With the launch of FedNow, instant payments have become ubiquitous, and their adoption will only grow. But there are complexities to consider, particularly for banks and payment service providers (PSPs) that are figuring out how to best integrate this new service without incurring significant operational costs.
In a recent PaymentsJournal podcast, Nicholas Botha, Global Payments Sales Manager at AutoRek, and Elisa Tavilla, Director of Debit Payments at Javelin Strategy & Research, discuss how banks and PSPs can overcome these obstacles and how automation can help.
Providing FedNow Payments at Competitive Rates
Instant payments, by their nature, result in a significantly higher volume of payments at a faster speed. As such, it is essential that companies are equipped with some form of automation to ensure operational efficiencies. Many are still working with legacy systems that, unfortunately, are not capable of handling instant payments.
Implementing operational efficiencies downstream will not only drive down operational costs but also ensure wider profit margins. These lower costs can eventually be passed down to customers or can bolster the financial health of the companies.
“With this new payment rail, you can expect more competition to enter the market,” Botha said. “Typically, when we see more competition, you should expect there to be pressure on those costs, which essentially means that there’s more requirement for creating those operational efficiencies to try and expand those margins as wide as possible.”
Reducing the manual components of the operation is also important. Tavilla noted that automation helps create greater efficiencies and can reduce the errors that result from paperwork or other non-digital methods.
“This is a great opportunity with FedNow for businesses and operations to improve automation,” Tavilla said. “It’s the first time in 40 years we have this new rail and this new technology, especially in the payments industry.”
Mitigating the Challenges of 24/7 Settlements
Automation can be considered the golden ticket to ensuring that FedNow payments are leveraged to their highest potential. The use of automation ensures that payments are processed instantly, securely, and cost-efficiently—something that’s difficult to get from traditional payment flows designed for more traditional payment rails.
“Companies onboarding FedNow payment rails will need their operational flows to match the nature of what the payments are to ensure a couple of things,” Botha said. “One of the main things is to ensure customer adoption. You need to create that confidence in what has been adopted more widely and help create that fast adoption across the market by creating trust in what the process is.
“The second thing is to match your customers’ expectations. If customers are making payments in real time, and there are any issues or discrepancies, they want to know the results of those in the same nature as the payments taking place.”
How Liquidity Risk Can Be Managed Effectively
With the launch of FedNow, treasury teams now have the task of ensuring that liquidity is accessible to settle payments 24/7. Again, this is an area where the use of automation could significantly mitigate risk.
If treasury teams are reliant on legacy platforms or processes for their reporting requirements, they may be exposing themselves to more operational risk with instant payments’ 24/7 settlements.
“An effective way of looking at this would be to deploy automated reconciliation and automated reporting solutions with real-time reporting capabilities,” Botha said.
Botha emphasized that it is vital for treasury teams to have continuous access to the real-time liquidity status to manage their risk more effectively.
With Peak Times Approaching, Should Banks and PSPs Look to Cloud Hosting?
As we approach the holiday season, particularly Black Friday and Christmas, payment volumes are expected to spike. It’s important for businesses to leverage the necessary tech platforms to ensure they’re set up for success.
“Modern technology platforms that have the option to be hosted via a cloud are an effective way to reduce any risk around shortfalls or any errors within your infrastructure setup,” Botha said.
“It’s a more cost-effective way for businesses to host their infrastructure with these multi-tenanted environments that these large cloud providers have to offer. So you actually pay for the space that you’re requiring without having to provision for these huge spikes well in advance,” he said.
Where Instant Payments Are Heading
Instant payments will keep growing, and as the space evolves, banks and PSPs will need to evolve with it. Implementing and leveraging the latest technology to guarantee their customers a fast, cost-effective, and safe way to send payments will be key.
“With a new system like FedNow and instant payments, there’s a lot of potential for businesses to improve efficiency—whether it’s through automation, digitization, reduction of manual processes and also from a data capacity perspective by using cloud technology that increases capacity for businesses as well as other players,” Tavilla said.
Said Botha: “I would suggest having conversations with all different actors within the payment space, within these geographies, to really build that trust within the U.S. market with regards to FedNow payments.”