By Roy Urrico
More than a year after the official launch of the instant payment system FedNow on July 20, 2023, financial institutions (FIs) remain in various stages of implementation. To unravel the complexities of real-time payments, FIs need to analyze transaction data within their ecosystem and better understand how accountholders use their services, according to Plano, Texas-based Alkami Technology Inc., a cloud-based digital banking solutions provider for credit unions and banks.
FedNow, an instant payment infrastructure developed by the Federal Reserve, followed the launch The Clearing House Real-Time Payments (RTP) Network in 2017. Both services enable U.S. financial institutions of any size to provide safe and efficient instant payment services to accountholders. One issue: The two payment rails do not currently work together, even though they are both based on the same ISO 20022 standard.
“A great benefit of FedNow and RTP is they are very easy for FIs to set up and maintain compared to other payment channels such as wires and ACH, which can get really complex,” said Jeff Bucher, senior product strategy manager, money movement, at Alkami.
Bucher sat down with Finoptamus to discuss how FIs may benefit in onboarding both FedNow and RTP.
“As more digital platforms and fintechs decide how they want to use RTP and FedNow, I think it is going to grow. We are just in the early stages of trying to figure out how to use these instant transfers and instant payments,” Bucher said. “It is going to keep growing over time as more people get comfortable with it. It is going to take a big chunk out of ACH and wires, and over time, just basically replace it. Because it is easier to use, less complicated than ACH for certain and less complicated than wires.”
Where Instant Payments Stand Today
While many FIs are exploring these solutions, they are by no means rushing into them. In all, about 10% of the nation’s 9,000 FIs are estimated to be participating in FedNow. For credit union and banks, the evolution from daily batch payment processing to real-time workflows requires improved infrastructure. This may include more robust fraud checks, since real-time payments cannot be canceled by the payer.
“It is one year in, the Fed did a ton of marketing on FedNow, so there was a lot of buzz. It not only raised the profile of FedNow, it raised the profile of RTP. Now that platform (RTP) has increased considerably, not as much as FedNow, which is up to (about) 1,000 financial institutions,” said Bucher. “Like 90% of them, if not higher, are just doing receive.”
Bucher pointed out, “They are just getting onto the (FedNow) network so that if another financial institution wants to send them a payment, they can receive that payment. The FedNow network and the RTP network are two separate things. There is no interoperability; they do not cross over whatsoever. So right now, if you want to be able to receive a FedNow payment, you have to partner with either the Fed directly or you have to partner with a payment provider who will facilitate you getting onto that network to be able to receive those payments.”
Sending: The Next Step
The next bridge to cross for credit unions and banks is sending real-time payments. That comes down to use cases, according to Bucher. Currently, the account-to-account (A2A) use case is the most popular. “And that's what (Alkami) built on our platform, that's what I see on a lot of other platforms, and a lot of other banks and credit unions have an interest in and have already set up or are looking to set up.” Bucher indicated many digital platforms are not set up for multiple instant payment use cases. “They only have like that A2A option.”
The peer-to-peer (P2P) payment option “is obviously another popular use case,” said Bucher. “A lot of the P2P providers like Venmo, PayPal, and so on, they are sending money where it is an instant transfer, but then they need to do settlement behind the scenes with the financial institutions. They are using RTP or FedNow for that settlement.”
Bucher also touched on business use cases. “There have not been a lot of business use cases set up, but that is where it is going to go next. Businesses, instead of sending a wire transfer, sending an ACH, they can send a FedNow payment and send an RTP payment.”
Said Bucher, “Payroll is another thing that has come up. A lot of businesses have some temporary workers that they need to pay and rather than sending ACH and waiting for the money to settle, they can go ahead and pay them today and then get them off their books. Uber uses RTP and FedNow. They pay their drivers right away.”
Bucher noted that Citibank and Bank of America have not offered FedNow to customers; only RTP. “Some financial institutions are just on FedNow. If they are on FedNow, you have got to send it FedNow; if they are on RTP, then you have got to send it RTP because there is no crossover between the two.”
Message to Credit Unions and Banks
Credit unions and banks need to connect to the networks. Bucher explained, “That takes some time to get that set up, either The Clearing House for RTP or with the Fed for FedNow. Once the messages go back and forth between the originating financial institution and the receiving financial institution then settlement happens.”
Acknowledging that different FIs have different priorities, Bucher recommends if credit unions and banks have the funds available, they should sign up to receive both FedNow and RTP. “You do not want to pass by the chance to receive funds on behalf of your members or users. Then the next step would be what use cases do you think are important for you as a financial institution? What do your users, what do your members want to be able to do in terms of sending funds instantly?
“You need to work with a payment provider partner who will hold your hand through all the steps (and) knows what they are doing with regard to RTP and FedNow,” said Bucher. He noted, for instance, that RTP and FedNow are 24/7 networks, which is very different than wires and ACH. “So, you know, on the weekends, at midnight on holidays, there can be payments happening. A good payment provider can automate a lot of the processes for you and make it easy for you to manage those where you do not have to keep somebody in the office 24/7, 365 (days a year) to manage it.”
Concern About Fraud
FedNow has built in several features to combat fraud. For example, financial institutions can set risk-based transaction value limits, message signing, and reporting features. Nevertheless, fraud remains an anxiety.
“There's been a lot of concern around fraud prevention and mitigation for a lot of the financial institutions, which I think is a valid concern,” said Bucher. “When you send funds via RTP or FedNow, you are sending funds instantly. It is very much like a wire transfer, once you hit the button and the funds are sent to the other financial institution, that is a final payment. There is no official mechanism to be able to pull those funds back.”
Bucher suggested FIs consider how to manage fraud for instant payment accounts. “(Alkami) always recommends a layered approach to fraud detection. We would also always recommend doing lower limits whenever you start out on a new network, whether it is RTP, FedNow, or even Zelle or any of the P2P providers. You want to set the limits across the board at a lower level, and then be able to bump the limits up over time.”
He cautioned many cyberthieves look for new accounts to hit. “They look at the list of who goes on to the different networks, and as soon as they see somebody come onto a new network, they assume that that financial institution doesn't necessarily know how to manage the fraud.”
About The Costs
Bucher explained costs vary by payment provider. “It could be tens of thousands of dollars to get onto the network as an upfront cost. There is still a cost of going directly to the Fed; they charge some upfront costs. Once you are on the network, the cost per transaction is typically not very high, $.045 basically per transaction.”
In addition, said Bucher “You are going to have incremental costs for the payment provider on top of that, but it is still pretty cheap. It is going to be in the range of how cheap an ACH is, or maybe even cheaper depending on who your provider is for ACH; it is definitely going to be cheaper than wire transfers.”
Bucher noted many FIs are looking to charge their users or their members a per transaction fee. “You could do percentage fees or you can do a flat fee per transaction to offset some of that cost if you want to. I have seen financial institutions that have turned it into a revenue stream.”