FedNow(SM) Pilot Program Update

This fall, FedNow leaders hosted a 90-minute virtual Community Town Hall featuring a panel of FedNow Pilot Program participants who shared their experiences and progress toward instant payments. From the business case to lessons learned on the journey toward implementation, panelists offered insights into what planning and execution of the FedNow service require.

Participants included: 

• Kassi Quimby, Vice President, Industry Relations, Federal Reserve Bank of Chicago
• Jessie Bitetti, Assistant Vice President, FedNow Industry Readiness, Federal Reserve Bank of Atlanta
• Blayne Furey, Management Information Systems Officer, Freedom Bank
• Margie Giles, Senior Vice President, Operations, Alloya Corporate Federal Credit Union
• Andrew Haskell, Director, Treasury Services, Immediate Payments Product Management, BNY Mellon

What follows are excerpts of some of the key points made during the session.

Use Cases

One of the key topics that rose to the top was how instant payments can be used. From clarity around immediate receipt of payment to supporting those with cash flow issues, FedNow Pilot participants focused on the benefits of having real-time functionality.

Blayne Furey, Management Information Systems Office of Freedom Bank, a community bank with assets of more than $100 million in Columbia Falls, Montana, had this to say:

In our conversations internally and with our customers, we found that instant wasn't really as critical, but what our customers needed and wanted was certainty. This disparity between the information and the actual settlement of funds…we sometimes have to tell our customers, because we’re relying on third-party service providers, the funds should be available in one to two days or that ACH should get picked up for the last nightly processing cycle. We’re very eager and excited to have that certainty and for our customers to know that the information and payment settlement are synced up together.

Margie Giles, Senior Vice President, Operations, Alloya Corporate Federal Credit Union, an organization representing 1,400 credit unions and credit union organizations across the country, offered a different perspective:

We've had some really good examples of situations from both the consumer side, as well as the business side, in terms of the need for quicker payments. And, so, looking at it from a consumer standpoint, just the faster nature of the payments for people who might be working paycheck to paycheck and might have some cash flow issues, or perhaps they've undergone some financial hardships… they need to receive those payments in a more immediate timeframe.

On the business side, I think there’s a tremendous opportunity here for businesses to take advantage of streamlining their receivables, their disbursements, using the request for payment capability. And, so I see there’s an opportunity for a lot of custom solutions to integrate with FedNow to disperse insurance payments, to make payroll more frequently based on end-user needs. So, it’s a great time. I think that the timing of this is really perfect in terms of people becoming more aware and understanding what real-time and instant payments can really do for them.

The FedNow Service is a platform for innovation that banks, credit unions, service providers, and others can use to innovate and offer various instant payment use cases for their customers, says the Federal Reserve. However, the initial release is limited to core clearing and settlement capabilities and requests for payment and remittance information to support a range of use cases, including Account-to-Account transfers and Consumer-to-Business bill pay.

Payments Strategy

With use cases addressed, Bitetti then asked participants about their instant payments strategy, particularly their goals for offering the FedNow Service.

“For us, it was looking out at the horizon and seeing this continued change happening,” explained Furey. “We felt that if there wasn’t a safe and secure method for instant payments, those transactions were going to happen somewhere, whether it was through a non-financial institution, FinTechs, or cryptocurrency, and there was a chance that financial institutions like us could get left in the dust.”

Freedom Bank's strategy was to focus on the safety and security of the system, recognizing that they would have to leverage third-party providers for an institution their size. The bank's account processing is outsourced to their core provider, which they also use for their online and mobile resources.

“What’s exciting about the FedNow Service being a payment rail developed by an independent agency is, hopefully, what we’re already seeing, spurring a lot of innovation and competition amongst potential third-party providers,” said Furey. “So, we look forward to being able to leverage a system that we can count on as being reliable and, most importantly, safe."

Giles offers a different perspective, emphasizing the customer/member experience.

“By leveraging those types of capabilities, it will enable our members to focus more on their customer base and the use cases they want to deploy out to their customers,” Giles said. “What it comes down to is trust. And our members trust us in terms of their money and our capabilities to provide sound, secure solutions. Our strategy is to really just enable all aspects of participation in FedNow for our members.”

As represented by these panelists’ responses, strategies for instant payments and goals for the FedNow service will vary based on the financial institution, its members and customers, and the various use cases that would best serve their organizations.

The Tipping Point

Bitetti asked panelists about what "tipped the scale" and motivated them to become an early adopter of FedNow versus taking a wait-and-see approach.

Although Giles didn’t recall a specific “aha” moment, Alloya Corporate Federal Credit Union has been involved with real-time and instant payments from the start with the Fed Faster and Secure Payment Tack Force and Faster Payment Council Workgroup.

