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The FedNow Instant Payments Service Is Here. Can Banks Finally Catch Up to FinTechs?

The FedNow Instant Payments Service Is Here. Can Banks Finally Catch Up to FinTechs?

Published on: 19 Nov 2023 9 min read

The Rise of Instant Payments

Legacy systems and expensive, clumsy infrastructure have held back traditional financial institutions for too long. They slow down transactions and limit growth and development opportunities. Against this backdrop, FinTechs and challenger banks have been disrupting the payments sector by catering to users’ needs at low costs, providing excellent customer experience built on innovative technology.

The FedNow Instant Payments Service Is Here. Can Banks Finally Catch Up to FinTechs?

The wider adoption of real-time payments globally is a natural response to the need for convenience, speed, and flexibility of financial transactions—something various players like PayPal, Venmo, Zelle, and Revolut have been capitalizing on for years.

To remain competitive in the increasingly crowded payments industry, traditional banks need to provide value-added services and prove themselves as customer-centric organizations that have their finger on the financial sphere’s pulse. They must be sensitive to emerging trends and shape their offering to reflect users’ fast-evolving needs.

Although this might sound easier said than done, there are ways banks can begin to close the gap between them and FinTechs, albeit gradually and at their own pace. Connecting to the FedNow program, the Federal Reserve’s new real-time payments service, is a must for forward-thinking organizations. The system, which began operations in July 2023, is part of the global shift towards real-time payments.

In Europe, for instance, the launch of SEPA instant in 2017 was an important milestone creating cross-border payment services between participating banks. It is equally useful for business, person-to-person and person-to-business transactions—the vast majority of them being completed in under 10 seconds. Both SEPA instant and FedNow operate 24/7 and the speed at which they complete payments doesn’t depend on an individual payment provider’s clearing and settlement capabilities.

This rapid shift is proof that instant payments are becoming the norm rather than the exception. FedNow holds transformative power and is already reshaping the future of money. Despite offering plenty of opportunities, however, the journey toward modern frictionless digital payments in the U.S. is fraught with challenges that financial institutions must navigate.

Regional breakdown of countries with access to Faster Payments Systems (FPS)

Key Steps when Preparing for FedNow

FedNow provides banks with great opportunities, such as the ability to better serve their clients and attract new ones. It can also help them generate additional revenue streams and become more competitive, especially in the context of FinTechs aggressively taking over the instant payments space.To get there, however, they need to plan for the adoption of the system, which, despite having a flexible and customizable setup, does require careful planning. These are the main steps your organization should take to prepare for the service.

Getting familiar with FedNow and the demand for it

Knowing why instant payments are in such high demand is paramount to making the right decisions when adopting the FedNow service. If you still don’t have a complete grasp on how the network will benefit users, you  can explore the Federal Reserve’s website and make use of the many resources available there.

In addition, your customers might not be telling you what they need directly, but you can derive meaningful data from their behavior. How much money have they transferred from their accounts to an online payment provider or a digital wallet? When you look at your small business customers’ accounts, how much of their inflows are coming from these providers?

Determining your customers’ exact needs

Understanding your customers’ needs starts with looking at their behavior, but you do need to dig deeper. Talking to them and conducting customer surveys is the next step in identifying their expectations towards you. This will inform your product-planning process and make you aware of the many opportunities FedNow offers for improving customer relationships and growing your revenue.

Instant payments can also improve your internal processes and your employees’ experience (think payroll and reimbursements). For more information you can review general use cases, account-to-account transfers and bill pay.

Sharing plans internally and talking to your relationship manager

Any successful implementation begins with planning, then partnering with internal and external stakeholders and vendors. Whether you are a large or a small organization, getting everyone involved will help you, your employees and your customers benefit from instant payments.

Also, the Federal Reserve has made Relationship Managers available for the financial institutions that decide to use FedNow and their role is to help navigate the adoption process. You can find yours in the Find Your Contacts section.

Challenges of Adopting FedNow and How to Solve Them

FedNow is a safe and efficient instant payments infrastructure that operates around the clock, 365 days a year. It provides a regulated network that will revolutionize payments across the U.S., as well as a springboard for financial institutions (FIs) to offer innovative solutions. This means the stakes, especially for smaller and regional banks, are high.

On one hand, they can’t afford to miss out on all the perks their customers will get (instantly send and receive money with confidence and no risk of overdraft and late fees, better cash flow management for businesses). On the other hand, they will have to do some heavy lifting to prepare their infrastructure and set up internal systems to support the adoption of  FedNow.

This will involve overcoming technology challenges, big and small, some more complex than others. Here are the most common ones and how Scalefocus can help you manage them to get all FedNow benefits.

Overcoming the limitations of legacy systems

Deciding to use the FedNow service seems like a no-brainer for banks that are already aware of its advantages. However, many of these same banks still rely on legacy technology making it difficult to support the new network. Legacy systems will hinder the transition to the 24×7 operations of real-time payments, as well as the adoption of APIs and the ISO 20022 standard.

Not replacing them is often associated with fear of service disruption and stems from the ‘if it’s not broken, why fix it’ mentality. However, using FedNow optimally while running on legacy systems is going to be an almost impossible feat. Banks need to embrace legacy system modernization if they want to keep pace with FinTechs.

