Hundreds of banks, including some of the country's largest institutions, have been piloting the Federal Reserve's real-time payments system, FedNow, for months. And although the remaining thousands of other organizations that make up the financial industry will all have the opportunity to participate in FedNow, we shouldn't expect to see a massive wave of adoption right away.
Some organizations will wait to see how the service unfolds in the coming months before taking the leap themselves. Others don't have plans to implement instant payments at all. This begs the question, if and when these organizations do decide that they want to leverage the FedNow service, will it be too late to catch up?
Regardless of where banks are in their instant payments journeys, they shouldn't be worried —yet. Having worked with some of Brazil's leading banks during their implementation of Pix, the instant payments system that inspired FedNow, I can say that banks' ability to compete in the instant payments market is not entirely dependent on how long they've been preparing (although, having a head start does help).
Rather, banks' success will be heavily influenced by variables such as their data infrastructures, the steps they take to proactively address consumers' concerns about safety and value and willingness to collaborate with others in the financial ecosystem.
There are several ways banks can offset any FedNow challenges they encounter to ensure that each of these factors work in their favor—even if they get a later start.
One challenge banks adopting FedNow will encounter is the delicate balancing act of introducing new infrastructures on top of existing or legacy systems.
Most U.S. banks can already support API integrations. Their bigger challenge when it comes to implementing entirely new instant payments technology — and what many banks ran into in Brazil — is their underlying data infrastructures. Legacy data layers can prohibit newer capabilities like instant payments from accessing the data they need on the back end to carry out consumer-facing functionality on the front end.
The payment company is focused on small-business borrowers operating in areas where branches are shutting down.
Banks don't need a full infrastructural overhaul to participate in FedNow, but they do need to ensure that any modern capabilities they introduce will integrate seamlessly with their existing structures. For many banks, this will be the first and largest roadblock to overcome.
For customers to adopt instant payments, they need to know they're secure, easy to use and a better experience than what they're using now. In this area, traditional banks and financial institutions have a massive leg up on their digital counterparts: security. The banks that are most successful with instant payments will be those who ensure that this advantage is front and center of their offerings.
When Brazil first launched Pix, consumers were overly hesitant about using it because they didn't feel confident that their money and data would be secure within the service. The steep increase in instant payments adoption that Brazil has seen since launching Pix came down to three components that financial institutions emphasized to enhance consumers' experience with it: security, convenience and user experience.
In addition to ensuring that their instant payments offerings provide these three features, banks should take proactive measures to inform customers about the benefits — rather than waiting for them to educate themselves, or leave for a bank that has already done so.
Banks also need to be willing to embrace others in the financial ecosystem as partners — not competitors.
Banks that opt to handle all of their technical, infrastructural and operational projects around FedNow themselves will fall behind those that don't. While fintechs have been some of traditional banks' biggest competitors for years, the services they provide through APIs and plug-ins that can connect banks directly to the FedNow service represent opportunities for banks and financial institutions to save money, time and resources as they integrate their internal systems with those of the Federal Reserve for FedNow. These services are also a way for laggards to catch up to — and even outpace — early adopters of FedNow.
The centralized nature of FedNow means that it's available for organizations to participate in as soon as they're ready. However, the further ahead other financial institutions get with their FedNow offerings — scaling with new use cases and customers along the way — the harder it will become for slower adopters to catch up.
