Miriam Sheril, Head of Product, US at Form3, and Board of Directors, Faster Payments Council
It’s been a big year for faster payments in the US. July 20th 2024 marked the first anniversary of the launch of FedNow in the US, The Fed’s instant payment network. It’s fair to say that the US is behind some other regions in terms of instant payments infrastructure, but the past 12 months have seen significant progress.
I’ve been fortunate enough to get a closer view than most of FedNow’s development. I led the product development for the FedNow service for the Federal Reserve Bank of Boston, and managed Fedwire initiatives for the wholesale payment office at The Fed in New York, most recently as the FedNow Core Product Manager Lead AVP, responsible for the design and build of the FedNow core product since its inception.
Now as the Head of Product, US at Form3, I am focused on enabling instant payments adoption with banks utilizing FedNow and RTP rails by offering a resilient, cloud-based solution. Further, as chair for the Faster Payments Council’s Operational Considerations Work Group, I have been hoping to provide financial institutions with guidance to help them effectively manage operational changes they need to undergo to adopt instant payments.
As well as this, I’ve recently joined the FPC’s Board of Directors, where I am able to access a wide range of perspectives from across all of the organization’s working groups and have been taking part in conversations with some of the senior stakeholders across the US financial industry. The FPC is the association with the broadest impact on the U.S. payments industry in my opinion. As well as encouraging adoption of faster payment rails, it plays a vital role in helping vendors develop their product strategy and how they build and market their instant payment products.
In this article I’ll outline some of my observations and provide some insight into how the faster payments landscape in the US is developing.
FedNow’s First Anniversary
The launch of FedNow has undoubtedly been a success. While there hasn’t been an overwhelming wave of early adopters, the numbers have been encouraging and in line with targets. There are currently more than 900 participating financial institutions that have onboarded in this first year. And the knock-on effect has been significant too; adoption of FedNow has also helped grow RTP’s network as many banks have been connecting to both services at the same time.
While payment volumes across FedNow in the first year have been modest, the healthy levels of adoption of both FedNow and RTP will drive more use cases for faster payments, meaning payment volumes will likely rise significantly in the coming years.
Wider Trends Driving Demand for Faster Payments
We’ve been seeing a shift towards real-time, on-demand payments driven by consumer expectations for several years now. Driven by services such as PayPal, Venmo and Zelle in the peer-to-peer payment space, and the functionality of other digital services such as Amazon Prime, consumers are demanding real-time services from their banks.
But with legacy infrastructure that many banks are still using, achieving the scale and volume that real-time payment systems require simply isn’t possible. Banks are fast realizing that they need to adopt new technologies to stay relevant.
As Demand Grows, Banks Must Plan for Modernization
The process of technology modernization is necessary for banks and financial institutions that want to hold on to their customers. Cloud-based platforms that are flexible, scalable and resilient aren’t just optional, nice-to-have technologies; they’re table stakes. Similarly, using APIs to create systems and services that can be securely and effectively integrated with each other is the only realistic solution for banks overhauling their infrastructure, rather than relying on legacy middleware such as MQ.
While the volume of faster payments that most banks are needing to process at the moment are relatively modest, they’re set to ramp up dramatically as adoption of FedNow and RTP grows. This means that upgrading technology is critical for long-term success, even if the short-term business case is currently difficult to build. If they’re not prepared for the industry shift to faster rails, they risk losing out significantly. My advice is that strategic planning and budgeting programs should start immediately in financial institutions that haven’t yet transitioned to the cloud.
A Cloudy Outlook
Again, using the cloud to process payments is the bare minimum. While cloud providers offer high service levels, they don’t guarantee 100% uptime. If a cloud provider suffers an issue in one of its data centers, this could impact banks that use that cloud to process payments.
With a multi-cloud setup, payment flows can be re-routed if one cloud suffers an outage. And as well as increased resilience, using more than one cloud also offers benefits in terms of latency and the bank’s ability to handle large volumes of payments.
Takeaway: Banks That Fail to Plan Risk Losing Out
Without a strong payment strategy, banks could be in big trouble. While joining faster payment rails right now isn’t going to have an immediate impact on their bottom line, failure to do so will be costly in the longer term. Forward-looking organizations will join RTP and FedNow sooner rather than later.
Ideally, banks and credit unions that haven’t yet connected to faster payment services should consider joining both RTP and FedNow at the same time to reduce costs and provide a foundation for many new use cases that will help them to retain and attract customers. Seeking guidance from the FPC should be a first step for those that haven’t yet planned for the faster payments future.
