Very short Blog – Recapping a few tweet streams.
I think FedNow is a great effort to provide an open alternative to TCH’s RTP. I’ve spoken with, and consulted for, the KC fed on a number of occasions and provided my input to the FedNow service back in 2013. Per my blog last week the survey result from the Fed’s efforts found “emergency bill payment” as the top consumer use. Paying someone faster brings on risk. The Fed depends on banks to manage risk and price that risk. As a former banker running payments at 2 of the largest banks I have a view here.
FedNow is a banking service, that only banks can use. There is no mandate for a bank to support direct consumer use of FedNow. Each and every bank has the ability to determine if and how they support (including which types of transactions) and how they price it. Thus FedNow faces challenge of 1) bank adoption, 2) consumer adoption, 3) merchant adoption.
For example on how Banks may choose to roll this out FedNow, look to Fedwire..
- Today, go to your online banking and initiate a wire. Most online banks do not support wires, those that do charge $30. The payee registration process is onerous. Why? because the originating bank owns the fraud loss and fraud management systems require detailed information (my 41st Parameter team worked with banks to build commercial wire fraud checks).
- Pricing – while the cost of Fedwire to banks is $0.165, banks charge $30 for https://frbservices.org/resources/fees/wires-2021.html.
This same approach will happen to FedNow, with banks requiring MUCH more detailed information (like what items are being purchased) to make a risk decision. Having run payments at 2 very large banks, and build risk systems in wires, I have a view here.
Back in 2008, the UK faster payments initiative mandated banks “turn on” real time payments to consumers. One UK bank I was working with was losing 60M GBP a day.. and this was A2A volume (not eCommerce). Fraud systems take time to “bake” and integration into consumer support/research.
TCH RTP is 10 yrs ahead of FedNow (technically) but still in very early stages. Tokenization + Vocalink allows for permissioned flows integrated with fraud facilities. Currently only 2 banks send and ~300 receive (wholesale). For consumers use.. banks must map all accts to RTPA. PayPal’s Venmo is FAR ahead on A2A. They are 50% of TCH RTP volume (disbursement) provide integrated risk/fraud mgmt w/ an established brand. Venmo acceptance on Amazon and WMT are what we should be talking about. Venmo is the key datum on a V/MA end run. Will it win? I think it will do well in some sgements..(like under 21). For more info see my blog https://blog.starpointllp.com/?p=5022
Summary position. V/MA are very very efficient networks. I believe net savings of Venmo to Amazon will be 30-40bps. Merchants don’t want a NASCAR like checkout page with 20 options, payments work. Their focus is on winning the customer. FedNow will likely see success in A2A, recurring bill payments, small biz payments.. but these are NOT V/MA flows today.
Appendix – Fraud and Data – Fed Now
Per my 2013 blog Perfect Authentication is a Nightmare for Banks, the core of banking is risk management. Banks are the original data business. Banks have made multi-billion dollar investments in transaction risk management as THE KEY differentiator (along with credit risk management) in consumer banking profitability.
As discussed in 2014, Authentication in Networks, the most important battle in banking and commerce surrounds consumer identity. While banks held a powerful data advantage, it atrophied when banks shifted risks to merchants in eCommerce. Card not present rates/rules created MERCHANT incentives for KYC and transaction risk management .. thus consumer transaction data became key to retailer margin (costs and advertising/acquisition). Large online merchants have thus created deep expertise powered by direct consumer insight and now manage fraud to less than 3bps. It is little wonder that they now use this to power their own financial services (ie Amazon, Target, Walmart, …).
Risk management today is now held at BOTH nodes. Merchants and specialists like PayPal are better able to manage eCommerce risk, and banks are better able to manage POS (and banking) risks. Where will risk be managed with FedNow and how will that risk be priced? This is what non-bankers miss.. FedNow is a banking service for Banks.. As in other markets, it will start with inflows (like government payments) and some A2A.. but consumers are in no “hurry” to pay a bill or make any payment. Payment geeks hide behind “the need to modernize” but 3 day ACH fits most of our needs.. as does V/MA. (see my blog on how V/MA settle and why ACH will never go away).
The FedNow facilities provide VERY VERY basic message level features to support fraud analytics and authenticate transactions (see FedNow Service Details). This is NOT risk management. Banks will be sure to leverage their existing infrastructure for any new retail transaction types, and they will price their services. The cost of FedNow will not be zero.. nor will merchants have a way to leverage their risk services.
This is the political dynamic that few FinTech execs understand.