The Banking Buzz: FedNow® in Focus: A Strategic Dialogue on Instant Payments

Kara Talka. I am the marketing communications coordinator here at Alligent. In today's webinar, we've invited the Federal Reserve to come speak with us and have an open dialogue and fireside chat about all things instant payments. We have a great lineup of speakers here with us today. We have Doug Hendrix, our senior product manager for payments here at Allergen, and Ian Schweid, the vice president and head of FedNow client specialist team at the Federal Reserve Financial Services. If any questions come up during the webinar, please feel free to type them into the chat box. We will have a designated Q and A segment at the end. And with that, I'm gonna hand things over to Doug and Ian. Thanks, Peter. Appreciate it. Ian, first, just wanna say thanks for joining. Obviously, appreciate the time today and then the conversation about something that at Alligent, you know, we see the instant payment space and, you know, the FedNow service as as really, you know, kind of the next evolution. You know, for for payments in general. So appreciate the time and the conversation today. So I think, you know, okay. To be here. I really appreciate the invitation. We love talking about FedNow and the network, and a lot of exciting stuff going on. So we're thrilled to be here talking with your customers. Yeah. So, you know, let's jump right in and, you know, just kinda walk through the the overview of kind of where where Fed now is, you know, kind of the the starting point to where you guys are now and, you know, How are things going? Absolutely. So, yeah, let's start with a little history. We got some statistics on this slide. For those of you that don't know, the FedNow service was launched in July of twenty twenty three. So we're just over our second anniversary here, if you will. Been up and running for two years. When the service was initiated, we had thirty five institutions on board. Now actually, it's ironic. I gave this slide to Algin about two weeks ago. We were at fourteen hundred. We're actually over fifteen hundred institutions live on the network today. I looked at it yesterday for another meeting, and we were at fifteen o eight. So coming up on coming up on sixteen hundred before year end, I'm pretty confident. We typically add a number of institutions month over month. It's pretty consistent in that thirty, forty range. Right now, as we kinda roll into the end of the year, that's typically what we see, and that's on. We have a number of service providers that we are partnered with, just like Allogene, to help institutions like yours connect to the network. We have an entire team actually of service provider support relationship managers that work to help the organizations understand what's available, all the new features as they come out, and help to make sure that those are integrated. As the network has grown, it's been really fun to see In all fifty states, of course, and to have the largest of the large, you know, JPMorgan, Wells, and Citi are all on the network. We even have extremely small institutions with literally just a handful of people. As you can see from the slide, just three hundred million in assets. So, really, what that tells me and when I meet with customers, they tell me is that it doesn't matter how big or small you are. There are ways that you can leverage the instant payment network to help your customers. And so we've been really thrilled to work with with throughout the ecosystem as the Federal Reserve does. Right? It's one of the reasons that we built this service was because of feedback that we received from institutions of all sizes in the ecosystem that they wanted to have, an option from us to do instant payments for their customers. Yeah. I mean, you know, I I think everybody is at least having the conversations. But to your point, smallest to the largest, you know, now now is the time to really be able to, you know, put yourself out there, find your your partner, your potential service provider, or have the conversation directly with the Fed. I mean, the the next slide with the numbers themselves, I mean, it it speaks to where things are going. Right? Absolutely. I mean, you can see I mean A year ago, we used to hear people say, well, I'm not really sure if this is gonna get utilized, but we've seen nothing but a a hockey stick type of trajectory on our on our volume graphs. These are the numbers from the second quarter. The third quarter numbers are actually gonna get released probably this week before AFP and money twenty twenty. And I have actually seen them, and spoiler alert, they're only going in one direction. I can promise you that they're not going they're not going the other way. Right? But volume is growing quarter over quarter somewhere bet always double digits, somewhere between forty percent and a hundred and seventy percent quarter over quarter volume growth. The dollar growth is even higher. It's been really interesting as we started with a five hundred thousand dollar limit. We went to a million, and now we're gonna go to ten million. Some institutions have used that for very specific use cases, while other institutions have utilized the tools within the system to say, you know what? We don't need ten million dollars. A million is fine. Or even five hundred or even one hundred thousand dollars is fine for the customer base that we serve and the use cases that we wanna enable. But we've seen rapid growth in those volumes and in, the dollars that we're seeing on