The Federal Reserve has announced the launch of its new instant payment system, FedNow, in July 2023. As financial institutions across the US prepare to run their engines for real time payments on the FedNow service, many of them are mulling over the “build vs buy” debate. When deciding whether to buy or build a service, banks should consider factors such as time-to-market, cost, scalability, compliance, expertise, and strategic goals.
Several financial institutions are embracing third-party service providers to manage their payment networks. While correspondent institutions can provide aggregation and scaling options, banks are realizing the importance of retaining strategic and economic control over these newer schemes, which offer growth and revenue opportunities. As more financial institutions seek to capitalize on these opportunities, they are recognizing the need for greater control and flexibility in managing their payment networks. This trend comes at a time when CIOs and CTOs are exploring structural levers to optimize backend operations and drive productivity gains. Third-party -as-a-service models are promising rapid payback through better equipment and managed services, making them an increasingly lucrative option for banks seeking to modernize their infrastructure and streamline their operations.
Key consideration for bank CTOs and CIOs when deciding to buy or build
As the banking landscape undergoes seismic changes, major players are keeping up by investing heavily in technology. JPMorgan Chase, for instance, has a team of 50,000 technologists and an annual budget of $12 billion, with a focus on developing home-grown technology in areas such as blockchain, AI, and ML. However, for services like FedNow, there is less advantage to handcrafting the technology in-house. Instead, compelling options to launch FedNow quickly and without heavy-lifting are strengthening the case for the "buy" decision. By leveraging pre-built solutions, banks can decrease maintenance costs and shorten time-to-market. Recent internal surveys of bank executives have reinforced the preference for this approach. While big banks continue to invest in technology, they are also recognizing the value of partnering with third-party providers to achieve their business objectives.
Exploring alternatives to in-house development for FedNow Technology
Financial institutions have the option to designate a service provider to act as their agents to send and receive the payment messages and manage other services. These agents perform the functions on behalf of the financial institutions to complete the FedNow payment flows. By working with service providers, financial institutions can leverage existing technology and expertise, reducing the costs and complexities associated with building and managing in-house solutions. This approach allows banks to focus on their core competencies, while still benefiting from the latest technology and tools.
Who can act as the typical agents?
- Core providers
- Payment technology providers
Key capabilities that Financial Institutions should seek in agents
In recent years, over 300 banks in the US have begun to receive instant payments through the RTP network, mainly through core providers. However, the limitations imposed by these legacy systems due to structural deficiencies have limited the opportunities that come with the ability to receive instant payments. Once bitten, twice shy – now, these banks are evaluating comprehensive instant payments infrastructure from payment technology providers for FedNow, seeking solutions that are structurally fortified rather than incrementally layered on top of their core systems. While several providers act as agents and offer FedNow as a managed "as-a-Service", it is essential to ensure that there's enough under the hood. The following checklist can be useful for evaluating service providers.
Real-time payments, by design, are purpose-built to be free of legacy infrastructure – this applies to RTP, FedNow and other instant payment schemes around the world. Financial institutions that want to take advantage of these instant payment rails should ensure that they decouple their instant payment infrastructure from their legacy systems. By operating on a completely real-time infrastructure rather than relying on legacy batch-based systems, banks have a greater opportunity to productize and monetize through transaction fees and associated products, and increase their brand reach and value.
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