42 MARCH / APRIL 2021 FINANCIAL MANAGEMENT FedNow: The Future of U.S. Payments? Today’s rapid advances in technology and unprecedented pace of change have pushed community financial institutions into what is, for many, unfamiliar territory. Gone are the days when a new technology solution or platform could be implemented and then left to run for a decade or more. Nowhere is that more true than in the world of payments, where rising customer expectations and increasing competition from both bank and nonbank actors require a level of foresight and responsiveness that smaller organizations may find difficult to build into their planning. Adding to this mix, the Federal Reserve Bank has announced its own proposed instant payments solution, FedNow, to be implemented by 2023. But will FedNow replace existing payment methods? Will it coexist with other new payments solutions, such as The Clearing House’s RTP Network? While there is no crystal ball to provide all the answers, some details are becoming clearer as to where U.S. payments are headed. First, it may be helpful to review how we got here. In many ways the current era of payments evolution began in 2015, when the Fed published Strategies for Improving the U.S. Payment System.1 That release kicked off a years-long effort to drive payments modernization that included the formation of the Faster Payments Task Force,2 the implementation of the RTP Network,3 and planning and development for FedNow.4 The concept of a new payment rail through the Fed was announced through a posting in the Federal Register in August 2019. After comments from more Shane Bauer First Vice President Compliance, BSA & Security, Audit Bankers’ Bank SBauer@BankersBank.com Bankers’ Bank is a Diamond Associate Member of the Indiana Bankers Association. than 180 financial institutions and other interested parties, high-level details were made public in August 2020. Additional information, including service details and the future flow of FedNow payments, have been made available on The Fed’s services site.5 In January 2021, the Federal Reserve announced that more than 110 organizations will participate in the FedNow pilot program. This will help bring FedNow to completion, with participating financial institutions and processors providing advice and input into the new service’s development, ultimately to include refinement and testing as “go live” draws near. Meanwhile, the RTP Network has already achieved access to more than half of all U.S. checking accounts through widespread adoption by the nation’s largest banks. The Clearing House has announced a goal of adding another 20% of all accounts in 2021, primarily by adding regional and smaller financial institutions to the network. By year-end, a strong majority of all U.S. banking customers will be able to send and receive realtime payments. While they create new opportunities for payment solutions and positive customer experiences, these new payment options also create some complications. The “secret sauce” of the RTP Network is pre-funding, enabling instant settlement. Financial institutions that allow customers to send RTP payments fund their portion in a joint account held at the Federal Reserve Bank of New York. But 24/7 management of liquidity can be a challenge, and running out of funds means declined transactions, as there are no overdrafts in RTP. Many smaller
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