Rakesh is a passionate leader with an MBA in finance. He began his career in banking and has been working in consulting and IT in the areas of payments, cards, and investment banking for the past decade. He has a strong track record in strategizing and driving initiatives across customer banking. His expertise extends to delivery management and digital transformation in transaction banking. At Brillio, Rakesh is responsible for expanding our footprint in the cards and payment space with a strong focus in strategy and consulting for BFSI.
FedNow has the potential to modernize payment systems in the finance industry. Can IT companies and financial institutions work together to streamline integration challenges and set course for widespread adoption?
The demand for instantaneous payments is on the rise, with both consumers and businesses seeking payment solutions that align with their increasingly on-demand lifestyles.
The shift toward digital-first commerce and financial services in the US gained momentum during the pandemic. Today, consumers expect payment options that operate in near real time. They have an appreciation for mobile technologies and applications that enable them to make payments instantly and access goods and services with a single click. Recent research from the Federal Reserve revealed that four out of five consumers consider it crucial for their financial institutions to provide faster payment options. Additionally, approximately 75% of consumers use mobile payment devices for sending and receiving payments.
In a 2022 survey conducted by the Federal Reserve, nine out of ten businesses anticipated their banks to be prepared to facilitate faster payments 24 hours a day, seven days a week within the next three years. Businesses are actively seeking faster payment solutions due to their attractive features, immediate receipt of payments, inclusion of remittance details, and instant access to received funds.
FedNow gives financial institutions and fintech companies the opportunity to innovate with technology for improved financial flexibility and time-sensitive payments.
The US Federal Reserve released a pilot program for FedNow in January 2021. Officially launched in July 2023, FedNow is designed to provide secure payment capabilities to individuals, businesses, and financial institutions making it a crucial innovation in the world of fintech. Some of the key features of FedNow include the following:
FedNow is designed to be accessible to a wide range of financial institutions and service providers. This will encourage businesses and foster widespread adoption across the industry.
FedNow enables fund transfers in seconds and provides its users with the ability to send and receive money in real time around the clock.
Any payments made are irrevocable and final, enhancing security toward risks related to fraud.
With real-time payments becoming the norm, consumers and businesses will expect financial institutions to offer instant payment capabilities. Furthermore, its arrival will also see the emergence of new business models and fintech startups. Gartner’s Legacy to Digital Platform Survey found that 32% of respondents were making a phased replacement of their payment system compared to 24% who were making a major replacement. The window of opportunity is immense and will unlock avenues for financial institutions as follows:
Businesses that integrate FedNow into their payment frameworks stand to gain a competitive edge by attracting new customers as well as retaining their existing customers.
Real-time money transfers will improve customer satisfaction since it is seamless and convenient.
Financial institutions can monetize the FedNow service by offering premium services such as accelerated payments to their customers and value-added features for businesses.
FedNow will reduce the costs associated with traditional checks and automated clearing house transactions making operations more seamless and economical.
FedNow promises to make payments easier for households and businesses alike but it’s not without its own set of challenges. Integrating FedNow into an existing infrastructure is complex and expensive. This makes it difficult to integrate without disruption to existing operations. Furthermore, banking and finance being one of the most regulated industries in the world makes it challenging for financial institutions to implement FedNow. They must carefully navigate a regulatory landscape that is constantly evolving and ensure strict compliance with rules and security standards as well as ISO20022 message support.
Finally, the increased speed of transactions calls for robust cybersecurity measures to protect customers against fraud, data breaches, and other cyberattacks. This will make it crucial for IT companies to seize the opportunity and help industry incumbents and new players alike in navigating all these changes and disruptions.
Implementing FedNow is challenging but it opens the doors for technology players to help financial organizations traverse the challenges of regulations, complexities, and security risks.
Financial institutions need someone to assess their current payment landscape, identify gaps, and provide 24×7 support and instant payment services on their current infrastructure. They will also need the help of IT service providers to integrate FedNow into their existing systems and provide the necessary consulting, development, and integration services. With increased transaction speeds, the security risks increase too, and this makes implementing robust cybersecurity measures very critical to protect financial institutions as well as their customers.
Tailoring solutions with FedNow that address the unique needs of the financial institution will be in demand. IT companies need to provide customized software development services as well as help manage regulatory compliance associated with real-time payments. Every financial institution is driven by data. Offering analytics and data insights to help them optimize their operations and make informed decisions will help them achieve their goals.
While FedNow presents opportunities, it also poses a few challenges to IT companies.
There will be a need for scalable solutions that can handle higher volumes of real-time transactions which is a technical challenge that must be addressed.
For IT service companies, this represents a wealth of opportunities to provide the essential services for financial institutions looking to embrace real-time payments with FedNow.
FedNow is a gamechanger in the US payments landscape. To succeed, IT service providers must be agile and stay abreast with regulatory changes. They need to develop innovative solutions in partnership with fintech firms that provide off the shelf solutions to meet the evolving needs of their clients. FedNow is a catalyst for transformation, and IT service companies that adapt and innovate stand to thrive in this new era of instant payments. Finally, for financial institutions looking to provide a peer-to-peer service to their customers, an initial phase of preparations and assessments are needed which are given below.