Preparing for FedNow Instant Payments

As the Federal Reserve poised to launch its FedNow instant-payment service, Treasury & Risk spoke with Bob Stark, the global head of market strategy for Kyriba and a long-time commentator on the progress of treasury technologies. FedNow, which represents a major development in the U.S. payments landscape, went live a week ago. Now, businesses that may be interested in using the service should be evaluating their options and preparing to incorporate FedNow instant payments into their processes.

In the first part of our conversation, Stark explained the benefits of instant payments and the differences between FedNow and the Real-Time Payments (RTP) network from The Clearing House, which has been available for several years. In this continuation of the discussion, he addresses what corporate treasury groups should be doing to add FedNow to their payments portfolio.

 

Treasury & Risk:  What should corporate treasury groups be doing right now?

Bob Stark:  There isn’t much work that corporates need to do to initiate FedNow instant payments. However, they should be thinking about whether they want to use this option. And, if so, they will need to redesign certain processes.

The first thing to figure out is which of their banks support FedNow instant payments, RTP, both, or neither. While their ERP [enterprise resource planning] or treasury management system should already support instant payments, it is important to validate whether providers are FedNow participants, and whether the platforms are optimized for instant payments.

Presuming the company discovers its providers do support instant payments, the treasury team should evaluate the business case. Do they need instant payments to supplement the payment types they already use? Many organizations know about all their payments 15 days ahead of time, and next-day ACHs are so cheap that there’s no reason to add FedNow to the mix. The business case comparing ACH with instant payments is typically less compelling from a cost perspective.

On the other hand, think about how we use instant payments in our personal lives. It’s very handy to use Venmo or Zelle to send and receive payments right away. Maybe you’re at dinner with friends and someone takes the check, and you want to pay your portion—you might want those funds to arrive instantaneously. Insurance companies have been using instant payments for years. And consider transportation or delivery businesses where product may not change hands until payment is received.

There are other scenarios where next-day ACH just won’t do—say, you need to pay someone right away for compliance or labor reasons. If you compare the cost of an instant payment against the cost of a wire, the instant payment will look appealing. If you don’t send many wires, one may cost you $15, plus the recipient’s bank may charge them as well. Organizations using wires more often will see lower costs, down to $6 or $7 a payment. Real-time payments through the TCH network are more like $1 per payment. The Kyriba clients that use RTP payments swear by them because they’re immediate and they’re cheaper than other emergency-payment options.

And then, there are opportunities for richer data to be transferred, although taking advantage of that will require most companies to revamp their procure-to-pay and order-to-cash processes.

 

T&R:  What processes will companies need to redesign?

BS:  Well, the first thing they will need is a process for deciding when to send payments through FedNow or RTP. Most treasury teams already have a couple of different payment options, and they have built rules defining which situations should use one type of payment versus the others. Does it need to be a quick payment? For anything requiring expediency, they may currently choose to send a wire. If they add the option to send FedNow payments, they will need to expand the process and logic into their decision-making.

Obviously, a key question is which banks they use for payments in different regions of the country—and which banks their payments’ recipients use, since the banks on both sides of the transaction will need to be tied into the FedNow network. On top of that, they should consider the speed with which they need the payment to arrive, the cost, and whether a particular payment channel provides the right amount of data to crunch.

Then, companies that send instant payments need to think about their controls. When you send a FedNow or RTP payment, it is truly instant. With wires or ACH, you could conceivably chase them down if you needed to, although that wouldn’t be easy. With instant payments, there is no ability at all to retract a payment. Thus, governance needs to be stronger and faster than it was before. What about your payment policy needs to change to make that happen? You might need different checks and balances, different reviews, different processes—maybe even a quarantine for suspicious payments. Some steps in the payment journey might be a little different for instant payments.

Then there is the speed at which the payments are processed. That’s the hardest part for most organizations. If your payment approval and transmission processes are adding time, then you are taking away the advantage of using instant payments, maybe even destroying your business case. Because if you’re using instant payments to meet an emergency need with a supplier, but your internal processes take hours, does it make sense to use the instant payment? You need to really look at your processes and make sure you understand what you’re going to do differently so that FedNow or RTP is an advantage rather than an Achilles heel for the company.

