December 2, 2019
American Banker: Don’t wait around for FedNow
The financial services industry is in the midst of implementing its latest wave of payments innovation — real-time payments — but the debate over the pending FedNow network has stifled progress.
Although the infrastructure for this technology has already been developed in several countries, the United States has just begun to build momentum around a domestic network. The Clearing House’s RTP network is the only viable option existing today that can support both consumer and commercial use-cases for secure, reliable and instantaneous transactions in the nation.
Consumers and businesses should not bear the burden of waiting. Commercial enterprises have the greatest opportunity to radically reshape their payments processes but are handicapped by inefficiencies across legacy payment rails.
Institutions should be focused on the immediate opportunity to alleviate pain points and democratize innovation by enabling more efficient technological capabilities. While there has been continuous debate amongst industry stakeholders regarding the development of FedNow alongside the RTP network, parties on both sides of the debate have lost sight of several key issues.
First, the demand for real-time payments is here now and the landscape for payments through FedNow in 2023 is unimaginable. The pace at which technology advances makes it nearly impossible to determine what payments will look like in four years’ time.
By then, the industry will already be fixated on the next means of innovation.
Second, banks, consumers and commercial businesses will all be hurt by the delay in implementing modernized solutions. Continued hesitation only stifles innovation and prevents the U.S. from establishing itself as a global hub for the payments industry.
From a bank’s perspective, if two real-time payment networks are developed in the U.S., there must be interoperability and ubiquity to ensure a safe and fair system. Independent networks that do not functionally support transactions between members of each will only lead to costly and time-consuming clearing of payments.
Participants of the RTP network should not have to duplicate their investment of material time and financial resources to connect to FedNow. This is counter-intuitive to the purpose of developing a network at the scale and breadth that already exists globally.
Interoperability increases the value of both solutions.
For community banks in particular, real-time payments provide an opportunity to compete and create a level-playing field with larger financial institutions. The flat-fee pricing structure implemented by The Clearing House means that smaller institutions can offer competitive products at the same rates as larger institutions, regardless of transaction volume.
For consumers, a slower payments system could unintentionally encourage seeking risky capital options. As a result, this inadvertently perpetuate cycles of debt.
With today’s payments infrastructure, an individual may be forced to wait three to five days to access their money, leaving many in a financial bind.
Most tech-forward institutions have developed same-day payment methods. But truly instantaneous, real-time payments are just beginning to be rolled out by the most advanced institutions.
Quicker access to capital could empower customers to pay expected and unexpected bills immediately, minimizing the necessity for high-interest predatory loans.
While consumer access to real-time payments will drive the hype cycle, business access to real-time payments will create true paradigm shifts.
Businesses suffer in the current ecosystem as they must wait for access to their capital that should otherwise be available to purchase more inventory, expand their offerings and make payments until funds are settled.
Real-time payments are the key to unlocking substantial benefits around businesses wishing to optimize their cash flow for both disbursements and settlements.
There are numerous business-focused use cases but the simplest and most universal is around employee payroll disbursements. Under the current system, businesses lose access to three days of payroll funds to float management.
Under real-time payments, if a business wants to settle their payroll due on the 15th of the month, they can send funds via RTP from their primary bank account to their payroll account on the same day of payroll.
The business would then call the banks to initiate a same-day transaction, enabling payroll to be sent out, via the RTP network. The instantaneous nature of the transaction allows the business to utilize capital rather than leave it in limbo for several days.
The key to providing real-time payments capabilities today lies not only in the implementation of the existing technology, but the creation of a large enough network to make the system viable.
The “network effect” is clearly at play with the RTP network. The more banks of all sizes that participate in the network, the more consumers and commercial clients can be reached.
If only a handful of institutions join the network, then its existence will be arbitrary, facilitating transactions and benefiting only a select few participants. Ubiquity is key to the success and growth of a real-time payments network.
The difficult decision for institutions is not whether they should innovate, but how they should innovate.
Innovation does not mean spending an exorbitant amount of capital. Rather, it means investing and utilizing resources efficiently to address customers’ pain points.
Innovation starts with a conversation that allows institutions to build services that address customer needs. Implementing real-time payments isn’t just about establishing a system for today’s demands. It’s also about ensuring that the financial services infrastructure is prepared for the future and evolving consumer needs.
Financial institutions have a duty to enable modernized capabilities for their partners, not only in the payments space but throughout all product and service lines. Idly waiting for innovation will lead to the demise of progress.
Hon. Phil Goldfeder is senior vice president of public affairs at Cross River Bank, a New Jersey state-chartered, FDIC-insured bank. In this role, Goldfeder spearheads all aspects of the bank’s external affairs, government relations, marketing, community affairs and investor relations.