Beyond the Myths: What’s Happening with Instant Payments?

Jim Marous (00:11):

Welcome to Banking Transformed, the top podcast in retail banking. I'm your host, Jim Marous.

Jim Marous (00:16):

Instant payments has officially entered the mainstream, but adoption is still uneven, and questions remain: how is FedNow performing more than a year after launch? What's driving momentum, and what's holding institutions back? And what will it take for real-time payments to finally reach critical mass?

Jim Marous (00:35):

In this episode of Banking Transformed, I'm joined by Bernadette Ksepka, Senior Vice President and Deputy Head of Product Development for the Fed Reserve's FedNow service. We're going to explore how instant payments are reshaping financial interactions, debunk some of the biggest myths surrounding FedNow, and examine financial institutions, from both community banks to major players, on how they can leverage this infrastructure for a competitive advantage.

Jim Marous (01:01):

From new use case studies and fraud prevention to the economics of real-time liquidity, this conversation offers a clear-eyed look at where US instant payments ecosystem stands today, and where it’s heading next.

Jim Marous (01:15):

If your institution hasn't yet activated Send, this episode might change your mind. So, welcome to the show, Bernadette. Before we start, can you introduce yourself to our audience and explain a little bit about your role at the Fed Reserve?

Bernadette Ksepka (01:30):

Hi, Jim. It's such a pleasure to be here. So, I'm Bernadette Ksepka, I'm with the Federal Reserve Financial Services, and I'm the Deputy Head of Product Management for the FedNow service. So, basically, I have responsibility to drive the roadmap for the Fed's instant payment service. I've been with the Fed for over 20 years now, and I've been with FedNow since the very beginning.

Jim Marous (01:54):

So, let's begin with the basics. For bankers still assessing FedNow, can you give some background on the service and explain what sets it apart from traditional payment methods like ACH or wire transfers?

Bernadette Ksepka (02:06):

Yeah, great question. So, to start, maybe the FedNow service is the Federal Reserve's instant payments rail. We launched back in July of 2023. And it basically enables immediate money movement with instant clearing and settlement 24/7/365. So, my friends say like, “Okay, what does that really mean?” And I like to describe it as instant payments can be applied in so many ways in our everyday lives.

Bernadette Ksepka (02:35):

So, for example, your employer might offer you an option to get paid immediately after your shift, and you don't have to wait till next Friday to get your pay. Or you can pay the painter or the contractor that just came, and you can pay them immediately electronically without a check right after they're done, say, painting the bathroom. Or you can receive a government disbursement from FEMA if you are impacted by an unfortunate disaster.

Bernadette Ksepka (03:05):

So, the uses of instant payment are vast, and instant payments is all about how do we move money in real time all the time. And I am a huge believer here that it has the potential to just change our lives and just how we think about money in general.

Bernadette Ksepka (03:26):

So, you asked about what sets FedNow apart from traditional payments. So, we focus a lot on the speed of instant payments. And the name itself, “instant payments,” implies it. But it's not just about the speed that makes the network so valuable and different.

Bernadette Ksepka (03:45):

So, first, we have the 24/7 nature, it's the only Fed payment rail to be offered around the clock. We have finality, so there's no clawbacks like you have on ACH. You also have confirmation of funds, and you have transparency, so you know exactly when it settles. There's no guessing if the beneficiary received it.

Bernadette Ksepka (04:08):

And lastly, the transaction itself, it allows for a lot of data richness, which allows for reconciliation, which is really great for businesses. So, it's all of these things put together that really bring payments into the 21st century. And it aligns with that always-on customer expectation. If I can get an Amazon delivery within hours of ordering something, I should be able to move money with that same speed, that same efficiency.

Jim Marous (04:40):

Well, it’s interesting because as consumers are becoming aware of the ability to do instant everything (as you referenced Amazon), but if I'm getting my paycheck immediately, but I'm not getting my payment from my next-door neighbor immediately, it kind of puts questions in your head. And as a consumer, you're saying, “Whose fault is this? Is it my financial institution? Is it their financial institution? Is there not money in their account?” There is all kinds of questions that happen.

