The Federal Reserve won’t provide fintechs with direct access to its new instant payments system FedNow, but it’s still courting their participation in the new real-time ecosystem. 

Fintechs can help the Fed see what’s on the horizon for the new faster payment system and allow the new real-time payments services to be easier to use, said Mollie Markham, a Federal Reserve Bank of Chicago industry specialist who works with nonbanks. Fintechs can also assist the Fed in providing services that make the most of FedNow’s data-rich capabilities, she said during a conference this month.

She made the comments at an April 12 fintech conference sponsored by the San Francisco Federal Reserve as well as San Francisco State University and the University of California at Santa Cruz. The conference included a panel discussion with Markham and others addressing the subject of “It Takes a Village — FedNow and Fintech.” The panel also included representatives from the fintechs Plaid and Modern Treasury. 

The Fed is prohibited from connecting directly with fintechs because its congressional mandate only allows it to link with banks, or core service providers acting on behalf of banks. That edict has been a point of contention for fintechs increasingly eager to connect directly to Fed services, such as FedNow, so they can bypass traditional banks and attempt to upgrade banking services. 

The Financial Technology Association, which represents fintechs that include Block, Marqeta, Stripe and Wise, among others, has urged the Fed to make direct access to the new faster payments system more widely available to fintechs. 

Regardless of their direct connection, the Fed sees fintechs as integral to maximizing the benefit of FedNow, its new instant payments system that launched last July.  

“All of those nonbanks are so critical to the payment space because they help us understand what is needed, what customers are demanding (and) not seeing, what's on the horizon that we should be thinking about that,” Markham said at the “The Evolution of Fintech: AI, Payments and Inclusion” conference.

During the panel discussion, Markham made clear that the Fed sees fintechs having a significant role to play in expanding the reach of FedNow. She also underscored the importance of core providers that are enabling banks to connect to FedNow.  

While large banks have their own sophisticated IT systems, regional and community banks often rely on core providers to help them with advanced technology and upgrades. That’s particularly important in the case of FedNow because the effort is focused on extending real-time payments to smaller institutions. Some core providers involved in FedNow include Jack Henry & Associates.  

“Those core providers are really going to help us get the long tail of adoption, and maybe ramp up to a quicker adoption pace as we go,” Markham said. 

The RTP network, initiated by The Clearing House in 2017, has already drawn some banks to such faster payments. TCH is owned by major U.S. banks and so RTP has attracted many large financial institutions.

FedNow had onboarded about 600 of the 10,000 some financial institutions in the U.S. as of March, but Fed officials are in the effort for the long run. Some major banks have not signed on with FedNow. 

Markham said she would pre-empt one question she knew was coming by saying that the Fed isn’t yet willing to disclose FedNow’s payments volume at this time.  

“We're not even a year into the service yet, it is still so early on, and we're still processing our lessons learned before we can share (such volume figures) more broadly,” she said. 

Markham suggested that her fellow panelists and other industry players in the audience could help the Fed zero in on those “volume opportunities” as the central banks seeks to build out FedNow. 

By Lynne Marek on April 22, 2024
Original link