FedNow Payments - Disruptions, Challenges & Predictions
The latest buzz in the payments space is FedNow. The Federal Reserve Board is gearing up to launch its first real-time payment network for banks, consumers, and merchants. FedNow isn’t the first RTP network, but that doesn’t mean it won’t make waves in the industry. When a product is backed by the Federal Reserve, it adds a lot of credibility, and major players in the payment ecosystem are more likely to try the product immediately.
The banking industry in the US has been slow to innovate compared to banks in the United Kingdom. UK banks adopted real-time payments way back in 2008. They’ve provided APIs for third-party providers to build new services on top of their infrastructure, giving banks more power to monitor transactions. In addition, their RTP system is more focused on security rather than creating a more seamless but less secure experience.
Real-time payments are not new to the US, with dominant players like Venmo , Cashapp Support , Zelle? and others. The payments industry has been going through a revolutionary period in recent years, with countless innovations happening in this space. We’ve also seen the rise of cryptocurrency in mainstream culture with more well-known institutions allowing consumers to leverage bitcoin as a payment method.
Disruptions
One of the most pressing needs for both merchants and consumers is faster payments, and the demand for faster payments has created the need for more players in the market. With The Clearing House (TCH) RTP network and third-party P2P providers already in place, why did the Federal Reserve decide to introduce this new payment product?
The fear of losing control is the main reason for the Federal Reserve to enter this space with FedNow. The government is currently blind to many of the transactions facilitated by all the third-party P2P services in the payment ecosystem, which makes it very challenging for them to monitor and block illegal transactions.
With FedNow coming into play, third parties like Venmo and CashApp may face new competition as banks use FedNow to offer their own P2P payment options.
Challenges
Competition in the marketplace drives better products and prices, and the Federal Reserve entering the RTP space is a positive development for both consumers and merchants. Having two major networks in place (TCH & FedNow) raises new questions:
I believe it’s better to have two systems than just one. However, this also brings up questions about how the two systems should interoperate and how much the Federal Reserve should be involved.
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Fraudsters will no doubt be keeping a close eye on this new alternative payment method. The Fed has said the service will include “security features to support payment integrity and data security” but hasn’t gone into much detail about what those features will be. Even with a mature product like Zelle, there have still been many instances of fraud. Some of the most common methods are
The real question is how the Federal Reserve will stay up to date with new fraud methods and trends. Fraud is ever-evolving, and with real-time payments, the threats and challenges will be greater than ever.
FedNow integrations and APIs will be available only for depository institutions in the US. Depository institutions and their service providers will be able to build on this fundamental capability to offer value-added services to their customers. This poses a challenge for innovations within the FedNow platform. Fintech providers are often key to creating seamless options for various payment methods. Blocking access to fintech providers will slow the product’s growth and give it a disadvantage in the development of new features. Lobbyists are asking the Federal Reserve to consider changing this policy.
Predictions
Unlike many other regions, getting a credit card in the US is incredibly easy, and we’re all accustomed to paying with them. Changing consumer habits from relying on credit cards to using bank debits will be challenging. Most of the payments happening on existing services like Zelle are for interpersonal transactions like paying a friend or a babysitter. Even with the FedNow launch, this will likely continue to be the case for some time.
Current real-time payment systems don’t have any protection for consumers in cases of fraud or merchant error. Consumers are typically expected to bear the costs if a merchant doesn’t deliver on their promise. Without a system for disputes, consumers will shy away from using these systems for high-value transactions or when dealing with unknown merchants.
If FedNow opens its gates for Fintech disruptors, merchants will be able to provide real-time payment options in their checkout process with a seamless experience. Also, attractive discounts may be provided to consumers who use this payment method since merchants will be able to avoid credit card fees and shift default liability to consumers (provided no changes are made to the dispute liability).
If more consumers adopt real-time payments, it could cut into the business of credit card networks. However, we live in a world of instant gratification, and one way people fulfill that need is to buy things they want using a credit card before they have the money in their bank account. As long as this mindset continues to prevail, credit card networks shouldn’t be too threatened by the rise of real-time payments.
For more information or to extend the discussion message Suresh Dakshina (Author, Co-Founder, Investor & Entreprenuer).