Jim Marous (05:08):

As you referenced, it's been over two years since FedNow launched. What does the adoption curve actually look like today? Provide us with some real numbers and how many institutions are connected. And overall, how does the trend of acceptance compare to what original projections were?

Bernadette Ksepka (05:25):

So, we're two years in, and I would say that we are right about where we expected to be, and we're quite pleased with it, both in terms of volume and adoption. So, in terms of the transactional volume, we saw a 63% increase from Q2 to Q1. And then in Q3, we actually increased our transaction limit in June.

Bernadette Ksepka (05:54):

So, even with increasing our transaction limit from 500,000 to 1 million (which is where we're at right now), we expect to report a healthy double-digit increase. So, we're super excited about that. We now have 1500 financial institutions on the service, so that reaches about 40% of demand deposit accounts. (so those are DDA accounts), which is really the number of end consumers that we can reach across the country, and it continues to grow.

Bernadette Ksepka (06:28):

We also have 41 certified service providers on the network. And why that's important is it's these service providers that can help the small medium-sized banks enable FedNow, and we need the remaining 7,000 or so institutions to adopt FedNow, because the goal with FedNow is to get to ubiquity. And then let me just maybe tell you a little about the 1500.

Bernadette Ksepka (06:57):

So, it's a really diverse group across all 50 states. And 95% are made up of community banks and credit unions. And then we, of course, have some of the largest financial institutions in the US. And what this tells me is that all consumers and businesses, regardless of where they bank (small bank, big bank), they want the same access to safe, efficient, resilient options to be able to move their money across the US.

Jim Marous (07:26):

So, it's interesting. I remember before the instant payments platforms were introduced, I was at a meeting of a lot of very large banks. It was the biggest banks in the country, and we're talking about payments overall, it wasn't about this subject overall.

Jim Marous (07:42):

But I asked the question to the group. I said, “How many of you are going to implement instant payments immediately?” And no one raised their hand. And it completely blew me away that I'm going, so why is that?

Jim Marous (07:54):

So, I had to ask a follow-up question, and the answers came back, “Well, we want to see what happens economically, we want to see the take-up rate …” all the normal excuses. At the same time, I knew that a lot of my smaller bank clients were on the committees that were actually establishing the guardrails for how this was going to be.

Jim Marous (08:13):

Why was there such a difference at the very beginning of how the smaller banks reacted to the capability versus larger banks? Why was there tentativeness among the bigger banks while there was really some enthusiasm from some of the smaller players that you referenced?

Bernadette Ksepka (08:29):

So, we aren't the only instant payments player right in the market. So, you have The Clearing House, which offers RTP®, which is owned by some of the largest banks in the U.S. And ultimately, it comes down to the smaller banks wanted the same access to instant payments as the large banks so that they can offer safe, efficient payment options to their customers, just like the large banks can, and that they can stay competitive.

Jim Marous (09:05):

So, I'm a salesperson at heart. So, when you're speaking to a doubtful CFO or CAO at any size of organization, what's your elevator pitch? Why should financial institutions and ultimately, their customers care about instant payments compared to the payment methods that have been used for decades?

Jim Marous (09:23):

Because what's interesting is we talk about it often on the podcast, that it's one thing to have the technology, it's another thing to have the leadership actually embrace what the potential is and deploy against that technology. What do you say to those organizations that haven't gotten on board yet?

Bernadette Ksepka (09:42):

Alright, elevator pitch. How many floors are we going here?

Jim Marous (09:47):

I should remember that one when people hit me with the “What's your elevator pitch?” I'm going, “How many stories are we going?” because I can lengthen it or shorten it.

