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The launch of the FedNow system was a milestone for ISO 20022 adoption, but it was only the beginning of the search for interoperable instant payments in the US.
In July, FedNow became the second instant payments network to launch in the US, following the launch of RTP, the private-sector network from The Clearing House, in 2017.
Although the two systems are similar in many ways, there are key differences that will stimulate both competition and innovation among financial institutions (FIs) in the US.
In terms of costs, both systems charge $0.045 per originated credit transfer transaction. FedNow also charges $25 per month for each enrolled routing transit number, whereas RTP charges no participation fees.
However, to stimulate early adoption, FedNow has waived its participation fee until 2024. It has also waived the credit transfer fee on the first 2,500 transactions per month for each FI until 2024.
One of the main differences between the two systems is their settlement models.
As a private-sector network, RTP uses pre-funded joint accounts at the Fed, where the funding participant is the owner of the account and The Clearing House is the sole agent of the account.
In contrast, FedNow uses the Federal Reserve Master Account of each participating FI and connects it to a FedNow account. FIs can therefore transfer funds to and from each account when required, allowing for more flexible liquidity management.
Over time, this is likely to tempt many of the 370+ FIs that have already joined RTP to also join FedNow. But for the time being, the number of FIs participating in FedNow currently stands at 123.
Instant payments but lack of interoperability
Both RTP and FedNow use ISO 20022 as their payment messaging standard. However, although the two systems speak the same language, they do not support what is known as message exchange interoperability.
With message exchange interoperability, one system can be used to initiate a payment that is bound for the other.
Despite close collaboration with The Clearing House during the development of FedNow, this type of interoperability was not pursued.
As David Watson, CEO of The Clearing House, said in July: “If we ever want the two to be interoperable, we are going to have to build some kind of translation machine between the two.”
Thanks to ISO 20022, however, the two systems do support what is known as message routing interoperability.
This means that a payment message originated on one system will share similar specifications to messages originated on the other, allowing for more efficient processing at the receiving end.
But for FIs, the main challenge is how to move those payment messages from one system to the other.
Instant payments bridges
Finastra, a global provider of financial software applications and marketplaces, is one company that has taken up the challenge of providing its customers with connectivity to the two systems.
As a technology provider that provides direct access to both networks, Finastra enables banks to send and receive payments to and from RTP and FedNow.
With Finastra’s Payments To Go, FIs can connect to a core-independent, cloud-based payments processing solution that enables the delivery of instant payments on a 24/7 basis.
For further connectivity, the solution can also provide access to other payment systems in the US and beyond such as FedWire, TIPS, Swift and Visa Direct.
Amelia Ruiz Heras, senior director, global solution consulting for payment solutions at Finastra, said Payments To Go customers benefit from end-to-end processing for a variety of payment types.
They also get access to partner applications and add-ons delivered through FusionFabric.cloud, Finastra’s marketplace of fintech providers.
“At Finastra, we don't sell just a product or a service,” she told Vixio. “We sell a solution, and as part of a solution, we think of all the end-to-end elements that our customers would need on top of the core payment app.”
Compliance built in
As of last month, Payments To Go is now available pre-integrated with real-time transaction screening and monitoring from Fincom and ThetaRay respectively.
“We provide an end-to-end experience so that real-time payments can take place within the regulated timeframe of schemes like FedNow,” said Ruiz Heras.
“This also includes real-time compliance applications, covering fraud, anti-money laundering and sanctions screening as well.”
Finastra’s integration with Fincom and ThetaRay, known as Compliance as a Service, is currently available for FedNow and Europe’s TIPS, based on the Single Euro Payments Area (SEPA) instant credit transfer scheme, but there are plans to expand it to other networks.
“In real-time payments, the compliance aspect is so important because time is of the essence,” said Ruiz Heras.
“In traditional payments, you can stop the transaction, have someone manually look at the data, and maybe even call the customer before you make a decision.
“But in real-time payments you need a compliance system that will satisfy the regulations and the underlying requirements of the scheme or network — and that means very few to no false positives.”
