FedNow

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..

  1. 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).
  2. 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.

6 thoughts on “FedNow”

  1. Thanks Tom.

    Just trying to better understand, what enables some international networks to operate with lower transaction prices vs. a theoretical fully adopted RTP in the US? I’m assuming the international networks have to deal with the same fraud risks.

    How are international networks like UPI able to offer services with no transaction fee?

    Networks like iDEAL in the Netherlands with low transaction fees?

    What would be needed for markets like the US and UK to reach these levels of cost and price efficiency?

    1. Great question. The co-founder of one of my new companies is Andrew Row, who just moved from NE last month.. he was head of Uber payments in Europe and has the retailer perspective. Germany, Nordics, Netherlands and Belgium have over 30 yrs driving bank account payments. Consumers are well accustomed to paying with BAN (see article). These “push payments” are permission directly from the bank.

      See example of how Amazon and iDEAL process see this Amazon page. When you checkout you are asked for your bank and then presented with a QR code. You take a picture of the QR code on your mobile phone through your Banks mobile app. This links the merchant transaction with an instant bank transfer with the amount confirmed. You are charged when the merchandise ships and can not change the payment method once an iDEAL payment is started.

      Note that iDEAL does not handle disputes or refunds (see link). Quote from iDEAL

      [if dispute] concerns a purchase from another consumer you will have to resolve the dispute with this consumer, because the payment is not part of any (delivery) obligations between you and the private recipient. This means that you make an iDEAL payment at your own risk.

      To summarize, Netherlands, Germany, Nordics, Belgium
      – Have low CREDIT card penetration
      – 30 yrs of consumer behavior supporting bank transfers (push payments)
      – low bank resistance since they don’t have credit interchange to protect
      – significant downgrade of consumer rights in a dispute. BTW..
      – Important to note that consumers in EU understand that if they willingly give out their bank credentials.. they are at risk for all loss… (this is why aggregation in EU does not happen).

      1. Hey Tom, just discovered your blog. In a binge reading right now. Lots of knowledge, thank you for sharing freely.

        What do you mean by “aggregation in EU”?

        1. EU has PSD2 and OBWG.. a regulatory requirement for open banking. As such Plaid, yodlee, MX and other aggregators don’t play here. Fintechs go to banks directly.

  2. Tom
    Just wondering if you think a company like Paypal/Venmo could take advantage of the FedNow rails to improve the economics of their existing services by removing the percentage of transactions that go across V/MA. They’ve ostensibly reached a truce with V/MA by not aggressively emphasizing ACH transactions, but does FedNow offer enough advantages that they’d nudge users in that direction?

    1. LOL.. PayPal did just the opposite in last 5 yrs as they moved ACH volume to card. ACH is virutally free.. and was 64% of volume. FedNow pricing is TBD but it will be more than ACH. https://blog.starpointllp.com/?p=4584

      For real time payments Paypal is committed to TCH and is the pilot customer (see my previous blog). No hope for PayPal in FedNow. Think of FedNow as a smaller bank initiative to compete with TCH.. with NO mandates for banks to participate.

Leave a Reply

Your email address will not be published. Required fields are marked *