The FedNow Service instant payments system is slated to launch next year — a culmination of an effort stretching out more than three-and-a-half years, a pilot program with more than 100 participants and the development and testing of multiple product features, functions and use cases.
In a recent On the Agenda discussion, a trio of payments experts took note of the excitement, ambition and challenges that have been building since August 2019.
Taking part in the OTA discussion were Dan Baum, senior vice president, head of payments product for the FedNow Service; Kevin Alsup, senior vice president technology solutions, Excite Credit Union; and Elspeth Bloodgood, senior advisory technical product manager at Jack Henry.
The final months of the 120-member pilot program’s advisory phase — and the move, now, into the testing and certification phase — they said, is the beginning of the reality of truly modern payments in the U.S.
Expectations among the banks, the processors and the providers that have already signed on are high. Alsup said that Excite Credit Union’s clients “want us to provide them with a secure, convenient, instant way of moving money back and forth … we’ve always believed that the Federal Reserve was the one place that could deliver instant payments, which is why this is very exciting for us and for our members.”
An Agile Process
Through the initial stages of the pilot program and into the present day, said Jack Henry’s Bloodgood, the Federal Reserve has approached the program through an agile process, which has helped avoid friction and pain points.
“They would bring pieces forward one at a time, and then we would be able to respond to that and provide input on how that would impact community and regional financial institutions,” she said.
Those regional institutions tend to have more complex tech stacks, Bloodgood noted, due in part to the size of the financial institution (FI) and a web of relationships with processors and correspondent banks. Constant discussions with the Federal Reserve has helped turn feedback into testing and live demos.
“It’s easy to undersell the amount of complexity and effort that has gone on with this project,” said Baum.
He described some of that complexity: the FedNow functionality “plugs into” the master accounts at the Federal Reserve system. Settlement will be done instantly in real time to the master accounts, which also are interacting with all the other existing payment services. And, they are the accounts upon which correspondents and other financial institutions will rely — 24/7/365.
“We’ve seen a lot of excitement in the industry,” said Baum, “and it’s being conveyed in the readiness of FedNow Pilot Program organizations and their customers.”
There’s still education needed to bring other FIs into the fold and to move to ubiquity, said Bloodgood, who added that some banks are comfortable with the current payment rails.
“You really have to step back and make sure everyone understands the language, you have to provide that education. And so we’ve been really active in participating in that,” she said.
Looking ahead, the panelists said, there remains some low-hanging fruit that will prove to be early use cases for the FedNow Service and instant payments. Bloodgood said that there’ll be a digital transformation of the paper checks used in B2B. And there will be connectivity on an international stage as real-time payments networks interact with one another.
“Business services need to move money,” said Alsup, and offering another path beyond ACH and wires can address a number of inefficiencies. Payroll is another use case that will see early adoption.
“We’re at the early stages where we don’t even know, yet, what’s coming to market,” said Bloodgood, who added that for FIs and instant payments, “the real mistake would be not learning about it, not building it into your strategy.”
The journey has been long, the fine-tuning constant between the Fed and 120 pilot program members.
And as the Federal Reserve’s Baum said, “we’re close, we’re in the ballpark — and as we move toward our launch in mid-2023, we’ve got everything where it needs to be.”