The future of payments is in the palms of our hands

“We are committed to building an instant payment system that delivers the payment speed that users want without bypassing the legal and regulatory protections they have come to expect from banking relationships,” said Lael Brainard, former vice chair of the Fed, and incoming director of the National Economic Council.

“Instant payments will enable millions of American households and small businesses to get instant access to funds, rather than waiting days for checks to clear,” Brainard said. “An instant payment infrastructure ensures the funds are available immediately, which could be especially important for households on fixed incomes that wait days for the funds to be available to pay a bill.”

This new protocol will not only help end users, but also financial institutions, which will have the opportunity to develop new business models due to the open APIs. This will be an historical mark for US banking institutions, but alongside it comes significant challenges.

The main challenges are in complying with Fed regulations while implementing the new protocol; establishing high-quality implementation of the Open APIs; and anticipating any future problems. It is of paramount importance to ensure that all integration processes within the bank’s legacy system will be carried out without any damage to the current structure. Additional challenges include dealing with short deadlines and large teams while managing several important stakeholders with different demands.

GFT has successfully participated in the implementation of instant payment initiatives in Brazil. We also had a part in the debates with regulators on Open Banking throughout the rollout in Brazil, and even helped build the proposed structures and data that the working group led by Federação Brasileira de Bancos (Febraban, Brazilian Federation of Banks) presented to Banco Central do Brasil (BC, Central Bank of Brazil). Pix, the Brazilian instant payment system inspired the Fed to revolutionize the American instant payment system in part due to its success in Brazil.

In announcing the accelerated timeline for the launch of the FedNow Service, the Fed provided financial institutions with notice that the service would launch in less than a year. Thus, GFT is preparing to help our clients implement these solutions and adapt to this new protocol, of which thousands of institutions are requiring assistance. This includes provisions of the new regulations and onboarding of partners on the platform for exposing the APIs.

The success of the service for the institutions that are required to offer it, will depend on three key aspects:

The ability that banks have in offering the service, in addition to its core offerings and features, better than its competitors, will make a difference. In a game where each participant plays by the same rules and adheres to the same deadlines, those with a focused determination to invest money, use cutting-edge technology and employ the world’s best professionals – products, businesspeople, technology architects and engineers – all have the chance to be successful in the market.

Customers will use FedNow only if they are 100% convinced about the reliability and security of the service. Even for an established major financial institution with a strong reputation and loyal customers, there is always an uncertainty associated with the service that must be addressed. Besides ensuring all data security aspects run smoothly and maintaining the stability and availability of the 24/7 online service, institutions must effectively communicate with their customers, through marketing advertisements and institutional campaigns.

This is a key aspect because it can act a great difference-maker for institutions. It is not clear yet how the Fed will define the guidance for the use of FedNow. However, our experience dictates that there will be some flexibility in the end-user experience journey. In other words, the institutions that provide the best look and feel, with the simplest and most seamless transactional and data flows, will strengthen their customer relationships, allowing them to earn their trust that much more. The opposite effect is also a risk, where a negative user experience can cause customers to consider a change to another platform in order to carry out instant payment transactions.

“The FedNow Service will be released in phases and additional features and service enhancements will be introduced over time. Other aspects of the service, such as fee structures and governing terms, will be announced prior to the launch of the service,” according to a September 2022 Fed press release.

FedNow can be understood as a piece of the bigger picture of Open Finance. The technical aspects and the API approach are similar to other Open Finance products and services. As well, the technical standards and its systemic regulations are common to Open Banking and Open Finance arrangements. From a business standpoint, FedNow allows customers and institutions to easily share data, i.e. transactional information used in instant payments. It also provides customers with a choice in being able to easily switch services by using a similar product that can provide a better experience.

FedNow represents a more significant revolution than Pix. With FedNow, we are now talking on a global scale with the future of payments in the palms of our hands.

Sources:

• https://www.federalreserve.gov/paymentsystems/fednow_about.htm
• https://www.ecommercebrasil.com.br/noticias/eua-testes-pix-fed-brasil-importa-sistema
• https://www.forbes.com/sites/forbestechcouncil/2022/10/31/five-lessons-from-brazil-for-implementing-fednow/?sh=1b0eb94b7c4c
• https://www.federalreserve.gov/newsevents/speech/brainard20200806a.htm