the network today. Yeah. I mean, I think I think there's a dollar amount and a use case out there for just about everybody. Right? Alright. So what instant payments different from other payment rails, I I think, is the the typical conversation and theme that that kinda jumps out. And so, you know, I'll let you hit on some highlights. Yeah. There's definitely some highlights that make it different. And look. We talk to people all the time about the payment ecosystem and where the instant payments fit in. It's not the Fed's expectation that instant payments is gonna take over all payments and that other rails are gonna go away. Right? There's always gonna be a time and a place we think for Fedwire, for Fed ACH, maybe even for check, of course. There's all those options that exist, and they exist for a very defined purpose. But there are situations where those payment rails don't necessarily meet the client's expectations, and that's one of the reasons InstaPayments was developed. So what makes it different? We see some key components here on this slide. One of the things that I like to talk about is the credit push only. It's on the bottom of the left hand column there. This is a credit push only network. It doesn't do debit like ACH does. It was designed that way to help with fraud, of course. So we wanna make sure that transactions are pushed out only from the customer, not debited from them. It is available twenty four by seven, three sixty five. I do like to point out that that is what when you join our network, you will be receiving twenty four seven. But that doesn't necessarily mean you have to make sending available to all customers twenty four by seven. We've seen some institutions that say, this is not what our customers need. We don't have necessarily a process where we wanna support that. So some institutions have determined that they wanna not necessarily allow origination, but they will allow receive twenty four by seven. So there's lots of flexibility in the way this system can be implemented in your institution. Another key point that I always like to point out on this slide is that it's irrevocable. Right? So a transaction that's sent is irrevocable very much like a wire transfer is irrevocable. Now, of course, we do have processes. In fact, we even use our error resolution service that's currently available from the Fed is allowed. You can utilize that as well for Fed now. In the event that there's an issue, maybe there was a mistake made, clerical error, or potentially fraud, which we're seeing very little of on the network today. But but those payments are irrevocable. But and that's a good thing for a lot of business cases. Right? They don't wanna worry about the returns. They don't wanna have the risk of return, especially in, a purchase scenario. So there are some things about this network that are specific and different than other rails that are currently available. So the last thing I'll just point out is currently trans it's only currently domestic only too. So that's another thing that makes it a little bit different than some of the other rails. Well and and I think you were you pointed out the credit push, which I like, you know, and then you comment on irrevocable. I think the greatest thing you said that sits in between those that I find typical in conversations I have is you get to decide how you play. Right? Do you wanna take on the risk of send? Do you just wanna start with receive and allow growth with your institution? Understand how the send world's going to work. Multiple types of use cases for you to play in that are low risk in the SIN space. I I think that's a a great call out because that's one that I find, typically, I end up bringing up as well and say, you know, the connection point getting started is important. The great news is unlike some other payment rails, you will actually get to decide how you play. Right? So if you just wanna start slow, just wanna start in the received position, You know, fraud risk as low as it could potentially be. Like, you can just dip your toe in and, you know but you're started and you're there, and you're ready for that evolution. So think that that's a great one because I think that's a big one for for institutions who are starting this journey and just getting, into the instant payment space to, you know, understand, which takes us right into, you know, competitive advantage offerings. Yeah. I wanna I wanna pull on that string for a minute, though, Doug, because your point is super important. When we meet with institutions, they don't realize all the flexibility that they have. And a year ago, people would join the network and say, I'm gonna receive. We'll talk about Sen later. And then we've seen that evolution where people are like, you know, the time between them receiving and starting to send has started to shrink. People join the network, and much more quickly do they start to send. And the reason they do that is just what you said, which is such a key point. They can determine how they wanna do it. Some institutions say, I'm gonna start by sending by just doing my internal payments for my institution that I'm dispersing. Maybe it's a maybe it's some sort of employee reimbursement. Maybe it's a loan disbursement. Because when you're dispersing funds to your customer that you know, that you've vetted, maybe that you've underwritten for a loan, again, the profile of that transaction is extremely low. So a lot of institutions will start doing that and then add additional use cases as their customers