"We've been on this journey for quite some time," Giles said. "I would say momentum continues to build, and it's really just a natural place for us to be an early adopter and work to help simplify and streamline the back-office environment for our members and help them understand how best to take advantage of instant payments for their members or their customers."

On the other hand, Freedom Bank waited to see what was happening in the real-time payments space before acting. Furey explains:

As a community financial institution, we have to be really careful about how we allocate resources, and we have to understand and recognize that we can’t do everything. For example, we don’t offer a credit card product, because we couldn’t do it as well as a lot of major players already out there. So, we’ve been picking and choosing things that we can do really well. And when we saw the announcement of the FedNow Service, that, for us, was perfect. This is our opportunity where we can offer the same type of product, a competitive product that can match what a customer may get from a much larger institution.

As pilot participants, these FIs are early adopters of FedNow and have begun the journey in support of broader industry engagement. So, naturally, the conversation then shifted to planning to date and what other FIs should consider as they gear up for FedNow.

Lessons Learned

So far, there have been two lessons learned, according to Giles.

One is that this solution, this this new FedNow instant payments, it's not an all-or-nothing proposition. I think it's something that each institution, each company needs to evaluate how they want to participate and what the right timeline is for them. You don't have to do everything all at once right at the beginning, so you need to kind of look at and educate yourself on what options are and figure out what the right path is for your organization and your customers, and then plan accordingly.

The second lesson learned is that I think collaboration and partnerships are really key in this endeavor. There are a lot of pieces to this puzzle, and regardless of the size of the organization, you might represent there are opportunities to work together, to leverage the strength of different partners, trusted partners that you have relationships with, or others that might have solutions that could meet your needs.

Furey said that Freedom Bank's first and biggest lesson learned was understanding the distinction between a payments service and a payments product. Initially, the bank had in their minds a picture of their customers having a FedNow app on their phone that they opened. Realizing that isn't what's being developed for the FedNow Service was a critical lesson for the bank to get early on. Recognizing the opportunity and the necessity of working with third-party providers that will do a lot of the leg work for the bank was an important point of distinction for Freedom Bank.

“We see at our own institution that consumer education will be really important,” said Furey. “We created sample roadmaps our members can think about as they learn more about what their customers need. Again, it’s not a one-size-fits-all deal; it’s going to be custom to the specific needs of each organization.”

Fraud

Panelists also discussed the need for risk mitigation and fraud controls, noting fewer opportunities to recover funds with real-time and instant payments. The importance of knowing your customer, following the guidance for electronic payments, and conducting a risk assessment were also raised as important issues to start thinking about now, in addition to use cases and products.

“Take advantage of artificial intelligence (AI) and machine learning,” said Furey. “The best offense is a good defense. Build up those defenses as soon as possible.”

Educational Resources/Engagement Opportunities

With the panel discussion at a close, Kassi Quimby, Vice President, Industry Relations, Federal Reserve Bank of Chicago, shared more about future engagement opportunities and educational resources that will be made available to the public, some of which have recently been released.

According to an October 20 news release, the Federal Reserve’s new instant payment tools and support include:

• The FedNow Explorer website, an experiential platform designed to educate and engage financial institutions and service providers with curated content and business tools to support their instant payments journey.
• The Ecosystem Accelerator Group, a new user group within the FedNow Community that will provide payment processors, core banking system providers, mobile and online banking platform providers, payment hubs and gateways, bill pay/presentment service providers, and other new opportunities.
• A new Service Provider Showcase to support end-to-end development of the instant payments ecosystem and FedNow Service implementation. The online showcase will enable service providers who are members of the Ecosystem Accelerator Group to highlight their technical and consultative capabilities related to instant payments on the FedNow Explorer website in early 2022.

More information about the FedNow Service and other instant payment resources can be found on the FedNow Explorer website.

Next Steps in Preparing Your FI for Fed Now

The various approaches and strategies discussed by the panelists highlight a no one-size-fits-all approach for participating in the FedNow Service. Now is an opportune time to educate yourself and your organization about the FedNow Service, consider potential use case,s and engage in thoughtful discussions around your real-time and instant payments strategy.

Visit the FedNow Explorer website to learn more about the FedNow Service and the opportunities it affords your financial institution and its members. In addition, consider diving deeper by listening to the full panel discussion or viewing the presentation slides. And to stay up to date on all FedNow developments, join the FedNow Community.  

In addition, NEACH is offering the Future of Payments Symposium to explore faster payments and other key topics. We also have created educational resources, including our  Innovating Payments website.

As you make decisions around your faster payments plans, feel free to reach out to us with any questions or needs. Our goal is to continue to support your planning and implementation efforts as 2023 draws near.