Implementing FedNow: Four Considerations

It will take some time and effort, but with proper planning and research financial institutions can minimize the hassles.

Many people in banking and financial technology aren’t aware that the word “core” in “core banking provider” started out as an acronym for “Centralized Online Real-time Exchange” (or “Environment”). This “real-time” technology allowed consumers to deposit money and see the balance reflected immediately. Consumers could also withdraw cash from any of the bank’s branches. The CORE system of banking cut the processing time for deposits from 24 hours down to minutes.

The recent launch of the Federal Reserve’s FedNow Service promises to make a similarly radical change to the world of digital payments.

For the average consumer, real-time payments happen all the time using Venmo, Cash App, Apple Pay, PayPal, and Google Pay. Behind the scenes, these services create the impression of instant payment by floating the money while the actual transaction clears over several days.

The difference with FedNow is that it will allow banks to implement a true, real-time payments mechanism in their digital-banking environments, which brings us to our first consideration.

How Do Faster Payments Fit into Your Digital Experience?

The FedNow service will help to level the playing field for financial institutions competing with certain fintechs. Consumers and businesses will be able to use the capabilities of FedNow only through a bank or credit union.

That means you can incorporate an excellent new product or “feature” into your digital-banking experience without developing it in-house.

However, your technology team will still need to work with your digital banking provider to ensure the user experience for both employees and account holders is smooth and intuitive.

As you are probably aware, the ability to send and receive payments faster is a major selling point, especially in the commercial banking space. While consumers will likely use the service, real-time payments will be a much bigger boon for businesses and other organizations that use commercial-banking services. This brings us to the next consideration: use cases.

Which Specific Use Cases Does Your Institution Want to Support?

The financial-services industry is littered with pundits overstating how XYZ digital technology will “change everything.” That kind of language makes for grabby headlines and poor strategic thinking.

As of this summer, only a small cohort of institutions had adopted FedNow. It’s safe to assume that many more institutions will soon follow suit. The best way for your institution to engage with FedNow is to set aside time to plan and list all the specific use cases that your teams can identify. Some will be obvious. Others may apply to individual clients or partnerships.

Start by listing all the ways that your institution relies on “slow” payments. Then list the more imaginative or untested use cases where real-time payments could create revenue or improve the account-holder experience.

These lists will probably include product and service updates that impact online banking, mobile banking, text banking, and Interactive Voice Response (IVR) systems. Account opening and funding is another area that could be improved. You may also need to change the processes for statements, reports, data extracts, and other data-driven tasks.

What Other Questions Should You Should Ask Your Team?

FedNow is a tool that only financial institutions can access. The Federal Reserve permits financial institutions to function as middlemen, offering real-time payments to their account hold-ers. They’ve also published several helpful resources to help your institution understand the new service.

This means that much of the experience will be hidden within your existing technology stack. That sets up an easy mistake: implementing FedNow in ways that serve your staff but fail to consider the account holder’s experience, or vice versa.

It may help to think of FedNow as a new product your institution is adopting, so someone in your organization needs to “own” it. This person, or team, will be responsible for analyzing and optimizing the user experience for staff and account holders.

Here are a few questions that will jumpstart your FedNow implementation strategy:

What data will the FedNow Service require?

Much has already been written on the ISO 20022 standard that FedNow uses, but there may be other ways your data ecosystem and workflows will need to change.

Will your current digital banking and back-office interfaces make it easy to report fraud or erroneous payments?

One of the risks of instant payments is the potential for fraud. Although inconvenient, slow payments make it harder for consumers to have large sums stolen without recourse. Your institution will need protocols to help mitigate fraud and its effects.

What reporting needs will your retail and commercial customers have for real-time payments?

These changes may be minor, but they shouldn’t be an afterthought. Create a fictional retail account and commercial account. Then, walk through multiple reporting scenarios. Take a report from an existing account and reimagine it with real-time payments supported.

FedNow Can Be a Powerful Tool

In some ways, implementing FedNow may feel like a huge undertaking for your staff and a long-overdue upgrade for your account holders. Remember, their expectations have been set by the fintech apps on their smart phones.

However, with a little forethought and strategic planning, you can equip your staff to navigate the changes. If an account holder responds to the new feature by saying “Finally!” and starts paying in real time with your digital banking app instead of Venmo, that’s a win.

If all goes well, your account holders will embrace real-time payments through your institution and forget why they used separate third-party payment apps in the first place.

—Murthy Veeraghanta is chairman and chief executive of VSoft.