ask for it or as they determine demand in the marketplace, and then they can do it in a controlled manner. They don't necessarily roll it out to all their customers. I like to so I ran product at a ten billion dollar institution. And when we used to do things like ACH, not every customer got ACH. And when they got the or the availability to originate ACH, they got it at a particular type of ACH they could originate and a particular amount they could originate, and it was definitely not across the board. And we're seeing people roll instant payments in very much the same way. So, yeah. Well, we could talk about some of the advantages, but I but it's important, I think, for people to understand how much flexibility they have in rolling out the service. Yeah. No. I agree. It's certainly one of the the landscapes that at Allogene I've, you know, had on the road map from, you know, that the known transaction landscape has always kind of resided in that research landscape for banks. Right? You gotta put in the analytics. You gotta figure it out. The fact that instant payments is real time, it's settlement instantly. That data is so much more rich in terms of analytics for the known transaction landscape than waiting for a check to clear or an ACH to post five days later. That is certainly one of the models that that I find myself having the conversation about as well. So I I completely agree. Yeah. So look. We we we were talking about differences. Right? We were gonna we were gonna transition. And one of the real things is that our customers are one of the the the Fed does a lot of things really great. And one of them is we do amazing research, and we've got great research teams. And what they tell us when they when they work with our customers Is that your customers are already using instant payments. In fact, whether they're business customers or or consumers we've got the business customer data here. We have consumer data that's very similar to this. They're using these services. Either using them from their financial institution, or they're using them often from nonfinancial institution providers because they want the service, but it may not be available from their primary institution. But as you can see from this slide, customers want their primary institution to offer them. And when they do, they're much more likely to utilize them. And the satisfaction that comes with that is so critical, right, because you're meeting your customers where they are. The types of things that they're accustomed to with other digital wallets or other types of nonfinancial services, when their financial institution can provide similar services, they know they have that trust factor with you all. And that goes a long, long way. So they get the functionality they want, but they also get the trust of their primary institution. We see this on the business side like these stats. We also see it on the consumer side as well. So no matter which side of the ledger you're playing on, your customers are absolutely gonna use this service. Yeah. And, well, then, you know, again, the numbers show what they show. But to your point, you know, they're only increasing. And so I think Absolutely. That don't that leans in perfectly to kinda the next landscape of, you know, where where is instant payments? Where is Fed now playing? And the truth is, you know, once you get started, like you said, you've seen the quicker adoption to move from receive to send. The reality is it it will end up playing everywhere. And I think that is another unique landscape because it's no longer The the delayed settlement has always been a industry topic of conversation, funds, slope management, this side or the other, and now that's no longer part of the process. And so I think when you look at the slide here, you know, the the spaces it's going to play in the the customers, to your point, businesses or consumers. They're they're they're sitting in a wide variety of seats, but they're all looking for the same the same kind of expectation. Absolutely. That that you're correct. So this slide, one of the things that we do is because, again, like you say, we think we see potential in so many industries. But these verticals are sort of have been some of the early adopters and where we've been supporting because as you can imagine, most of the ones on this screen, they generate a significant number of payments. Early adopters, number one use case we've seen is digital wallets. Right? So that's funding and defunding of those wallets. When what's a digital wallet? Let's take one second and just kinda deconstruct that. A digital wallet is a general term we use for lots of different things. It could be a nonbank provider like PayPal or Venmo. It could be a a retailer like Walmart or Target or Starbucks. It could also be other types of services. We see them in the gaming industry often where you're sending money and receiving money. That same type of model, we also see in the brokerage industry. Right? So if you have a brokerage account and you wanna buy a stock, but you don't have enough funds and you wanna get the funds in there, that the brokers love to see you get an instant payment in so you have instantly available irrevocable funds, then they can allow you to go out and actually purchase your purchase your stocks or whatever you're looking for. Government has been so hot the last four weeks with since the treasury has expanded their utilization of the network. The treasury was actually one of the very first organizations that did transactions