Philip advocated a pragmatic approach to adoption, wherein initial progress is gradual but deliberate, which he called a “crawl-walk-run” approach.
At finzpire 2.0, we had the privilege of hosting Philip Sprague from Federal Reserve FedNow team as a keynote speaker, whose compelling address shed light on the significance of nurturing customer relationships, and the urgent need for a paradigm shift within the payments landscape.
Philip kickstarted his keynote by drawing attention to the remarkable transformations witnessed across various industries, such as the seismic shift from Blockbuster to Redbox, and ultimately to Netflix. Philip pointed out the comparative laggardness of the payments sector in embracing innovation, ascribing the delay to the inherent nature of its organic and incremental evolution from barter to checks and to other electronic payment systems. Organic progression has resulted in a fragmented landscape where multiple systems and processes coexist, stifling the pace of progress.
Sprague delved into the groundbreaking advent of FedNow as a cutting-edge payment service poised to revolutionize the industry. He underscored two pivotal factors crucial for its success: the imperative for financial institutions to evolve their payments offering to include real-time solutions and the compelling need to champion a robust business case for change within these institutions. Encouraging banks to discern the inherent value proposition offered by FedNow, he advocated a pragmatic approach to adoption, wherein initial progress is gradual but deliberate, which he called a “crawl-walk-run” approach. As a crucial first step, he encouraged financial institutions to initiate their journey by embracing the receive capability, gradually progressing towards adopting the send and request for pay functionalities.
Preparing for FedNow:
To prepare for FedNow, Sprague unveiled three indispensable considerations for banks:
- Establishing the starting point: Banks must carefully evaluate their current standing and strategically determine the most relevant starting point for embracing FedNow and harnessing instant payment capabilities aligned to their strategy.
- Crafting the compelling business case: Identifying, crafting and articulating a compelling business case galvanizes stakeholders at the FI and instills confidence in the transformative power of FedNow, thereby ensuring successful adoption.
- Unveiling the value proposition: Banks must have a consensus on the primary value proposition that FedNow brings to their institution and customers, showcasing tangible benefits and competitive advantages that leave no room for doubt.
Dispelling concerns through collaboration:
Addressing concerns surrounding the provision of round-the-clock support, Sprague reminded banks of their existing proficiency in supporting other payment systems such as ATMs and card rails. He also emphasized the importance of choosing the right third-party service provider, such as Finzly, by considering critical aspects such as connectivity, processing capabilities, and settlement details through either the bank's own master account or correspondent relationships.
On the pervasive question of the potential cannibalization of existing payment rails, he stressed that FedNow's true value lies in its applicability to innovative use cases, complementing rather than replacing traditional payment methods like wire transfers and ACH. He believes that the traditional payment rails, including cash, still hold significant value and will continue to coexist alongside the instant payment networks.
While the current landscape lacks concrete plans for cross-border instant payments, Sprague acknowledged the growing demand within the ecosystem. He promised that the Fed is monitoring these demands and will continue to evaluate their role in this ecosystem.
Philip closed by reiterating that the path to transformative change may be incremental, but the potential rewards in terms of improved efficiency and customer satisfaction are undeniable. Finzly's incremental approach to transformation has been instrumental in helping several banks seamlessly adopt a rail-by-rail transformation, helping them to effortlessly include FedNow as part of their modular transformation strategy.