Payments Post was on vacation last month; your editor was making his way from Berkeley, CA to a new home in Chicago, IL. But now that I’m settled in the Windy City, I’m happy to present this “double feature” post, covering developments in both June and July. Two major themes span these two months: 1) organizations responding to greenfield opportunity in fast payments and 2) organizations recalibrating their post-COVID fintech bets.
Let’s start with the first piece. Undoubtedly the most important news of the summer so far (and arguably of the year) has been the launch of FedNow. I want to spend some time speaking about what organizations are doing now that the rail is live. In general, we tend to think that the immediate use cases for FedNow are transactions that are already account-to-account today and where speed or data matter a great deal. Think of disbursements, payroll, bill payment. I recently argued that B2B transactions are ideal candidates for fast payments. So, what use cases are the 35 early adopter banks and 16 service providers actually implementing with FedNow?
It helps to understand the value chain: the Federal Reserve makes FedNow available to banks and service providers (including banks’ core software providers), who in turn make FedNow available to the customers. If those customers are corporates, institutions, or fintechs, they may then in turn offer FedNow-based services to their own customers, constituents, or end users.
A great example of FedNow “in the wild” is the Cross River/Plaid Instant Payouts partnership. Instant Payouts isn’t a FedNow product, strictly speaking; rather, it’s a multirail product that leverages FedNow alongside ACH and RTP to help organizations disburse funds to their customers (or in the fintech real, end users) across “use cases such as gig worker payroll, brokerage withdrawals, cash advances and commission payouts,” according to Plaid. And while I made the point above that fast payments are well-suited to transactions that are traditionally account-to-account, we also see some longer term pressure on cards; a Fiserv executive noted that FedNow’s launch is driving increased merchant interest in the acquirer’s pay-by-bank products.
Elsewhere, we see bank core providers like FIS and Finastra (and large banks like BNY Mellon) ramping up their capabilities to support FedNow and allowing their financial institution customers to offer novel solutions. There’s an ecosystem here that will take time to develop as more institutions and fintechs build out their fast payments solutions, but we see powerful signals that the industry is ready to move towards the fast payment paradigm, indicated by strong volume numbers from Nacha and TCH, RTP’s operator: the value of Same Day ACH transfers rose by more than 50% YoY and RTP surpassed half a billion payments on July 22, just two days after FedNow went live.
As the launch of FedNow ushers in a new era of payments in the United States that (in many ways) mirrors developments in fast payments ecosystems in other parts of the world, we also see some trouble in the fintech space. We have observed for some time now that banks are increasingly concerned about the risk implications of their fintech partnerships, particularly around KYC and credit risk. This is partially attributable to growing regulatory scrutiny, such as the Fed, the OCC, and the FDIC issuing joint guidance for banks on managing risk associated with fintechs in June. It is also attributable to real world incidents of risk management breakdowns.
One particularly public example has been Goldman Sachs’s reevaluation of its relationship with Apple. Following over $1 billion in losses related to the Apple Card portfolio, Goldman is now reportedly in talks to transfer the program to American Express. Other banks are similarly deemphasizing fintech partnerships and declining to take on new fintech clients. That attitude shift could potentially stymie the development of the fast payments ecosystem I described earlier.
What remains to be seen is whether that attitude shift will promote sound growth in the space or if it will hinder innovation. For those of you with an appetite to learn more about the bank-fintech saga, I’d recommend you listen to three of Glenbrook’s recent Payments on Fire episodes that dive into this more deeply:
- Episode 201 – Fintechs, Banks, and the Companies Joining Them Together – In Conversation with Tarun Gupta, Jump Capital, and Chris Uriarte, Glenbrook Partners
- Episode 206 – What’s Hot, What’s Not, and What We’re Watching: Checking in at 2023’s Halfway Point with Glenbrook
- Episode 209 – Part 2 of What’s Hot, What’s Not, and What We’re Watching: Checking in at 2023’s Halfway Point with Glenbrook
As always, we’d love to hear your perspectives or to help you think through your payments challenges. See you next month!