on our network, and they've been with us from the start. But they've expanded their program in recent weeks. And you may have noticed in the press, FEMA has started to use it for disaster relief payments, and they have a number of other agencies that they're lining up to utilize this. So when the government has to pay out, like, the event of an emergency, they can get those funds instantly to the folks that need them. They don't have to worry about whether there's an ATM machine to get cash out of a out of a, you know, out of a debit card or or something like that. They can instantly get those funds directly to their bank account so that they can use them. And, honestly, that's the kind of thing that really puts a smile on my face. Right? When we think about I live in South Florida. We get hurricanes here all the time. And when I think about what it's like when those things happen and the availability of simple things like that cash and the availability of funds, it it's just a real game changer. And as they continue to move and add more and more of their agencies to this service that they have to allow for that type of disbursement, I think we're gonna see rapid adoption as well. And it all stems back to the reality. If I have an opportunity to pay Doug in three days or two days or four days, I'm not really sure, or I could pay you, Doug, do you want it right now? What are you gonna what are you gonna choose? You're gonna choose to get paid right now. Most people will. Right? That that's yeah. That's Lots of use cases. Yeah. It's and it's always the option. And I think, you know, what I like to point out to FIs is, you know, the fact that the risk from float management is going down for businesses and consumers, essentially, it means your risk is going down. Right? You don't have items that are sitting out there for seven to ten to fifteen days with a, you know, memo debit of a penny coming from the card network or this, or the other, the fact that float management is is wildly getting reduced for consumers and businesses, it only lowers your risk as well. So let's talk same top and on that and on that topic, Doug, there's an operational efficiency that institutions are seeing because they don't have that second day reconcilement, or they don't have to redo to manage the returns that come the second or third day. Because the transaction is initiated and completed, you know the money was sent, the money was received. It's all done. Or you know it wasn't, and then you can take action immediately. So you so there's in addition to that float management, which you're right is really key, there's operational efficiency that comes as as you as your customers are utilizing this rail. Yeah. So let's take a step into you know, for the FIs and the folks that are that are listening. You know, maybe they haven't started. Maybe they're just having the strategic discussions, you know, within their their senior leadership, What is kind of, you know, the process look like for them? Yeah. So the first process, of course, is understanding your how you're gonna connect to the network. And I will tell you ninety six percent of institutions utilize a service provider. There are only the largest of the large, quite frankly, are connecting directly utilizing their FedLine terminals. Most other institutions are utilizing some sort of service provider for various aspects. Whether that be your core provider, whether that be an overlay service, whether it be some, you know, some other thing that you utilize, that's the most common way. So working with your service provider is an important part of determining how you wanna connect to the network and what you plan to offer to your customers. They then usually, there's a those two parties engage directly with us, and we have an entire new team in our in our onboarding. We have an entire new onboarding team that was created specifically for FedNow. And and one of the things that I think is really cool about this I I know that our legacy services sometimes have varying degrees of ways that you have to go about getting connected to them. But when they built TEDNow, they said, look. We're gonna have nine thousand institutions join this network, and so we're gonna have to put a lot of people through an onboarding process. It better be automated. It better be streamlined. It better have the ability to make sure that we can move people from the beginning of the process to the end of the process quickly. Otherwise, we're all gonna drown in it. And I will tell you the Fed has absolutely achieved that. So when they get their onboarding managers in the bottom right, when you see that when that gets connected, they literally will work hand in hand with you and your service providers. Typically, the onboarding process takes thirty to sixty days. That's what we see as a typical average. I will tell you that we've seen some institutions onboard in as little as eight days. Right? Because a lot of institutions I told you earlier, we have fifteen hundred institutions on the network. So we've done this more than a couple times. We know how to move people through that onboarding process. A lot of those service providers also have learned to move people through the process. So, really, sometimes what we see as the longest cycle is getting those internal approvals to move forward at your financial institution. And that's where your relationship manager and the folks on my team, the Fed, now client specialist team here at the Fed, can help providing you research if that's what's