Bernadette Ksepka (09:56):

Alright. So, to keep it simple, there's widespread demand for instant payments, and that's making FedNow the fastest-growing instant payments network, 1500 and counting, in terms of institutions. We are adding lots of new features, from fraud to liquidity controls to APIs, we're increasing our transaction limits. So, we're going to go to 10 million, which is going to enable additional B2B use cases, real estate use cases.

Bernadette Ksepka (10:28):

We are building a market-leading product here. And instant payments is adding unique value, not because of just the speed, but we're able to solve real customer needs here. So, paying last-minute bill pay, moving away from checks to digital payments, making timely loan originations, and in general, just improving cash flow challenges.

Bernadette Ksepka (10:58):

And we are witnessing the emergence of really tide-turning use cases, which are driving volume on FedNow, including FEMA, which is the first federal agency to disperse on the network. I saw these stats, and one of the stats said that 78% of consumers choose faster payments as a preferred option. Everybody wants money faster.

Bernadette Ksepka (11:23):

But half of those consumers held their balances at non-bank providers. So, if I'm a bank, I want to stay competitive, I want to be innovative, I want to keep those deposits. And financial institutions are going to need to offer instant payments because that's what their customers want. They want modern payment options.

Bernadette Ksepka (11:47):

So, the demand is there, institutions of all sizes are signing up, and now is really the time to join. So, that's my elevator pitch, but I want to tell you about one of our FedNow participants. So, MSU Federal Credit Union, they're a university-based credit union.

Jim Marous (12:06):

Oh, wait, we know them very well. They're an organization we've interviewed many times. Their CEO is a big fan of us, and we are of her, so yeah.

Bernadette Ksepka (12:13):

Awesome. So, they serve primarily the Michigan State University students, the alumni, and so forth. And many of these students, they're trying to make a buck as gig workers. And they expect, and I'll go so far as to say, they need access to those funds quickly. College life isn't cheap.

Bernadette Ksepka (12:35):

Whether they're rideshare drivers or delivery drivers, the ability to access their pay instantly using FedNow is just such a huge, big benefit to them. But also, what a differentiator this is for the credit union.

Bernadette Ksepka (12:54):

I love stories, so let me just share one more with you. So, my mortgage servicer changed. They just got bought out, and they sent me mail, I know I missed the new payment details. So, by the time I realized it, I was at the risk of being late on making this payment. Of course that has real implications.

Bernadette Ksepka (13:21):

So, normally, ACH is totally suitable for mortgage payments. And most of us probably use ACH to make our mortgage payments. You authorize it, you forget it. But in this situation, I needed an instant payment option. And with instant payments, that stress disappears. You can move and settle money instantly, and it could be outside of your traditional banking hours, and you can make those time-sensitive payments.

Jim Marous (13:49):

So, is the consumer really the entity that's driving all this more than the merchants, more than the financial institutions themselves? Because I look at, I get frustrated if I get told that, “Oh, by the way, we sent your money, and you'll be able to receive it in two to three days.” And you go, “Why?”

Jim Marous (14:08):

Now, I'm in the banking industry, and I know what the “why” is, but the reality is my expectations have changed immensely since COVID, since the initiation of instant payments. And it becomes the go-to, and as you said, a gig worker that's trying to make the rent may work extra hours, but they need that money. They can't wait for that money to show up at the end of the month when their payment is due on the 20th or on the 15th.

Jim Marous (14:33):

And it just seems like financial institutions (as we're seeing more and more in different areas) are playing the game of catch-up. Because the consumer, they'll go into the branch going, “I don't get why you're not doing what I'm getting here, here, and here.” Is it the momentum now catching up to itself and actually driving the implementation and the kind of numbers of growth that you're showing right now?

Bernadette Ksepka (14:58):

Yeah. So, a couple years ago, I didn't know I needed Amazon to come to my house every day and bring me a package. But now, I can't live without it. And actually, over time, my expectations for Amazon have changed. If I can't get something today or tomorrow, and they tell me two days, that's kind of disappointing.

Bernadette Ksepka (15:21):

And that is translating into payments. And I think the expectations that we have in our daily lives is also translating to businesses. Because if I can have something as a consumer, I should be able to have those benefits as a business owner as well.

