By John San Filippo
Finopotamus has assembled a panel of experts in a recurring series, The Industry Leaders Forum (ILF). Each month, we ask the panel a broad technology question and share their informative responses. Respondents are presented in alphabetical order by first name.
Part 2 includes responses from:
For August 2023, Finopotamus asked the ILF panel:
The launch of FedNow has put faster, cheaper payments top of mind for everyone. There's a potential to disrupt virtually every area that involves money movement. What do you think will be the short and long-term effects of FedNow and technologies like it?
Dawn Sirras, CTO, Corelation
With the high availability of mobile-first, faster payments options, credit unions are under increasing pressure to make these services available to their members. The risk of not responding to the growing market demand is member attrition and reduced member growth. These new payment options such as RTP and FedNow bring enhanced convenience to members by making money movement available 24/7/365 and settlement near immediate as well. The greatest challenge for credit unions with these new payment rails is the operational burden. These new networks are always online including weekends and holidays. Credit unions need to have the infrastructure in place to support that anytime processing.
Perhaps the largest operational obstacle credit unions need to overcome with the implementation of real time payment networks is fraud prevention and mitigation. Many financial institutions are turning to artificial intelligence-based algorithms and machine learning to monitor and identify patterns of fraudulent activity and draw out suspicious transactions for further review or immediate action. These automated mechanisms allow the credit union to deploy solutions that can keep pace with the timeliness and schedule of real time payment activity and ideally prevent fraudulent activity before it happens. Member education is another critical component to any fraud strategy. Informing members on how real time payment networks work and educating them on common fraud and scam tactics can help credit unions further minimize their risk.
One of the unique aspects of the real time payments networks is their “Open-Loop” processing model meaning payments are withdrawn directly from an account, rather than relying on a prepaid balance. These payments are also irrefutable and cannot be taken back or reclaimed by the sender. This accentuates the importance of preventing fraud on the front side of these transactions. At the same time, it presents some intrinsic benefits for the credit union’s back office. Coupled with the instant payment notification, each transaction provides a number of additional data points including all of the data necessary to identify a payment, as well as creating an open line of communication between payer and payee as compared with the one-way communication that ACH and wires afford. This enriched data set and messaging protocol can help to minimize payment inquiries and reduce the number of resources dedicated to support and receivables posting and reconciliation. A few additional use cases for businesses include improved availability of funds for payroll for gig workers, quicker loan disbursements with enhanced traceability for transactions such as property closings, and even last-minute bill and invoice payments to avoid late fees and penalties. Not to mention, these transactions are typically less costly for the originator and the receiver than other money movement methods.
These networks are still in their infancy compared to the long history of alternative rails such as ACH and wires, so much remains to be seen about the future adoption and impact of these alternatives. One area that will be interesting to monitor is the potential erosion of card usage as consumers and businesses migrate over to these payment programs to avoid interchange fees, reduce expenses and enhance convenience. As consumers grow more and more accustomed to existing P2P networks and tap to pay programs, it is intriguing whether adoption will spread to QR code-based payments in retail locations. Obviously, there is an infrastructure gap that needs to be put in place first, but the promise of reduced card processing expenses, might justify the effort.
Adoption and deployment of infrastructure are the key variables that will determine the success of these new payment rails. Consumers and businesses alike seem drawn to the immediacy and reliability of the networks but if fraud is not managed well up front, consumers will be wary to change their ways.
Dean Michaels, Chief Strategy Officer, Co-op Solutions
If there were any doubts about the appeal of real-time payment solutions, the launch of FedNow should put those to rest. Credit unions should view the launch as a bellwether of consumer and business member priorities. Clearly, the ability to move money faster, safer and with ease is on its way to becoming a leading driver of the primary financial relationship – if it’s not there already.
That said, credit unions should evaluate the integration of FedNow through the lens of their own membership base. Most will discover the platform is not especially advantageous for the typical consumer member. That’s because the appearance of a payment occurring in real-time is typically enough for most people. It’s the rare individual who cares about the actual behind-the-scenes mechanics of a transaction.
Business members, on the other hand, may find a lot of value in the availability of FedNow through their trusted credit union. In circumstances where actual vs. perceived speed of transactions is important, FedNow may be an appealing solution. Property and casualty insurance claim payments, for instance, are an ideal use case for immediate payments. Similarly, payouts to members who work in the gig economy and payment settlements for low-margin retail businesses are scenarios in which having actual money in hand immediately is paramount.
Co-op research shows that today’s members are financially nomadic. Therefore, business members who do need true real-time settlement, may leave even their primary financial relationship to get it somewhere else.
It's important to consider that FedNow is not the only real-time payments rail in the game. It’s great that the U.S. is taking real-time payments seriously, but it’s not likely that FedNow will be the one rail to rule all money movement. In terms of long-term impact, adoption will be a slow burn with lots of competition in the mix.
Doug Brown, President, NCR Digital Banking
With the launch of FedNow, we are now at the ‘wait and see’ step of the launch. While it’s still way too early to tell how it will impact the payments landscape, the general consensus is that it will be fairly major.
In the short-term, I anticipate that we are going to see the biggest impact in the business sector, especially the small business sector. Small businesses will be able to improve cash flow through decreased time to send and receive funds, primarily, allowing them to hold onto cash longer before making rent payments, paying invoices, etc. The new convenience of faster payments will require the advancement of risk models and security practices to protect consumers to prevent a “FraudNow” situation. From a consumer perspective, it’s likely we see a pretty large impact on the adoption of digital payments. The convenience of instant payments can and will encourage even more users to adopt the practice.
In the long-term, it’s likely we see new innovations and solution offerings in the Fintech space. Instant payments will provide technology providers opportunities to move money and provide financial services to customers in ways not previously seen.
Over the next months to year we will continue to learn a ton and adapt to the new world of FedNow. Regardless, banks, credit unions, and technology providers will have major regulatory and security challenges. For FedNow to be successful, it will be critical that those that support are constantly upgrading security measures to keep people’s money safe.
James Moughon, VP of Delivery, Praxent
The launch of FedNow has many considering the potential benefits, but there are also many questions around the processes and technology required to successfully implement it, as well as how it fits into a credit union’s strategy.
FedNow and the heightened attention on faster payments have the potential to be especially impactful when it comes to small business banking. As the fight for deposits continues, many institutions have turned their attention to small businesses, determining how to acquire these relationships and better serve this segment. Payments play a big role here, since one of small businesses’ most prevalent pain points is optimizing how to pay and get paid.
However, FedNow will not be for every institution. First, they should consider if the use cases are there – does the institution have the business customers or members for this investment to make sense? The technology side must also be considered. Does the institution have the expertise and resources to integrate into the rails and conduct the data mapping? While there are several vendors offering off-the-shelf solutions, there is still a lift required by the institution. Then, there’s the deployment of capital – does the institution have enough to instantly move money? And this isn’t just something for technical staff to manage, there must be compliance buy in as well. Perhaps the largest consideration is the operational concern of implementing FedNow. After all, real-time payments mean real-time fraud. There will be many steps a credit union has to take to stay on top of increased risk.
While FedNow has the potential to deliver significant value to credit unions and their business members, it should be approached carefully and strategically. The institutions that do decide to embrace FedNow should consider tapping strategic implementation partners to help them effectively integrate into the rails while optimizing compliance.