necessary, providing you information about return on value, providing you use case information, whatever it is that you need to build your internal business case, your relationship managers, and our team can work hand in hand with you. And then, of course, once we get you onboarded, we have an entire support team. We call them like the old Maytag repairman. If you're at my age, you remember that old that old ad. They're around, and they watch the network all day, all night, all the time. And they're also always available to support you. Yeah. I mean, I think it's great. Obviously, I have connections with a number of the the relationship spaces for the Fed specific to FedNow. And I'll say, you know, former banking life with a major FI to, you know, Allogene. In the world of technical lift, having the fed literally come to the table and shake hands with both parties acknowledging that, one, you're going to be doing this. You're going to be sitting in this position. Let me make sure everyone knows who's who, what's what, what you're going to have to do versus what you're not gonna have to do for for technical lift, I think, is fantastic. It's a huge win for the FIs that, you know, maybe they don't have quite the bandwidth and get someone like Alligent with our third party component, we've got the bandwidth. We can handle that. But the fact that the Fed brings people to the table to sit down and really drive all parties together through the process, I think it's fantastic. I think it's an unbelievable help for the FIs. You have the direct questions. It's it's been great. Like I said, number of relationships with the Fed now onboarding space, and it it's it's awesome. It's and we consider it to be one of our real differentiators again because we knew we had nine thousand banks that we were gonna put on this network. And and the fact that we have this entire team to support a financial institution from the very just like today, what is FedNow all the way through getting onboarded, understanding how it works. You're after after on networking reports, after you're on the network, functionality or use cases. We support you all the way through, and we really think that there's very few parties in the in in in the industry that have that level of support for our for our customers. Well and, I mean, I completely agree because the the lessons learned slide. I mean, you you you don't get this kind of information if you're not in a position to get feedback, and especially, like, meaningful feedback. Right? Okay to start small and grow. It can be easier to reconcile. So putting yourself in that position is how you're gonna get this feedback, and I think that, to your point, is what's driven that process to be so successful and so engaging for sure. What? Yeah. Yeah. That that last bullet you just touched on about it being easier to reconcile. So the way FED now works is that all of your transactions will enter or exit through your FedMaster account, just like your Fedwire, just like your Fed ACH. So it's really just kinda all engaged in your in your reporting right there. So it makes it really easy for liquidity management and settlement and all those types of things. And we also have, obviously, specific settlement tools to help you fund if that's something that you need from a funding standpoint. So so in in building this, it was really thought through. And and that's one of the reasons I think, again, we've seen such rapid adoption is that people, once they get on the network and they start receiving, they see how easy it is, and then they recognize, oh my gosh. We've got opportunities to do send. I will touch on that second bullet real fast. At the very early days, a lot of people just did receive, and they didn't even Think about sin. And remember, we talked already on this call about the fact that you have the ability to control how you will send out within your institution. So when you get on the network, and it's not if, it's when you get onto the network, Get on for send and receive, and you can determine how you wanna roll out sending. But make sure you do that in the same project with the same cert with the same effort and the same team. It's just much more efficient because you don't have to go back and try and do a phase two. So we we've seen that as a real a real a real a real lesson to to take forward. Cool. Okay. So, you know, kinda stepping into that, you know, it kinda brings us into the halogen space of things. And and I think, you know, conversationally, you know, what we've been talking about, we see a lot of the similar things. And it's a lot of the conversations I have with FIs. And and for us being, you know, the the kind of expert in the landscape of items processing for the check check transaction movement, you know, understanding the difference between successfully, you know, moving items day zero, day one, day two, returns in clearings. That really brought us into the instant payment space saying, you know, evolution wise, this is the the next platform to participate in. You know, personally, being around the industry as long as I have, I think the instant payment, instant settlement has always been the the payment rail that was missing, that banks have wanted for a long time, reduction of flow and all of that. And so for us, you know, the the the simplicity of it, the ability to send, receive, you know, is huge. Management at the transaction level is, I don't think that's given enough coverage. It's not as exciting as talking about a stable coin, you know, or things