Since the announcement of FedNow, the Federal Reserve’s real-time payment network, many financial institutions are facing the decision of whether to wait for the Fed to deploy FedNow, which might take four plus years, or to seek other solutions now.
Some community banks like Avidia Bank are integrating to TCH, while others will wait for the Fed and potentially look to other faster payment solutions like debit push payments and same-day ACH to offer some faster, if not real-time, transaction options in the meantime.
As reported in Bloomberg Law:
Many community banks aren’t seeing significant demand for real-time payments just yet, putting their business needs in sync with the Fed’s time frame, said Julie Hill, a professor at the University of Alabama School of Law.
Those community banks “don’t get into trouble by waiting a little bit; they get into trouble by trying to get out in front,” Hill said.
But there is a consensus among community banks that the central bank should move faster on FedNow than its projected launch date of 2023 or 2024. Some bankers view it as a question of competition, with fintech payments companies Zelle, Venmo, or Square threatening to become significant competitors for payments processing by banks.
While financial institutions are determining which path they may take (including the option to not offer real-time payments altogether), there isn’t an initiative to tie these various payment options together and have them interoperate directly.
Gateways will need to be built to manage funds between systems. In The Clearing House’s comments to the Fed regarding FedNow, it views the interoperability of their two platforms as “highly unlikely:”
In addition to the desire for competitive equality between FedNow and the RTP system, TCH is aware that there is strong industry interest in the interoperability of the FedNow service with the RTP system. The Federal Reserve has indicated that interoperability is not an immediate objective for its service and further observed that interoperability “may be difficult to achieve”. While TCH believes that interoperability of real-time gross settlement systems is highly unlikely, the Federal Reserve may be able to reduce the impact of introducing a second system by aligning the FedNow service as much as possible to the RTP message specifications and operating rules, both of which are public. Further as it designs its system, if the Federal Reserve identifies potential ways that the government service may be made interoperable with the private sector service, TCH is willing to engage in direct discussion to explore those ideas for the benefit of the United States.
Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group
