The U.S. is seven months out from testing the FedNow Service, the Federal Reserve’s real-time payments rail, and now is the time for banks to prepare. The question is: How?

The FedNow pilot project launched in January of this year. Pilot participants, which include big banks like Citi, JPMorgan Chase and Wells Fargo & Co., meet every other week, with the goal of testing the system in January 2022, and launching it in 2023. Right now, the focus is on the settlement process, said Anne Sharkey, senior vice president of operations at First Internet Bank, which is also participating in the pilot.

The $4.2 billion First Internet Bank, based in Fishers, Ind., is ready for real-time processing, but other banks may have some work to do to get to the same place, Sharkey said, adding that this could entail talking to their core providers about real-time posting and messaging systems.

Real-time relevance

U.S. banks need to be more focused on preparations for the rollout, Craig Ramsey, head of real-time payments at ACI Worldwide, a payments system facilitator based in Naples, Fla., told Bank Automation News. For instance, it’s common in the U.S. for banks to invest in receiving — but not sending — real-time payments, he said.

“We’re not seeing enough urgency by the banks, whether they’re pilot members or not, in making a move to prepare for FedNow,” Ramsey said. “Our experience is that banks and financial institutions need quite a bit of time to prepare properly for new services.”

Financial institutions (FIs) that don’t offer real-time payments risk becoming irrelevant to their customers and losing market shares to fintechs and digital wallets, Ramsey said. However, banks just might be able to leapfrog competitors by offering real-time payments to merchants, as opposed to cards, he suggested.

Think beyond technology

FIs should also strategize about how real-time can translate into new products, while also considering how real-time might affect internal processes and policies, said Stuart Tarmy, global director of financial services industry solutions at Aerospike. The company offers a NoSQL, or nontabular, nonrelational database that powers real-time networks, including PayPal and payments for the EU’s real-time Target Instant Payment Settlement (TIPS), which was launched by the Eurosystem in November 2018.

Tarmy told BAN that banks have to take a holistic approach to their strategy. “I’d be looking very much at what I have to do for my processes, systems and staffing,” he said.

FedNow technology: What’s known

When FedNow is up and running, it will ultimately accomplish two objectives for the U.S., said Tarmy: It will ensure the country is not dependent upon private companies for real-time payment and, if the U.S. follows the trend seen in other countries, it will provide a payment option for the “unbanked.” In India, for example, many people without bank accounts are now making real-time payments using their cell phones, Tarmy said. In the U.S., approximately 7.1 million households are considered “unbanked,” according to the FDIC.

“The government’s putting a huge amount of resources against this,” Tarmy said. “This is incredibly critical — they’re a couple years behind Europe, with TIPS.”

However, when it comes to the technology itself, the Federal Reserve has released few details. What is known is that FedNow will comply with the International Organization for Standardization 20022, which deals with electronic data interchange between FIs.

Also, FedNow will use IBM’s freely available MQ MQi Client for the payment message flows. This component allows applications on a system to run Message Queue Interface (MQI) calls to a queue manager running on another system, according to IBM. This means FIs must integrate their core payment processing systems with FedNow Service in a way that’s similar to how FIs connect today to other Federal Reserve Financial Services.

Since FedNow will rely on APIs for integration, banks should retool to support APIs, sources told BAN. FedNow remains mum on key details regarding the solutions and vendors creating the new, real-time system.

What banks can do

The extent to which banks will need to update their cores or technology stacks ahead of the FedNow launch differs depending on to whom one talks. While Sharkey said FedNow will require updates to core and Ramsey called for banks to act now, Tarmy and Allen Sztukowski, senior vice president of operations at PCBB, suggested a more wait-and-see approach. The core providers are involved in the FedNow pilot, so it’s probable they will address any changes required to the core since no vendor wants to be cut out of the real-time market, Sztukowski said. There are also solutions that can handle real-time transactions but that sit outside the core.

Approximately 20 to 30% of the pilot participants are technology providers, estimated Sztukowski, who works for the $1.5 billion PCBB, a banker’s bank that provides technology solutions to smaller banks. Sztukowski heads up PCBB’s participation in the FedNow pilot project and offered a more sanguine view.

Larger banks have experience with the Clearinghouse’s Real Time Payment (RTP) system, a similar payments system to FedNow that launched in 2017. But those banks will need to retool for FedNow, Sztukowski said. On the other hand, smaller banks can “sit tight” for now, he said, adding several banker’s banks and a corporate credit union are involved in the pilot and “looking out” for the smaller banks.

“If you’re a community bank, most likely, you’re not going to create your own technology solution for this,” Sztukowski said, advising that such banks should talk to their tech providers to learn how they are preparing.

One thing is certain: Banks will need to be agile. FedNow has been very vocal that there will be multiple phases to its rollout, ACI’s Ramsey said, adding that if FedNow is like every other real-time effort ACI has seen, there will be regulatory changes, standards, and new use cases added for years to come.