Onboarding FedNow with Guest Kevin "Payments Professor" Olsen

Wrestling Payments Podcast: Season 2 - Episode 15

Episode Summary

In the latest episode of Wrestling Payments, host Joe Casali is joined by Kevin Olsen, the Senior Vice President of Innovation and Strategy at Pidgin. They dive into the intricacies of onboarding the FedNow payment system, emphasizing the challenges and strategies involved. Olsen highlights the essential steps for a successful onboarding process, including the importance of knowing one's OAL (Officer Authorized List) and the significance of thorough testing to ensure a seamless transition. The conversation touches on the rapid adoption of FedNow, with Olsen noting the impressive number of institutions already onboarded.

Olsen also explains the operational and strategic considerations for financial institutions adopting FedNow. He discusses the necessity of involving key personnel such as IT, treasury, and authorized contacts from the outset to streamline the onboarding process. The discussion extends to the practical aspects of managing exceptions and ensuring continuous operations, even during weekends and holidays. Olsen reassures that while the system is designed to minimize exceptions, institutions must be prepared to handle rare cases without disrupting service.

The episode concludes with a look at the broader implications of instant payments and the potential for future developments in the payments landscape. Olsen provides insights into managing liquidity and security concerns, especially for high-value transactions. He emphasizes the flexibility of the FedNow system in accommodating various use cases and operational needs. Casali and Olsen's engaging dialogue offers valuable perspectives for financial professionals navigating the evolving world of instant payments.

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Guest-at-a-Glance

💡 Guest: Kevin Olsen

💡 What he does: SVP Innovation & Strategy

💡Company: Pidgin

💡Noteworthy: Kevin Olsen, Senior Vice President of Innovation and Strategy at Pidgin, is known as the Payments Professor. He has extensive experience in onboarding financial institutions to payment systems like RTP and FedNow.

💡Where to find Kevin: LinkedIn

Key Insights

FedNow Onboarding Requires Strategic Preparation

Onboarding to FedNow involves several crucial steps to ensure a seamless and effective integration. Financial institutions must identify their OAL (Officer Authorized List) to handle necessary authorizations and ensure these contacts are up-to-date. A thorough understanding of whether the institution will be send-only, receive-only, or both is essential, as it influences the testing and operational setup. Comprehensive testing for both sending and receiving capabilities, even if initially opting for receive-only, is recommended to streamline future transitions. Institutions should involve key personnel from IT, treasury, and operations early in the process to address potential challenges and ensure all stakeholders are prepared for a 24/7, 365 operational environment.

Managing Exceptions in FedNow

FedNow’s instant payment system significantly reduces exceptions compared to traditional ACH processes, where account mismatches often result in manual exception handling. In FedNow, unmatched transactions are automatically rejected rather than queued for manual review. This automation minimizes the need for weekend or holiday intervention. However, in rare cases of acceptance without posting, institutions have until the next business day to resolve issues, thus providing a buffer period. This system ensures that most transactions are processed smoothly without the need for immediate manual intervention, making it more efficient and reliable for continuous operation.

Importance of Immediate Funds Availability

Immediate funds availability is a critical feature of the FedNow system, ensuring that funds are available to the recipient as soon as a transaction is processed. This capability eliminates the liquidity risks associated with traditional delayed settlement processes. Financial institutions must define and implement systems to guarantee immediate funds availability, which may require adjustments in their current operations. Ensuring compliance with Reg J and understanding the timing requirements are essential for seamless integration. This feature not only enhances customer satisfaction by providing quick access to funds but also improves the institution's liquidity management and operational efficiency.

Episode Highlights

Knowing Your OAL is Crucial for FedNow Onboarding

Timestamp: [00:01:55]

A significant part of the FedNow onboarding process involves identifying the Officer Authorized List (OAL). This list includes individuals authorized to make signatures on Federal Reserve decisions and paperwork, such as changes to the master account. Institutions often overlook this, leading to delays and complications. Ensuring the OAL is current and correct is vital for a smooth onboarding experience. It is recommended to update the OAL list regularly to avoid issues where the listed authorized personnel might have left the institution.

"The OAL is authorized to be able to make signatures on federal reserve decisions, let's say. So like the paperwork, if you're gonna make changes to master count, something like that. This is the authorized person at the financial institution who can do that [...] We ran into a situation. That person's been gone for 10 years."

Thorough Testing is Essential for FedNow Implementation

Timestamp: [00:01:27]

Testing is a critical component in the FedNow onboarding process. Institutions should test both sending and receiving capabilities, even if they initially plan to be receive-only. This comprehensive testing ensures that switching to sending capabilities in the future is seamless and does not require retesting. Institutions are advised to involve their IT teams and service providers during the testing phase to address any technical challenges and ensure that the system operates smoothly under all conditions.

"Even though you want to be receive-only, you probably should go ahead and test and we go through what testing looks like. You should also test for send and receive so that when it comes time that you want to flip that switch, it is just the flip of the switch. You're not going back through the testing itself."

Onboarding Managers (OBMs) Facilitate the FedNow Process

Timestamp: [00:04:55]

The Federal Reserve assigns an Onboarding Manager (OBM) to each financial institution to assist with the FedNow onboarding process. The OBM serves as a guide, helping institutions navigate the complexities of the system and ensuring that all necessary steps are followed. This support is crucial for institutions as they transition to FedNow, providing a dedicated point of contact who can address issues and streamline the onboarding experience. This role is part of the Fed's commitment to making the onboarding process as smooth and efficient as possible for all participating institutions.

"The Fed has what's called an OBM because everything's a TLA, right? Everything's a TLA, three-letter acronym. We can't use full words, but if we use our full words, it's called an onboarding manager. And the OBM is assigned to that bank or that credit union and the OBM will be able to guide them through the entire onboarding process."

FedNow Mitigates Liquidity Risk for Financial Institutions

Timestamp: [00:16:46]

One of the significant advantages of FedNow is its ability to mitigate liquidity risks. Unlike traditional payment systems, FedNow ensures immediate settlement, which means funds are available instantly. This feature eliminates the lag time that can cause liquidity issues. Financial institutions benefit from reduced risk and improved cash flow management. The immediacy of transactions ensures that even large sums, such as $500,000, are settled without delay, providing a robust solution to liquidity concerns that previously plagued financial operations.

"Your liquidity risk doesn't exist. You can't lose money on it. And he goes, wait, what? And I went, because of the fact that settlement immediately takes place, even on a $500,000 transaction coming into you, your good funds model is there, you can't lose money on it. And he went, I like that answer."

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