Kevin Emery, Chief Commercial Officer, Iliad Solutions
As Reed Luhtanen, Executive Director of the US Faster Payments Council, says - it’s a really exciting time for instant payments in America right now.
That’s because, thanks to the FedNow Service’s recent launch, we’ve witnessed a number of the nation’s biggest financial institutions embracing modern technology to make real-time transactions an everyday reality.
These developments will affect everyone from gig workers to stock market traders and are set to send annual instant payment volumes soaring.
To help businesses better understand the intricacies of implementing instant payments in the US and what financial institutions need to do to get on board, I took part in a special one-hour webinar hosted by Iliad Solutions in partnership with LTIMindtree.
Why payments innovation is accelerating in the US
It was a privilege to be joined in the session by US faster payments guru Reed alongside global financial ecosystem expert Ram Khizamboor, Chief Delivery Officer at BFSI and LTIMindtree.
The discussion was deftly steered by Vaibhav Shirke, who heads up LTIMindtree’s payments Centre of Excellence, and began with a neat summary from Reed:
“We’ve had a solution in production for six years now from The Clearing House’s Real-Time Payments network. They've connected to about 70% of the DDAs in this country for ‘receive’ and that has passed 500 million transactions processed through the network.
“And so what you've got is a really exciting combination of a brand new service coming to market and bringing a lot of attention and energy to the space, but also a lot of learnings that we've all experienced through The Clearing House in their operations.”
This is indeed very exciting, considering that when I moved to Atlanta from the UK instant payments weren’t widely available. It was strange having to revert to cheques and money orders - processes we’d moved away from in Great Britain.
But now that the US has a comprehensive system in place, the key will be how we ensure that instant payments are safe and secure and that all the different rails can connect as adoption scales up.
How end users from businesses to consumers will drive adoption
I also think that financial institutions should be mindful that customers will likely play a big role in driving uptake of instant payments.
To illustrate the point, I gave two examples during the webinar. The first relates to the growth in employers in the service sector attracting new staff by offering earned wage access - that is, enabling colleagues to draw down wages at the end of each shift. A great use of instant payment tech.
The second example demonstrated the flipside: financial institutions that opt to ‘front’ rather than facilitate genuine instant transactions could find themselves exposed and unable to trade due to a lack of funds needed to honour payments.
In summary, if you’re going to offer real-time transactions it makes sense to use technology like FedNow to ensure an instant payment is exactly that.
That said, while customers will put financial institutions under pressure to move with the times, Reed cautioned that banks will still be weighing up the cost versus complexity when deciding to move forward with FedNow, alongside any potential return on investment.
He also made an excellent point that businesses will be looking to ensure faster payments don’t undermine existing business models or cause issues for customers in terms of fraud or losses.
How the US shapes up compared to other markets
Putting things into a global perspective, Ram shared details of the scale of instant payments in India and China, where it’s become second nature for consumers to use smartphones and QR codes to make purchases and send and receive funds.
In China, there are around 18 billion instant payments per year whereas in India there are around one billion per month. The US, according to Ram, is on around 1.8 billion instant payments per year - but he pointed out that it was impossible to make comparisons due to the fact that population sizes were incomparable.
However, Ram expected the rate of instant payments to climb very steeply in the US, as has happened in India and China, where volumes increased by 20% per year while values rose by 50%.
It was vital then that systems are scalable and resilient. In fact it’s perhaps not in doubt that change will happen fast in the US, as there “is already talk of FedNow 2.0”, he said.
A new collaborative ecosystem
Another key point during the discussion was interoperability between the different instant payment systems. I agree with Reed’s point that growing the ecosystem is less about technology than it is about relationships and legality.
Indeed, the tools to integrate different players from across the instant payments networks are already in place. It’s only a matter of time before we see partnerships and co-opetition, in my opinion.
I also agreed with Ram when he said that the ISO 20022 messaging standard would become the foundation on which US instant payments systems connect with the wider world.
Nevertheless, while we’ve seen some big names in US banking, such as JP Morgan Chase and Wells Fargo, adopt FedNow since its July launch there are many financial institutions - large and small - yet to make a start.
Those at the beginning of their instant payments adoption journey should be mindful of 10 key areas: know the requirements; take time to prepare for implementation; engage with the industry; register with FedNow; get up to speed on compliance; thoroughly understand security; educate your staff; ensure certification is done properly; progress through approval; evaluate the success of your implementation.
Naturally, we discussed much more during the webinar, which can be watched in full here. Do have a look and share your thoughts with me at +1 404 723 6613.
And if you’re a financial institution contemplating FedNow adoption, you may also find this guide on testing useful.