The Federal Reserve board is taking comments on the FedNow real-time payments network it expects to launch in 2023 or 2024 as an alternative to the RTP network now offered by bank-owned The Clearing House.
Advocates say FedNow will provide greater access, efficiencies, and choice across the payments space.
In terms of expectations, the American consumer is running ahead of the payments engines that help drive their everyday financial lives.
That explains the “let’s get going” tone among some in the financial services world to the Federal Reserve’s recent announcement that it plans to develop FedNow, an around-the-clock real time payment and settlement service.
“I think a lot of consumers would be surprised to learn that their payments are not occurring in real time already,” says Glen Sarvady, veteran financial services analyst and principal at 154 Advisors in Atlanta, GA.
Glen Sarvady, Principal, 154 Advisors
Sarvady says the Fed’s move to join the growing movement of money in real time or close to it will help reduce the confusion and irritation consumers feel when they find out a payment hasn’t settled immediately or a deposit is being held.
The Fed doesn’t expect the service to be up and running until 2023 or 2024, but credit unions — and anyone else interested in weighing in — have until Nov. 7 to file comments on what they want to see in the new system.
In its Federal Register posting, the Fed describes FedNow as a “new interbank 24x7x365 real-time gross settlement service with integrated clearing functionality to support faster payments in the United States.”
The posting adds, “The new service would support depository institutions' provision of end-to-end faster payment services and would provide infrastructure to promote ubiquitous, safe, and efficient faster payments in the United States.”
Read the Aug. 9 Federal Register notice about FedNow, which includes instructions on how to submit comments. Read comments posted about the Fed’s potential action.
“Integrated” and “infrastructure” are key words here, because the new service must work alongside existing payments rails and integrate with financial institutions’ existing technology, especially core processing systems.
The new system also will exist in a payments environment that can be likened to the “co-opetition” world of credit unions, as FedNow will be an alternative to existing major players, namely, the NACHA-administered ACH Network — and its (soon to be three) same-day settlement windows — and The Clearing House, the big bank-owned payments network that recently launched its Real-Time Payments (RTP) service.
Interoperability must be job one from day one and baked into any plans. That includes working with all the third-party providers, including the core processors.
Like all depository institutions, credit unions must choose which payment rails to use, and integration with the credit union’s infrastructure is essential for any service, existing or new. That includes FedNow.
“Interoperability must be job one from day one and baked into any plans,” Sarvady says. “That includes working with all the third-party providers, including the core processors.”
There is some debate whether the FedNow service is even necessary. Sarvady weighs in on the “yes” side.
“There are credit unions that simply won’t sign up with TCH’s RTP because it’s owned by banks,” the veteran payments executive and consultant says. “That leaves them at a disadvantage if they can’t provide real-time settlement. If the industry’s goal is ubiquity and universal access to this solution, then FedNow makes sense for them.”
Of course, there are multiple major stakeholders in the payments space, and their views on FedNow vary. NAFCU and CUNA both support the idea, with some caveats. Here are a few other perspectives.
The View From A Credit Union
Rhonda Pavlicek is chief financial officer at TDECU ($3.5B, Lake Jackson, TX) and a member of the NACHA board. She says she understands why some member-owned cooperatives — especially smaller credit unions — don’t want to align their payments with the bank-owned RTP network, but her priority is to provide the real-time movement of money consumers expect and financial institutions must provide if they’re to remain competitive.
Rhonda Pavlicek, Senior Vice President and Chief Financial Officer, TDECU
For that reason, TDECU will consider using RTP as that rail’s user roster grows, especially as it will take another four or five years for FedNow to get up and running.
“Our members already use multiple channels like Venmo, Zelle, and Square Cash, and we use debit, wires, ACH same-day settlement, whatever we can to provide them their cash as quickly as we can,” Pavlicek says. “We have to respond to that demand.”
Plus, by the time FedNow launches, things could be completely different.
“Look how fast digital payments are changing,” the TDECU executive says. “Four years from now, will FedNow even be relevant?”
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Pavlicek also serves on the board of ePay Resources, one of a network of regional payments associations that provide advocacy, education, compliance, and other services to financial institutions. She recommends credit unions turn to theirs for guidance as they work to keep up with the changes.
