FedNow Is Live but Banks Face Integration Decisions

For banks eyeing what they must do to get on board the FedNow Service to meet customers’ expectations for faster payments and integrate with the first new payments rails in the United States in four decades — the challenges are numerous.

Form3 Chief Operating Officer Eimear O’Connor said in an interview with PYMNTS that some lessons have already been learned outside of the U.S., particularly in Europe, where real-time payments have been a mainstay.

“What we’ve seen in other markets is that the biggest integration challenge for many banks and financial institutions is not so much the access to the new payment system itself,” she said, contending that “the biggest challenges are more often than not within the bank’s own internal systems and processes within their back offices.”

Those legacy systems were never deployed to operate in a real-time environment, she said.

Making the Necessary Updates

“If banks haven’t yet made that investment to update their back offices to implement modern cores and platforms, this is where the integration challenges are by far the greatest,” O’Connor said.

The banks that have yet to modernize their back offices will find it daunting to meet customers’ expectations and demand for immediate experiences delivered through an app setting, along with immediate access to funds and the ability to have a real-time snapshot of their financial position, she said.

A platform approach and enlisting providers’ efforts (including Form3) can help smooth the onboarding process for financial institutions (FIs) as they embrace the FedNow Service, said O’Connor.

Form3 “is focused on the provision of non-proprietary functionality to all banks on the platform,” she said.

That functionality involves access but also payments orchestration and the data flows that all banks need to innovate, she explained.

“This is the infrastructure that provides the basis for those banks to package and create individual customer propositions for their own users,” she said.

The company is in the process of rolling out a multicloud platform that provides the added benefit of running “across” several providers simultaneously, which improves resilience, she said.

“Banks can truly outsource the burden of running the technology — not only now, but also ensuring that it evolves to meet the future needs of both the banks themselves and also the schemes that they’re connected to,” said O’Connor, who added that security is also built into the platform.

Fraud is top of mind for any FI connecting to the FedNow platform — for, as the saying goes, where there are faster payments, faster fraud will follow.

“Banks will be absolutely focused on how to ensure that security is built in right from the beginning” of product, service initiatives and payments scale across the FedNow Service, said O’Connor, “rather than perhaps as it used to be historically, which was much more of a control function at the end of a development cycle.”

The Importance of Data

Underpinning it all is data, and as more banks sign on to the FedNow platform, she said, it will be increasingly important to share data with their scheme counterparts, especially in a bid to stop fraudsters and head off various areas of attack, including push payment fraud (which has been a source of vulnerability, especially in the United Kingdom).

Banks can leverage advanced technologies, including artificial intelligence (AI), to insert fraud detection into the payment flow.

In the months and years ahead, banks will become increasingly comfortable with the FedNow Service and real-time payments, but there will always be room for legacy payment options that have been entrenched for decades, such as wire payments, O’Connor said.

A lot depends on the use cases, and, in many cases, the dollar amount of the payments (say, a real estate transaction), she explained. Some recurring payments might not require a sense of real-time urgency.

“The real value that banks can create for themselves lies with how they choose to productize different payment systems using the different underlying payment capabilities that they have,” she said. All the banks have the same capabilities because they will have the same infrastructure, “but it’s about how they package those up to meet the needs of their customers in different ways.”