Benefits of Modernizing Legacy Systems

The Scalefocus solution

If you have been reluctant to replace legacy systems unless absolutely necessary, the time has come. As your technology partner, we know that FedNow will require some strategic system upgrades because those legacy systems were never deployed to operate in a real-time environment. We will help smooth the onboarding process as you embrace the FedNow service.

Outsourcing the burden of running the technology to us will minimize your integration challenges. We will start off with a technology assessment, perform a value analysis, and create a future state roadmap that ensures a seamless adoption process. Our services span the entire transition life cycle – from existing IT landscape analysis and creation of a migration roadmap, to the delivery of a new Application Integration Platform.

Processing increased transaction volumes in real time

One of the fundamental challenges banks will be dealing with in the months leading up to their FedNow integration is managing their user interfaces and application programming interfaces (APIs). You may already have modern API-based layers in place but are you ready to deploy financial information from their underlying data systems?

For you the reality may be that your data infrastructures haven’t been updated in years, possibly decades. This is going to cause problems if left unattended as customers now expect straight-through API-based connectivity to their providers.

The Scalefocus solution

When dealing with this challenge, banks need to make sure their data system can work with the FedNow system. As your technology partner, our job will be to weave together modern systems and some of the legacy infrastructures (until a phased modernization strategy is put into action) to enable instant payment APIs to access historical financial data.

In this way, by securing everything runs smoothly on the backend, we will prepare it to carry out consumer-facing functionalities on the front end. Modernizing your data infrastructure will give you the tools to support the big increase in transaction volume.

Embracing the cloud for more added value

Until fairly recently, banking in the cloud was considered optional but as the FedNow service began operation, it’s becoming vital across the payments landscape. Financial institutions now have to deal with liquidity, fraud and compliance processing in a matter of seconds, which can be daunting for some of them.

To keep up with the demands of this rapidly changing payments environment, banks need to embrace the cloud — It’s the best way to gain the flexibility, speed and security that real-time money transfers require.

The Scalefocus solution

Making the investments needed to achieve high levels of speed and processing power on the banks’ own premises is difficult, especially for smaller players. However, going cloud-native will guarantee digital scalability, and upgradeability, as well as 24×7 uptime. Through our extensive cloud expertise, we can enable banks to modernize their core capabilities and accelerate time to value.

Our cloud experts will assess your current IT infrastructure to determine its readiness for cloud integration. Depending on your specific needs, we can implement robust data management and security measures, including encryption, access controls, and compliance monitoring to protect sensitive financial data. By helping you embrace cloud technology, we will enable long-term cost reduction from on-premises maintenance for your organization.

Redesigning UX to ensure ease of use

FedNow offers plenty of benefits to financial institutions and their customers, but it will definitely put pressure on banks to improve user experience. The service must be integrated smoothly with existing systems to guarantee ease of use.

New instant payment players will have to examine their channels and develop a UX strategy to enable the handling of increased amounts of data without sacrificing CX. Since FedNow is already driving a huge transformation towards instant payments across the U.S., redesigning digital channels and the user interface for B2B real-time payments is a critical component of banks’ adoption journeys.

The Scalefocus Solution

Our team will develop a UX strategy that will allow you to manage large data quantities while upholding excellent UX. We will ensure seamless linkage to remittance information when originating and responding to a payment request.

Our team gathers data from stakeholders and user personas and applies a wide variety of design thinking techniques to provide a high-quality user experience. First, we define user and business needs and we then validate the whole journey from concept to launch, performing continuous testing and hypothesis validation.

Applying Best UX Practices Saves You Money

Conclusion

FedNow has the potential to turn things around for banks in their efforts to be agile organizations of the future offering truly customer-centric services. If they utilize it correctly, they will attract new customers, generate additional revenue streams and most importantly — be able to finally compete with FinTechs.

Banks already have an advantage over challengers and startups in that they can better protect consumers from payment security and fraud risks. To maximize the benefits FedNow undoubtedly brings, financial institutions need to determine whether their vendors and internal teams are well equipped to support the rollout and the ongoing participation in the network. Then, they must identify the right partners that could provide sufficient technical assistance.

Our Services: Why Scalefocus Is Your FedNow Integration Partner

Scalefocus can help you gain the freedom of thinking beyond the limitations of your technical infrastructure. We will enable you to respond faster to change and to give customers faster payments that will improve the quality of their lives. Our experts have an excellent track record of successful Banking and Financial Services projects that makes them perfectly equipped to handle the intricacies of adopting FedNow.

We will address some of the biggest roadblocks you have been dealing with for years, such as outdated capabilities, lack of integration across numerous IT, poor customer experience and subpar UI/UX so you can enter the instant payments sphere effectively and take advantage of all opportunities FedNow brought along.

Interested in getting a leg up against FinTechs? Have a look at our client success stories and schedule a meeting with a Scalefocus representative to begin making the necessary changes that will get you there.

About the Author:

Velina has been writing in one way or another most of her life. In 2020, she took a leap of faith and left advertising to explore the unlimited potential of the technology world. She is interested in topics such as FinTech, Digital and Neobanking, Payments, and Embedded Finance among others. Outside of technical writing, she enjoys vegan food, films, and creative storytelling.

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