Jim Marous (15:42):

So, one of the main concerns we hear from banks (and it was within the organizations that I met with at the very beginning of this whole process) is that faster payments equal faster fraud. We hear this often. Is this a real concern, or is it somewhat a myth that's holding institutions back? What does the data really show? We have two years under our belts, so there must be some stats on that.

Bernadette Ksepka (16:06):

So, this is definitely a misconception that hits a nerve. In reality, our customers tell us that they have seen very little fraud on FedNow to date. The irony here is that our slowest payment rail (which is check) is the one that experiences the most fraud right now. It's not digital, it doesn't have the controls built into it. But with that said, fraud is something that no payment rail (instant or not) can ignore.

Bernadette Ksepka (16:40):

Keeping the network safe, keeping it secure has to be our biggest priority. And ultimately, I think it's going to be multi-layers of safeguards here. So, you want to prevent the fraud before it even happens, but if it does happen, you want to be able to detect it. And then you want to mitigate the financial, the reputational impacts of that fraud.

Bernadette Ksepka (17:06):

And it's going to require the ecosystem working together across multi-dimensions here. Of course, you need the technology. So, you need multi-factor authentication that the banks need to build out. You need the controls that we as a network can build out. But there's so much more.

Bernadette Ksepka (17:27):

So, knowing your customers, so the KYC, information sharing. So, sharing information across the network, and hopefully we get to a point where we're sharing information across the industry. But then also consumer education and making sure that education, it's interactive, it's actually tailored to a particular audience all important features.

Bernadette Ksepka (17:52):

When we talk about fraud, we have to (as an industry) use the same language. So, using the same taxonomy. And that really helps in identifying the trends, educating end users, and then figuring out the right controls to build against the types of fraud that we're seeing.

Bernadette Ksepka (18:15):

So, this is why FedNow requires our participants to report fraud, and we also have them leverage the fraud classifier and the scam classifier. These are two models that the Fed worked with the industry to build out.

Bernadette Ksepka (18:34):

And then let me just maybe quickly touch on, because I think this is important and it's a differentiator for FedNow — we have some tools that are built into our service to really help our participants bolster their defense against fraud.

Bernadette Ksepka (18:50):

So, we have what we call account activity threshold functionality. And basically, this is configurable value velocity thresholds by customer segment and by time period. So, an example; a credit union might set a higher limit for their business customers in like a 24-hour period. But then for all new accounts that they open, they might want to set a much lower threshold because the risk is higher there.

Bernadette Ksepka (19:21):

So, lots of flexibility, great tool. And then we also have another one that we're piloting, and it's called network intelligence tools. So, basically, this is giving the sender more information about the receiver. So, I can get information like, “Is this the first time the receiver is getting a payment?”

Bernadette Ksepka (19:41):

Because that might imply that there's higher risk with this transaction. So, overall, fraud is an industry-wide problem. It's not unique to instant payments. And we're offering just a number of tools here to really help our participants fight that fraud.

Jim Marous (19:59):

It’s interesting, many institutions initially adopted more of a cautious stance, enabling receive but not send on the FedNow network. They consider this more or less a safe middle ground. Why is this approach flawed? Why is that a myth? And what should these institutions do because they're actually missing out on something?

Bernadette Ksepka (20:19):

So, a receive-first strategy is a great way to jump into instant payments. And if you notice, I said receive first, not receive only. Ultimately, planning for send is how financial institutions are going to unlock ROI (Return On Investment) for instant payments. So, it's a step that they need to get to. And right now, we have about a third of our participants that are enabled for send, and that's growing, which is great.

Bernadette Ksepka (20:54):

And not offering instant payment send I think can be a risk to customer churn, especially among those tech-savvy younger generations. So, with send, there's definitely more to figure out. So, financial institutions need to put fraud controls in place (many of which I mentioned they can use), but they also need to figure out that front-end or digital experience for their participants to initiate payments.