like that. But I think that's one that, you know, as as we've looked at the evolution within Unifi and the management of the transactions, that transaction level piece, you know, to the ISO twenty o x messaging, there's so many data points in there to reference the information you get. Really, to me, it's kind of an overlooked space because the fact that you get to sit right there and you can see that known transaction history. To your point, writing your business rules with the help of someone like Allogene and Unify based on the dollar amounts. Not everybody's gonna feel great about sending ten million dollars instantly when it's irrevocable. But at the same time, if you send, you know, ten thousand dollars. Ten that, like, the the numbers are what the numbers are. So, you know, from kind of that perspective, you said third parties seem to play the major role. What do you think FIs should be kind of looking for? Or what do you think really plays best for them in that space? I think it's key that you make sure you do understand what your f what your service provider can provide and that that meets your and that meets your expectations. Right? Because different service providers are at different levels of support for FedNow. Obviously, we have many of them that do send and receive and RFP and all kinds of other things. But the key is what's gonna match up with what you need for your customers. Right? And those controls that Doug was just referencing are also important. We have controls at the network level, and those may meet some of your needs. But finance but service providers like Allogene and others have the ability to provide additional controls that you might wanna utilize as you're rolling this out. So that's really important. So I I actually like your your first bullet on this slide I wanna key on because it sounds kinda general about you know, completing, your transaction ecosystem. But that but customers love choice, and that's what we see. If if I you know, in other presentations that I do, we talk about the kinda grander ecosystem, and And we see payments are rising all the time. There are more and more payments, and the reason is because customers have more and more options. So assuming your customers are like all of our every other customer we ever research, they wanna have options. And by providing this, you'll that will leverage them. So you're right, Doug. You gotta make sure you got alignment. Yeah. I I completely agree. I think it's great. So we'll see. I think we have a minute left. We'll see if, Kara, if we got any questions real quick. There we go. It's on mute. Yeah. It does look like we had a couple that rolled through the chat. Let's see. First one, what is the Fed's perspective for organizations in handling disputes and Reg E errors related to FedNow transactions? Oh, that's a one. When it comes yeah. Yeah. That's a good one. We get asked that often. So, again, like I mentioned a little earlier, we do utilize our air resolution service just like we have for other rails. Where you can communicate directly with, you know, the other institution, if you will, with regards to what's going on. So we look at these very much like you would look at any other rail. There's nothing specific or unique about the fact that it's going faster or instantly, if you will, than it would be if you had an error in another processing rail that we offer. Thank you. Let's see. Next one that I see is what is the next milestone for FedNow? Excellent. So we we anticipate of course, we're the the milestones are are are kind of threefold that that that we look at from our team. We continue to see adoption growing. Right? I mentioned that we kinda have, like, a a flywheel effect just going where we're adding more institutions. And so we got fifteen hundred. That's really amazing in two years. It's really one of the fastest growing networks that we've seen. That also means we've got seventy you know, fifty five hundred or seventy five hundred additional institutions we gotta get on because we got nine thousand of them out there in the ecosystem. So that's one of the milestones continuing to bring them on. The volume growth is really exciting as we continue to see our quarter over quarter growth. That's a key thing that we are excited about. And it's neat because large institutions turn on new customers, and we get lots of volume. And then we bring on new institutions. That's the third piece. So we've got, like, four of the top ten financial institutions are on the network today. We anticipate we'll get at least two or three more by the end of this year. So continuing to see those institutions as they join, and they join and they start sending pretty quickly. So it's it's those are the milestones that we continue to look for is continued adoption and continued volume growth and that the continued expansion, if you will, of the use cases. And every day, we it seems like I hear about a new one of somebody that wants to do something. It's really it's really exciting. Thank you so much for that. That seems to be the last one that I see in chat. So thank you, everybody, for joining us today. If you have any additional questions, please reach out to marketingallergen dot com or visit our website. Make sure to check out our events page for all future webinars if you enjoyed this one. Thank you so much, Ian, for joining us today. And to everybody in the audience, we appreciate your time with us this afternoon. Thanks a lot, Ian. Bye, everybody. Enjoyed it. Thank you. Have a good one. Thank you.