Back-Office Overhaul Critical to Survival in Faster Payments Landscape, Says Form3

Just a few weeks after launch, FedNow is live.

Miriam Sheril, Head of Product, U.S. at Form3, said that the initial interest and embrace by banks just a few weeks since the Federal Reserve’s instant payments service launch has been encouraging.

Having debuted late last month, and as transactions have started to move through the system, Sheril noted that “the service is live, there are banks that are live on it, and there will be more banks joining.”

But there is still some hesitation from some financial institutions (FIs) to make a full leap into the faster payments system. Connectivity is a concern, and FIs are watching their peers for a sense of where, when and what use cases will be most in demand.

“This is instant payments,” said Sheril, “and this is 24/7. There are some rules that allow you not to be 24/7, but that comes with pain points because if you’re the bank that ‘signs off,’ all the other banks get this notification and they can’t send payments to you.” In addition, for the consumers and enterprise clients anticipating the ability to, for example, pay their bills anytime — well, if their bank doesn’t enable that functionality, they’ll make the leap to another FI.

The last several years of The Clearing House’s RTP network offer an example of how things might go. Sheril noted that growth started slowly, then accelerated, and cumulatively has logged half a billion transactions in half a decade.

Moving Beyond Batch Payments

The move toward instant payments is forcing FIs to revisit their back-office functions and realize that resilience is key — and that, at the end of the day, batch processing will no longer be sufficient. Nor will any outages in a world where supporting thousands of transactions every second has its own technical challenges.

Sheril’s experience and vantage point has been informed by her current career path in the private sector and a previous stint at the Federal Reserve — working on FedNow.

There are still a number of banks, she said, that are less clear about what FedNow might do for them, as they already have existing rails, ACH and Fedwire.

“This is a brand new type of payment. It’s not really an ACH payment; it’s a retail payment … It’s not really Fedwire; it’s a real-time gross settlement, but it’s not a wholesale payment. And so it’s unique. It’s a Frankenstein baby,” she said. And the banks are not going to be able to build out the functionality to support FedNow themselves.

Sheril said that the go-it-alone strategy proved costly and difficult for banks in the U.K. as faster payments took root there — and ultimately found value in partnering and in relying on the expertise of others.

To move swiftly toward faster payments becomes easier with providers such as Form3, said Sheril, who noted that her company’s platform is already hosted in three clouds globally and has connections to RTP, to FedNow and to the data-rich messaging standards governing faster payments.

“We’re not building this from scratch,” she told PYMNTS, adding that “we’ve been running all of this for six years.” The partnership model becomes especially valuable, she said, when it comes to fraud prevention, and the faster payments, of course, are irrevocable. Form3, for its part, is building a fraud consortium to help improve those defenses. It’s also likely that confirmation of payee (entrenched in the U.K.) can help cut down on misdirected fund flows.

Asked by PYMNTS what will drive increased use of FedNow, Sheril predicted that “the businesses will drive the banks” as account-to-account transfers mark the early use cases, helping to transform everything from the student loan industry to real estate.

Payrolls a greenfield opportunity, she said, as companies will compete with one another for workers — and offering “instant” payments to employees as wages are earned will become at first a competitive advantage, and then expected.

No matter how FedNow evolves, Sheril told PYMNTS, “as that network grows, it’s going to become more and more important for more banks to get on it — or they will be left behind.”