Today’s rapid advances in technology and unprecedented pace of change have pushed community financial institutions into what is, for many, unfamiliar territory. Gone are the days when a new technology solution or platform could be implemented and then left to run for a decade or more. Nowhere is that more true than in the world of payments, where rising customer expectations and increasing competition from both bank and non-bank actors require a level of foresight and responsiveness that smaller organizations may find difficult to build into their planning.
Adding to this mix, the Federal Reserve has announced its own proposed instant payments solution, FedNow, to be implemented by 2023. But will FedNow replace existing payment methods? And will it co-exist with other new payments solutions, such as The Clearing House’s RTP® Network? While there is no crystal ball to provide all the answers, some details are becoming clearer as to where payments are headed.
In many ways the current era of payments evolution began in 2015 when the Fed published “Strategies for Improving the U.S. Payment System.” That kicked off a years-long effort to drive payments modernization that included the formation of the Faster Payments Task Force, the implementation of the RTP Network and planning and development for FedNow.
The concept of a new payment rail through the Fed was announced in August 2019. After comments from more than 180 financial institutions and others, high-level details went public a year later. Additional information has been made available on the Fed’s services site, and in January, the Fed announced that more than 110 organizations, including Bankers’ Bank, would participate in the FedNow Pilot Program. This will help bring FedNow to completion, with participating financial institutions and processors providing advice and input into the new service’s development, ultimately to include refinement and testing as “go live” draws near.
Meanwhile, the RTP Network has already achieved access to more than half of all U.S. checking accounts through widespread adoption by the nation’s largest banks. The Clearing House has announced a goal of adding another 20 percent of all accounts this year, primarily by adding regional and smaller financial institutions to the network. By year-end, a strong majority of all U.S. banking customers will be able to send and receive RTP payments.
While they create new opportunities for payment solutions and positive customer experiences, these new payment options also create some complications. The “secret sauce” of the RTP Network is pre-funding, enabling instant settlement. Financial institutions that allow customers to send RTP payments fund their portion in a joint account held at the Federal Reserve Bank of New York. But 24/7 management of liquidity can be a challenge, and running out of funds means declined transactions as there are no overdrafts in RTP. Many smaller institutions plan to outsource responsibility for this to a funding agent such as Bankers’ Bank. Funding agents provide liquidity management in the joint account on behalf of their respondent customers.
U.S. payments modernization has reached the end of the beginning, and realized solutions with real customer benefit will now become the focus. Participation in RTP is expected to grow significantly in coming years. When it arrives, FedNow’s first transactions will take place in an environment where RTP has already achieved a sizable lead.
As part of developing their payments strategy, every community financial institution will need to decide when and how to get involved in instant payments. Many are already live, or are working with core processors to connect to RTP and eventually have full functionality on that rail, including both send and receive capabilities.
The scale and scope of the RTP Network means that denying access to it carries the risk of dissatisfied customers. While there may not be a push for instant payments in all customer segments today, this could change as their benefits become more widely known. Despite this, some financial institutions have decided to wait for the implementation of FedNow. Others plan on implementing RTP now and possibly FedNow when it arrives. And still others may be assessing the value of offering instant payments at all.
Every financial institution will have their own approach, but RTP and FedNow will one day co-exist, and they will not be fully integrated immediately, if ever. Making thoughtful choices regarding an instant payments strategy deserves time and attention, as decisions made now will have significant customer impact for years to come.
Shane Bauer is first vice president/Compliance, BSA and Security, Audit at Bankers’ Bank, Madison, Wis. You can reach him at [email protected].