To take full advantage of instant payments, a treasury team should make as many steps as possible happen at machine speed, building processes that run more autonomously. From a technology perspective, that can mean everything from using APIs [application programming interfaces] to connect with bank systems, to leveraging artificial intelligence [AI] to validate that payments are compliant with internal payment policies.

 

T&R:  What is an example of a process in which AI could help accelerate payments?

BS:  If you think about a payment’s journey—whether it’s initiated in a treasury system or an ERP system—a few things need to happen. An employee originates the payment against the PO [purchase order], and the payment must be approved, which currently requires human intervention. Once approved, the originating payment system formats it to the bank’s requirements. The formatting is a complex exercise that involves determining what information fields and data points the bank will require, because that varies from bank to bank, even when we are talking about standardized formats such as XML ISO20022. If there are correspondent banks in the middle, they further complicate the question of what data needs to be transmitted. Technology can automate the entire formatting process, whether it is a treasury-initiated payment or it’s originated in the ERP.

There’s also a compliance and validation process. Going back to the question of fraud, AI can help ensure that payments are legitimate in less time than manual inspection could. Within the validation process, there are the obvious checks of separation of duties, making sure the right people approved the payment, making sure the documentation is there, etc. On top of that, the validation process might require some other steps. I’ll give you three examples.

One, the payment might need to be checked against a sanctions list from OFAC [the U.S. Office of Foreign Assets Control], the EU [European Union], or other entities. While banks will routinely screen payments for you, a lot of organizations like to do it themselves so they understand if there is something going on that needs to be flagged and requires further documentation, or perhaps should lead to questions of why the company is paying someone on the sanctions list.

Another example is bank account verification. A variety of third parties provide this service, including GIACT and Trustpair. They have databases of bank accounts that include who each account is owned by, and they validate payments against that list.

And the third example might simply be a suspicious check payment. A company could train an AI model on what good payments look like and what makes a payment suspicious, based on the payment patterns of the organization. If the AI system identifies a payment that doesn’t fit the criteria, it can put it into quarantine until a human can have another look at it.

Every organization will have different sets of validation criteria for payments. Some will be rules-based, while others will be much more AI-oriented, where the system is using pattern recognition and predictability. The more payment controls a company has, the more time those checks would take a person for a payment run of tens, hundreds, or thousands of payments. To optimize its use of instant payments, a company needs to offload these capabilities to software that can perform the checks at machine speed.

Now, companies can already have their systems do these types of validations for ACHs, wires, and RTP payments. But FedNow has spent a lot of time and energy researching the integration of process into their workflows and is working on everything from standardizing payment formats to providing practice recommendations that companies can take advantage of in both the creation and receipt of payments.

 

T&R:  So, the FedNow program will be suggesting best practices for corporate treasury groups to undertake?

BS:  Yes. They have already produced a lot of documentation. They are approaching FedNow as more than a payment network; they are approaching it as an opportunity to transform companies’ entire payment process, with instant payments as just one piece of that. A lot of companies that we’ve talked to appreciate the opportunity to open the hood and re-evaluate their payment processes.

 

T&R:  Now that FedNow is available to corporates across the United States, what do you expect to happen next in the instant-payments landscape?

BS:  Quite a few years ago, before the RTP network came to market, I was on a panel at a conference with The Clearing House, and I made the assertion that eventually every payment will be an instant payment. I still believe that—there is such an opportunity here. Think about it: In your personal life, can you imagine sending a payment on your phone and having to wait a day for it to arrive? That’s unfathomable.

Instant settlement will eventually be the standard, and we will move in that direction as more companies adopt FedNow and RTP. This momentum will be driven by those who are receiving payments, who will start expecting to receive the funds instantly. I think that, before long, we will reach a point where trade is based in part on whether a payment is instantaneous. And the introduction of FedNow will be a tailwind to help make that happen.