As FedNow Rollout Progresses, Banks, Processors Begin Strategic Shifts

Less than a year from now, faster payments — instant ones, in fact — will be a widespread reality in the United States.

Connie Theien, head of industry relations for Federal Reserve Financial Services, told PYMNTS that the work going on behind the scenes has involved a seismic shift of how companies think about operations and the payments landscape in general.

The launch is slated for next summer, and the service has already enrolled 120 separate organizations in the pilot program — 80 financial institutions (FIs) and 40 processors and other service providers that Theien said connect smaller banks to the FedNow Service.

“These companies have spent the last year helping shape the FedNow Service and have been getting their own ‘back rooms’ ready,” she told PYMNTS. “It’s been a big lift for many of these companies, with a lot of learning and planning just to get to this point.”

Along the way, she said, three key areas have been in focus for the FIs involved: developing product roadmaps; operationalizing the services that are to be made available (and in what sequence); and optimizing the back end.

“If you connect directly to the Fed, you’ll have to engage your mobile banking software provider and your core processing software provider,” she explained. “Thinking about these external partnerships and engaging with them early is key to success.”

The Fed has given a bit of tailwind to those discussions by offering service provider showcases — a sort of Yellow Pages for instant payments, she said, that ranges from processors and consultants to fraud analytics engine providers.

As might be expected, moving beyond the pilot stage requires some strategizing. Participants must consider whether they want to connect to the Fed directly or through processors in the bid to get transactions to post in seconds. In addition, they must decide how they will update everything from mobile banking platforms to corporate treasury departments. In the back office, there are considerations around funding accounts and managing transactions that will be real-time in nature and settle 24/7.

Such widespread internal change requires the input and collaboration of all manner of stakeholders across the firm, said Theien, including risk and fraud professionals, cash management executives and product development specialists. Security is, of course, always top of mind.

“As fast as life moves, and as fast as we’re trying to move money, fraudsters are pretty fast too,” Theien said.

It’s imperative for FIs to have strong authentication and security in place, along with consumer education. In some cases, FIs are exploring the potential to use “multiple choice” questions as to why money is being sent to help consumers protect themselves more fully, and to make sure that the transactions are indeed legitimate. Transaction limits also play a role in helping beef up security, Theien said.

Looking Ahead

Enough progress has been made, she told PYMNTS, that the FedNow Service will be launching end-to-end testing — and will be ready to go (fully) live by the middle of next year. The testing will have six to nine months of certifications before the FedNow Service hits the ground running. A rule-setting circular will be published in coming weeks, she said, along with pricing details.

The readiness to offer instant payments is critical, said Theien, noting that interest and demand are increasing. As many as 90% of respondents in the Fed’s business and consumer studies have said they want faster payments capabilities. Two-thirds of businesses have said they would consider switching institutions if those capabilities were not offered by their FIs.

“They want to use the capabilities to have the convenience to pay anyone, 24/7, without having to participate in 10 different closed loop services,” Theien said. “There’s a strong desire for ubiquity.”