Bernadette Ksepka (21:25):

Let me know a couple things here that maybe will help ease the concerns around jumping to send. So, it's okay to start small here. So, many of our participants started by enabling Send with a certain segment of their customers. So, for example, they might start with their corporates and then expand to other customers.

Bernadette Ksepka (21:52):

Others have started by enabling specific use cases. So, for example, they might start with something like auto loan originations. And then another strategy, which I think is really great, is first focusing on a financial institution's own outgoing payments.

Bernadette Ksepka (22:12):

So, banks make lots of payments, they move money around between their accounts for treasury management purposes. And I think that could be a really good learning ground. And again, in all of these strategies, you start small, you learn, you grow, and then you expand.

Bernadette Ksepka (22:31):

The other thing I wanted to know is that there's a misconception that you need to have staff around the clock, 24/7/365. Many of our customers have noted that there's actually not a lot of overhead with instant payments compared to other existing payment methods. And again, it's because of that transparency, that finality, the security of the instant payments.

Bernadette Ksepka (22:57):

I saw another study it was published by the Faster Payments Council, thought it was interesting. Most of the respondents said that they expect between 30 and 40% of US-based financial institutions to be sending instant payments by 2028.

Bernadette Ksepka (23:16):

And then finally, Jim, here, I'll note that financial institutions shouldn't feel alone here. They can learn from others that have already taken that leap. We have some great testimonials that we've shared. And then we also have relationship managers, and we have industry-facing teams that are ready to help each participant with their individual journey towards sending payments.

Jim Marous (23:43):

It's interesting, you referenced it earlier that especially with smaller institutions, which can be viewed as any size (I hate to put a qualification on what “smaller” means), composable banking, where you have a lot of solution providers helping institutions implement and actually deploy new technologies, become a tremendous asset where to your point of saying, if you want to see how others have done well on this, reference your solution providers who already have dozens of clients that are on this.

Jim Marous (24:15):

That's been a really good marketplace in this technology, in this product set where organizations don't have to take that much time, as you referenced. Doing that first step is important because you've got to get off stuck. I keep on using that reference, but until you get off stuck, you're not going to get comfortable with the dynamics.

Jim Marous (24:35):

And in an overall marketplace, it’s becoming more and more used to instant everything. Is this a differentiator that actually is making it so even if an organization may not know it, their consumers could actually be opening accounts where they get this service, and the organization doesn't even know that they've done it for that reason?

Jim Marous (24:57):

In other words, we talk about it a lot of times, I'm in a meeting, and I talk about how many of you in the audience, and they're all bankers, have closed a primary financial relationship in the last five years, and nobody raised their hand because they're working at that organization.

Jim Marous (25:10):

But even if it wasn't bankers, people just don't close accounts anymore. They open new ones. And I asked, “How many of you have opened a relationship with a third party, a neobank, a new technology company, maybe a small organization that maybe takes care of your loan or some other part of your business relationship?” And everybody raised their hands.

Jim Marous (25:30):

I think we may not even know the impact on what's happened in relationships with regard to if I want something … maybe I want my account with Chime to handle things that I want my instant payments, I may move different parts of my relationship. So, we may not even know the full impact as a banker of what's happening with my customer base.

Jim Marous (25:51):

Because they're finding ways in much the same way that remote deposit captures the beginning. You go, “I want my financial institution to offer this because I don't want to deal with this anymore.” Are you seeing that consumers in your research are actually making decisions based on the availability of instant payments?

Bernadette Ksepka (26:10):

Yeah, most definitely. So, the reality is that your average American doesn't know FedNow by name. What they know is that they want to send and receive their money safely, securely, and they want to make payments at the speed they need them. And they're going to do that either through their financial institution, or they're going to do that through a non-bank provider if that financial institution doesn't provide it.

Bernadette Ksepka (26:42):

So, if you're a financial institution that's not on the FedNow service, this is the time to get on board so that you can retain your customers, you can keep your deposits within your bank, and your customers can then also receive federal disbursements, for example, that are going to only grow in availability.

