FedNow is a gamechanger, but only for banks that act fast
- What’s good for merchants and their customers is also good for banks. This should be the driver for banks to adopt FedNow.
- With Temenos Payments Hub, banks can start with instant payments and then seamlessly expand to support multiple different payment schemes such as Fedwire, ACH, RTP, X- Border, on one single platform thus maximizing cost efficiencies.
By Patrick Devlin, Senior Vice President - Payments at Temenos
The arrival of FedNow, which has launched in the US this summer, is a huge opportunity for banks. Any executive in doubt needs to only look at the adoption of other instant payment systems around the world. The UK, Faster Payments processed 379.4 million instant payments in June, which is an 18% increase year-on-year. Their value, US$400 billion (£315 billion), was a 20% increase on the year before. In Brazil, $260 billion worth of instant payments are processed monthly via Pix of which almost a third are retail POS transactions, incredible growth for a system that is less than three years old. Almost 150 million Brazilians have used Pix - 70% of the entire population - and 800 banks and fintechs offer it.
This should be mouth-watering evidence for US banks considering whether to adopt FedNow. Though every country is different, instant payments are clearly popular around the world. It does not take much to understand why. For merchants, instant payments are the solution for the shortcomings of traditional methods. Cash is unsecure; paper checks require significant reconciliation management; credit cards are relatively costly; and ACH is slow. These inefficiencies cost merchants in terms of time and money, and place pressure on cash flow. In contrast, FedNow has relatively low processing fees, and immediate settlement, As well as improved liquidity, merchants can pass these benefits on to their consumers in discounts, or offers for choosing to pay with FedNow. The immediacy of FedNow is also in tune with a digitally native generation who expect 24/7/365 services. Waiting days for a money transfer to land (longer if it’s over a weekend or bank holiday) is an anathema to modern living. This 20-39 age cohort makes up almost two-thirds of Pix users.
What’s good for merchants and their customers is also good for banks. This should be the driver for banks to adopt FedNow. But it is not the only reason. If we look at the potential use-cases for FedNow - payroll, insurance payouts, government subsidies, bill payments, - we begin to understand the scope for banks to seize new businesses. ‘Consolidate your treasury banking with your payment activity’, goes the pitch to businesses. And it’s a compelling one. Services that can be consolidated under one provider can benefit from interoperabilities and economies of scale, reducing friction and creating superior user experiences.
What’s more, when a bank plays a greater role in a transaction, they get access to valuable data about both payer and payee. These insights enable banks to better understand their customers, create better products and offer personalized recommendations of appropriate loans, savings, wealth management, and other banking services.
In this way, FedNow gives banks two hits at new revenue; one from entirely new clients, and another from the clients they already have. Smaller banks will see the opportunity to dig into the dominance of the largest banks that issue and manage the majority of credit cards. That is the ‘why’; now for the ‘how’. As with any new initiative, banks have a choice. The first option is to enable FedNow in-house. Expect to use up significant technical resources, budget and time. For banks such as JPMorgan Chase, BNY Mellon, Wells Fargo, and US Bancorp, which all participated in the FedNow pilot, this isn’t an issue. They are not short of resources. But most banks don’t have this luxury of scale. The easier and faster way is to work with a technology provider who can bring the right experience and proven solutions to the table.
But who? What criteria should a bank prioritize in selecting a technology partner? Trust should be number one; evidenced by a track record of having successfully managed similar deployments for others. Ease of integration is also key, taking advantage of API and cloud-based payment solutions designed that work with any core to enable a progressive modernization of legacy systems, starting with payments. Both have a profound impact on how fast a bank can go to market with FedNow. Scale (in terms of breadth of services) is also beneficial. FedNow is just one payment capability a bank needs; and payments are just one pillar of a banking suite. A partner that is FedNow certified but can also easily enable other services and help build out and customize specific bank use cases on a single platform provides agility and future-proofability.
Temenos has a strong case to make on all these points. For starters, we have already enabled a major US bank to use the FedNow service, and are currently talking with many more to do the same. So we know what’s involved. Though we are very experienced, with over 50 sites around the world licensed for instant payments supporting 14 different schemes in 25 countries, every new method has nuances that need to be navigated. Having incorporated FedNow into our Temenos Instant Payments framework solution, we have learned about its unique features and demands, such as its encryption protocols, message handling and requirements for a bank’s production readiness. That knowledge is ready to be applied to others, today.
The flexibility of our payments solution is another reason why banks should look at Temenos to enable FedNow. With Temenos Payments Hub, banks can start with instant payments and then seamlessly expand to support multiple different payment schemes such as Fedwire, ACH, RTP, X- Border, on one single platform thus maximizing cost efficiencies.
Temenos Payments Hub is licensed by hundreds of banks and financial institutions for multi-jurisdictional, multi-entity, multi-currency, high and low value payment types and payment clearing rails. It can be deployed on any cloud for banks to run themselves or as SaaS on the Temenos Banking Cloud, delivering continuous updates, ensuring ongoing technical and regulatory compliance support. The breadth and depth of services available on Temenos Banking Cloud enables banks to be more agile to market changes, accelerate time-to-market for new products, automate processes, and ultimately maximize ROI.
This is early days for FedNow, and the prudent approach may be caution. After all, there is a sense that we have been here before; RTP (Real-Time Payments) has been available in the US since 2017. The big difference this time is that FedNow is a government initiative, primarily designed to bring competition to the banking sector by democratizing payments. That will have the double effect of wider adoption by mid-size and small banks, and by big banks defending their position. The support of the US Treasury also adds more potential use-cases for FedNow, such as making and receiving tax payments and refunds directly from your bank account.
And then there’s the network effect to also consider. FedNow requires both the sender and receiver to have accounts at banks that are part of the network. One way to achieve that is for both parties to bank with the same provider. The first banks to offer FedNow can position it as a quasi-closed loop, and attract new clients whose primary motivation is to benefit from accessing instant payments. (This is how PayPal, bitcoin, and credit cards before that, became dominant.) The longer a bank waits, the more banks will adopt FedNow, and the weaker this unique selling point becomes. Those banks that do move first in adopting FedNow will be better placed to explore its full potential. While there are some obvious use-cases for FedNow, such as account-to-account transfers, recurring bill payments and insurance, benefits and payroll disbursements, others will be created by banks armed with familiarity with the new system. Microloans, instant POS payments, and even integration with Swift or cryptocurrencies to enable cross-border transactions could be interesting (and profitable) avenues to explore.
For the banks that enable FedNow with Temenos, this exploration is part of the package. Our leadership status in banking technology has been built on always looking to the next opportunity; always innovating. FedNow is ‘just’ launching, but our involvement began in August 2019, as soon as The Federal Reserve announced it for the first time. And our involvement with instant payments began almost over a decade before that. This experience is why Temenos is ready to help banks enable FedNow now; and why we will be ready to help banks innovate with FedNow into the future.