The View From A Payments Association
Bill Schoch is president of San Francisco, CA-based WesPay, which serves approximately 1,100 members, including approximately 500 credit unions. He recognizes the appeal of real-time payments but says the use case is still developing. He warns against putting the cart before the horse.
Bill Schoch, President and CEO, WesPay
“I think it’s important to not let the technology drive whether to deploy a service,” he says.
The same-day windows that NACHA has opened has helped make batch processing timely enough for many purposes, he says. Plus, the back-end requirements of accommodating real-time payments messaging and settlement might make going that route more difficult for some than the value gained from the effort.
Schoch says he can see more appeal for real time among P2P users than business users. The former are individuals who don’t want to wait a couple days for relatively small transactions to settle, whereas businesses that move large amounts of cash like to hold onto that cash for as long as they can, something batch processing accommodates.
That said, he also understands why the Fed is interested in getting involved in real-time payments.
“The Clearing House tried to make extraordinary efforts to ensure fairness, but that didn’t seem to placate everyone,” Schoch says. “That’s why there’s been a groundswell of support for something like FedNow.”
The View From The Clearing House
Steve Ledford is senior vice president of product and strategy for The Clearing House, the bank-owned, New York, NY-based payments network that provides ACH clearing to approximately 400 financial institutions directly and indirectly to approximately 1,000 more.
Steve Ledford, Senior Vice President of Product and Strategy, The Clearing House
TCH was founded in 1853, making it the oldest banking association and payments company in the country. The network processes more than $2 trillion a day and covers half of all deposit accounts in the United States.
That bank ownership might be off-putting to credit unions and other non-banks, but Ledford points out that many credit unions already use TCH for ACH and now real-time payments processing. He’s a bit skeptical about the competing plans of the Fed.
“We have questions about FedNow,” Ledford says. “We don’t think it’s necessary. It’s not coming to market until 2023 or 2024, and we’re not sure what it will add that our capabilities don’t already offer.”
We think if we do a good enough job, we’re not sure what will be left for FedNow to bring to credit unions when it comes along.
Credit unions are big billers, Ledford says. And, according to the VP, TCH is working to make sure credit unions can send and receive payments on the company’s 2-year-old real-time rail, which according to Ledford “is perfect for billing and funding when it comes to things like cars and credit cards.”
He adds, “We think if we do a good enough job, we’re not sure what will be left for FedNow to bring to credit unions when it comes along.”
The View From NACHA
As far as NACHA is concerned, the possible arrival of FedNow simply brings more choice to financial services providers.
“It’s all about choice,” NACHA CEO Jane Larimer told the PaymentsJournal in August. “Whether it’s ACH, Same Day ACH, instant payments, or other new methods, I think the future will allow for more choices. And more choices are a good thing.”
Where others see competition, Larimer sees co-existence. New payment methods don’t necessarily ring the death knell for older ones.
“Cash and checks are an example of this,” she says. “While we continue to see fewer checks, they didn’t just instantly disappear when new payment methods emerged.”
The View From 2 Core Processors
Two of the major core technology providers to the credit union industry — Fiserv and Jack Henry & Associates — agreed the time has come for the Fed to respond to the demand for real-time payments.
Tim Ruhe, Vice President of ePayments and Strategy, Fiserv
They also stressed the need for provider cooperation and pointed to their own involvement with panels such as the U.S. Faster Payments Council and the Fed-organized Faster Payments Task Force.
“We urge the Federal Reserve to work in partnership across the industry, including with existing real-time payment providers, to establish a system that is both interoperable and creates opportunities for financial institutions of all sizes and charter types,” says Greg Adelson, general manager of JHA Payment Solutions, the company that owns the ubiquitous Symitar core processing solution.
Meanwhile, Tim Ruhe, vice president for ePayments Strategy and Partnerships, at Fiserv, says his firm supports more than 50 different payment networks around the world and is looking forward to the 24/7 capabilities of FedNow. However, those capabilities won’t come without hurdles.
“The challenge that credit unions will face is, one, how to integrate and incorporate FedNow into member-facing services, such as payables, receivables, disbursements, consumer bill pay, and person-to-person payments, and, two, how to operationalize support side by side with other payment networks and settlement methods,” Ruhe says.
Asked what his comment would be to the Fed if he were filing one for a credit union, Ruhe replied, “How soon will you be up and running?”
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