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PayThink

Small banks face a tough but necessary move to the Fed's faster pay

The Federal Reserve Board recently announced plans to develop a real-time payment and settlement service called FedNow. While real-time payments are not a new concept for some, FedNow will provide financial institutions of every size the ability to provide their customers instant payments.

FedNow presents an exciting opportunity for community financial institutions to offer the same real-time payments offerings as megabanks, leveling the competitive playing field. Currently, the only other real-time payments option is the RTP network from The Clearing House (TCH). Community institutions have been reluctant to use this option because of the costs—and the fact that TCH is owned by the world’s largest commercial banks.

However, because FedNow is backed by the federal government, it will be equal in cost and opportunity for all financial institutions.

federal reserve building
The Marriner S. Eccles Federal Reserve building stands in this photograph taken with a tilt-shift lens in Washington, D.C., U.S., on Wednesday, Sept. 2, 2015. Bill Gross said the Federal Reserve has waited so long to raise interest rates that any move now may be labeled "too little too late" as market turmoil restricts the room for policy makers to act. Photographer: Andrew Harrer/Bloomberg

But the promise of ubiquitous real-time payments comes with one major concern: FedNow will require members to settle transactions the moment they are sent through the network, making it more difficult to catch errors and prevent fraud.

For consumers, this can be costly in certain situations, like when a transaction is approved for the wrong amount. But for criminals, instant payments can be attractive because of the capability to claim transferred funds immediately. In addition, this means there will need to be systems in place to monitor transactions overnight, on weekends and during holidays.

Community institutions should work alongside their payment technology partners to add some friction to the process, setting standards and parameters to make sure suspicious payments are flagged. But it’s a delicate balance, because too much friction could cause customers to cancel or abandon transactions.

FedNow will provide tremendous advantages for community financial institutions, but it also creates areas of concern that will require additional oversight. It is important for financial institutions to work alongside their core and technology partners to put the best plan in place.

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