Those of us immersed in the banking industry have been anticipating big moves by the Federal Reserve around support for a real-time payment infrastructure. We have been placing our bets on whether they would outline their own protocols, or further endorse the Real-Time Payments (RTP) network by The Clearing House (TCH), which they support today for real-time settlements. The decision is in! The Federal Reserve has announced their intention to issue their own set of protocols to support real-time payments known as FedNow. We have an answer. But this answer is leading to even more questions.
The Federal Reserve predicts that FedNow will be operational by 2024. Not only is that five years away, but it’s more than seven years past when TCH introduced the RTP network. The Clearing House created the Real-Time Payments infrastructure to deliver 24⁄7 clearing and interbank settlement that includes the real-time movement of money and enriched data between participating financial institutions. Reports indicate that RTP adoption is ramping up and over 50% of US deposit accounts support real-time payments through the network. The open question remains: Can financial institutions, not yet on RTP, wait another five years before delivering real-time payment services to their account holders?
Like many, I believe the Federal Reserve has good intentions. While TCH has built an excellent real-time payments solution, they are a consortium of the nation’s largest banks. This ownership structure creates the perception that their actions are skewed to best support larger financial institutions, and not local and community banks. In fact, of the 50% of deposits running through RTP, the majority are through the large national banks. FedNow’s objective is to offer protocols that are neutral and not tailored to a specific bank size or type. The challenge to this approach, is that the very institutions FedNow are trying to help can be hurt more by waiting five more years. Local banks and credit unions already account for a small percentage of all deposits and waiting five more years to deliver real-time payments is only going to see that number diminish further.
With more unknowns than knowns at this point, what are local banks and credit unions to do? One thing is certain: they can’t delay in meeting their account holders demand of real-time payments. My best advice is, whether building on their own or leveraging a turnkey service, local banks and credit unions need to act now. I recommend financial institutions start by:
- Leveraging the RTP network today, meeting the immediate demands of their account holders.
- Lobbying the Federal Reserve to ensure that FedNow integrates with and works alongside the RTP network future proofing as much work as possible.
- Defining the solution needed today, while keeping future change and growth in mind. Recognizing that protocols, regulations and systems change regularly, and any technology investment should be in an infrastructure that is open and flexible to adapt with these changes.
Having been part of the Technology Fellows team at Capital One, I understand the increasing customer pressure for banks to deliver more digital self-service offerings, which includes real-time payment services. I also know modernizing legacy technology and infrastructures to meet these demands is not trivial, nor is keeping overall risk assessment low through all the change. If you are a local or community bank or credit union seeking advice and best practices, visit me at FinovateFall 2019 where I will be demoing Evident Systems’ answer to these very challenges. And if you can’t make it, feel free to contact me directly to learn more on how you can make real-time payments evident for your account holders.