale transactions should be more secure than legacy card payments. “That's one of the advantages that we're bringing with the Verified Rapid Payments Gateway is that it masks the payer and the payee, but at the same time, it verifies who they are,” he explained. “We know that it's a good consumer. We know how long they've had their, their credit union account. Um, we know how long they've had their mobile number, if they've got more than one email, all of the information about the payer and the payee that verifies that they're good folks, that they're not bad actors.”
According to Herman, diminishing interchange could prove beneficial to the member. “FedNow bypasses interchange, which leads to an average 3% profit margin we add back to the merchant on day one, literally,” he said “That creates is an opportunity for the merchant or the retailer to provide their customer a perk or an incentive, whatever they want to provide. It could be a free muffin for all we care. But give them a reason to not pay with their expensive credit card and cement that customer relationship.”
“Consumers have an expectation now that everything needs to be faster. Everything needs to be immediate,” added Bucher. “Expectations are already there. Credit unions just need to catch up and meet that expectation of immediate payments and immediate transfers.”
“You log into your credit union and you realize that your car loan is due today. You don't have to scramble,” said Narendra. “You just pay using the 24/7/365 settlement solution that your credit union will be offering. The credit union may decide to charge fees for it, or maybe not. And an employer could do a direct deposit once a week or even once a day if they choose.”
“There are 30 or more real-time payment schemes already active globally today,” explained Robinson. “Several of them have been in place for decades.”
Echoing comments from Narendra, he continued, “The general consensus is it increases your gross domestic product. The GDP goes up when you increase the velocity of the transactions and the payments.”