All things FedNow: A conversation with the executives of Orum, TabaPay, and Alloy
- The Federal Reserve's FedNow Service went live on July 20, 2023.
- Executives of Orum, TabaPay, and Alloy cast light on its implementation, user experiences, and key challenges that are yet to be fully explored.
FedNow has finally launched. And while there’s been a lot of hype surrounding the new real-time payments network and its capabilities for the past few months – its implementation, user experiences, and key challenges are yet to be explored.
I spoke with Stephany Kirkpatrick, CEO and founder of Orum, Tim Astanov, SVP, product commercialization and partnerships at TabaPay, and Sara Seguin, principal advisor of fraud and identity risk at Alloy, about how FedNow can add value to the payments landscape now and what can be expected of it going forward.
Is FedNow a valuable addition to the US real-time payments landscape?
Stephany Kirkpatrick, Orum: FedNow presents a massive opportunity for fintechs to build bridges between the different payment rails. US-based financial institutions (FIs) and fintechs will need to figure out how to integrate FedNow across the broader payment network first before these capabilities can be built out for cross-border payments. Ultimately, this challenge of interoperability across rails -- and across countries -- creates great opportunities for innovation in the US (and abroad) geared towards orchestrating payments across these different systems for the benefit of so many.
Tim Astanov, TabaPay: FedNow is a step forward in the modernization of US payment infrastructure, but I wouldn’t call it imperative since we already have cards (that settle t+1 but are effectively instant) that can be cross-border and RTP. We are cautiously optimistic and will launch FedNow later this year, but it will take time to reach critical mass.
Sara Seguin, Alloy: Until 2017, the fastest payment method in the US was wire or ACH, which takes an average of 1-3 business days to clear and settle. It’s true that wires could be made available to a client instantly, but banks must still adhere to cutoff times and no operation hours outside of bank business hours. Even same-day ACH usually takes several hours and has similar constraints to standard ACH payments, like cutoff times and no operating hours outside bank business hours. This delay in payment presents challenges for both consumers and businesses and, more broadly, goes against society’s increasing evolution towards instant experiences.
How can the US catch up with other countries implementing real-time payments?
Stephany Kirkpatrick, Orum: For one, having more ‘request for pay (RFP)’ capabilities go live will speed up real-time payment adoption. Over time, as consumers are able to gain more control over money, demands for instant payments will likely grow alongside, driving adoption and allowing the US to ‘catch up’ to other countries. Additionally, while the US is unlikely to have a central bank push to mandate the use of FedNow (like Brazil did with Pix), it will instead rely on creative innovators in the fintech ecosystem to drive more use cases and consumer demand.
Tim Astanov, TabaPay: The US is unique with 8,000+ FIs so it is much more difficult than an economy with 5 banks and a government that uses regulation to move forward policy. If there was a mandate to participate in FedNow, we could quickly catch up, but I wouldn’t bet on mandates or regulations from Washington D.C. There has been incredible innovation using other instant payment methods to speed up time to money and create businesses that weren’t possible before like Earned and Early Wage Access. We are very bullish on continuing innovation and our clients using the best rail for their purpose, be it card, RTP, ACH, FedNow, Visa+, or another rail in the future.
Sara Seguin, Alloy: Adding more US businesses to the FedNow network will put the US more closely on par with other countries’ payment ecosystems. This launch will also incentivize US banks to undergo necessary technical lifts, as they will need to technically manage the user interfaces and application programming interfaces (APIs) needed to facilitate payments via FedNow. By prioritizing technology and interoperability, the US can increase the number of payment transactions it settles to be in line with other global commerce conglomerates.
What practical challenges lie ahead for the new payments rail?
Stephany Kirkpatrick, Orum: The advent of FedNow adds another layer of infrastructure to an already complex landscape. As a result, FIs and fintechs will need to determine how to integrate FedNow across the broader payment network, especially with banks needing to go through formal testing and certification. There will also be adjustments in moving to a 24/7/365 service, and regional banks will need to re-allocate their resources to ensure a smooth implementation of FedNow. Nevertheless, these logistical hurdles are mere ripples when weighed against the broader opportunity that FedNow presents.
Tim Astanov, TabaPay: Two primary challenges are adoption and fraud.
If you take RTP as an adoption model, it has taken 6 years to reach 65% of DDA’s so even with an easier path, it will take time for 8,000+ FIs to participate. Consumer behavior is also a factor since Americans prefer to pay with cards and some people still use checks.
Fraud is a challenge due to the innovative nature of fraudsters, and the value of instant funds, and they will try everything to find an exploit. New fraud models will have to be developed and trained on transactions that don’t follow an existing pattern and social engineering fraud scams that currently happen with ACH, checks, and Zelle will be challenging to identify.
Sara Seguin, Alloy: Faster payment rails equal faster fraud. Because fraudsters will continue to adapt and figure out new ways to exploit FedNow, having strong fraud controls at onboarding, as well as rules and interdiction set up to identify account takeover as part of transaction monitoring is key to stopping fraudulent transactions before they begin processing. Real-time monitoring of these payments is also an important step to be taken to ensure transactions can be identified and stopped prior to being sent.
In what areas can FedNow shine?
Stephany Kirkpatrick, Orum: There are a number of different use cases that FedNow has the potential to drive.
For one, FedNow will support smaller community banks around the country, which means that its introduction may be most acutely felt by local FIs and their account holders. Wide adoption will likely take time, but increased accessibility will enable individuals and businesses in these communities to more fully participate in the financial system, making the promise of a more inclusive financial ecosystem closer to becoming a reality.
Another area is payroll. For decades, running payroll has been a multi-day event. People typically don’t get access to funds until days later, and well after the period they actually worked. Payroll providers that have historically relied on ACH may provide businesses the opportunity to pay employees faster via FedNow.
Tim Astanov, TabaPay: Many of the use cases we work with today where speed and account authentication are valuable will continue to take off. Disbursing same-day wages and A2A transfers along with Account Receivables/Account Payables and settlement and prefunding in B2B are just a few. It should replace most domestic wires and will likely impact same-day ACH and some other ACH use cases, but you will probably still get your paycheck via ACH. I’m most interested in use cases that don’t currently exist and how TabaPay can serve them, like RTP to FedNow and vice versa.
Sara Seguin, Alloy: Apps such as Zelle, Venmo, and CashApp are used to send money back and forth. These payments are ‘real-time’ or ‘instant’ for money transferred within that app’s system, and once you transfer funds to another person’s app wallet, it is irreversible. This has sparked a lot of attention on these apps’ responsibility when it comes to compliance and protecting their users from fraud.
When these apps first launched, they used ACH to transfer funds from a user's app wallet to their bank account. Now, many P2P apps use a mix of RTP and ACH payments to transfer money from the app wallets to a bank account.
FedNow may also be more attractive to smaller depository institutions. Unlike the Clearing House’s RTP network, which is championed by big banks, the Fed professes to have established “customer service relationships with more than 10,000 depository institutions,” including with “smaller depository institutions in rural and remote areas of the country.” This leaves me hopeful FedNow will enable more FIs, including smaller community banks, to facilitate real-time payments, promoting healthier competition in the financial services industry.