Jim Marous (27:03):

It's interesting because I think we don't track enough of what the consumer is doing because they're building their own open-banking relationships with other institutions, with or without you. They're saying, “I'm going to take care of this.”

Jim Marous (27:19):

I often reference my relationship with Acorns on a savings plan, where Acorn solved a problem I had in building a savings account. I wanted a way to automatically take money out all the time to build up a savings relationship. And my primary financial institutions didn't have that, so I opened that.

Jim Marous (27:35):

Well, that's the same way with payments, especially in something (as you've referenced more than once) where consumers know that it's available. They may not know what it's called, but they want to go, “Okay, if you can't do it, I'll quickly on my mobile phone open an account that does.” And that's an important dynamic that wasn't there five years ago.

Jim Marous (27:56):

So, we've talked about all the good news scenarios around instant payments and the FedNow process, but there are obstacles, or at least there are obstacles in the minds of financial institutions. So, what's the biggest challenge you see as you're out there doing your elevator speech? What is it? Is it the technology integration? Is it the cost? Is it a regulatory concern? Is it maybe internal culture, or is it something else entirely?

Bernadette Ksepka (28:23):

So, I don't like the answer “it depends,” but it does. There are so many institutions out there, there's 9,000 of them. And each of them face their own challenges. In some cases, I think it could be a question of prioritization and ensuring budget. So, there's just so much going on in the payments industry right now.

Bernadette Ksepka (28:45):

We just came off a large wire ISO modernization that the industry went through. And then there's lots of payment options that banks can choose from. And then of course, they have their own tech debt that they need to manage. So, making sure that they have budget and priority is key here for instant payments.

Bernadette Ksepka (29:06):

Another thing I'd note is FIs need to sell that value proposition to their stakeholders. So, their executive committees, for example. Ensuring that everyone in the organization knows the why behind instant payments is so important. And getting that buy-in, it's going to help with the budgeting and the prioritization.

Bernadette Ksepka (29:27):

But really, showing how instant payments is going to benefit their customers and the opportunities for efficiencies, for retaining customers, for growing satisfaction. And then there's revenue opportunities here as well that are critical.

Bernadette Ksepka (29:45):

And then in many cases (and you referenced this earlier, Jim), many financial institutions are reliant on their service provider, and their service provider is readiness. So, they can only move as quickly as their service provider. But as I said, we have 41 service providers that are certified, and all of them can receive, and many of them are working on enabling send for their customers, which is encouraging.

Bernadette Ksepka (30:13):

The last thing maybe I'll note here is that I think a lot of banks and service providers are thinking about payments holistically. So, in many cases, they're building out these new innovative, smart routing hubs that are going to be able to route payments based on different characteristics or customer preferences.

Bernadette Ksepka (30:34):

So, it could be the cost of the payment, how much is the consumer willing to pay for it? It could be the speed. How quickly do they want it? What time of day do they need the payment made? And some of these new technology infrastructures, they're taking time to build out. But I think the end result here is going to be game-changing.

Bernadette Ksepka (30:56):

And in all of this, we as the operator have tried to do our part, and we've made the onboarding process as easy as possible. So, we have a dedicated onboarding team. We have a fully digital onboarding tool. We also have what we call a DevRel resource. So, it's all the technical, all the operational documentation. And this is all to help financial institutions and service providers throughout the process.

Jim Marous (31:21):

It's interesting because my concern (as it often is with the industry) is that we don't know what we don't know. And what I mean by that is financial institutions aren't being asked more than once, “Can you do this?” They're asked once, and the consumer knows if the answer is, “No, we don't have that,” they can quickly, easily, make a change in their banking relationship that we don't know about. That it becomes invisible. That we have (as I call it) the invisible attrition that we can’t address.

Jim Marous (31:53):

And unlike most products and services that we've had in the past where the consumer would keep on knocking on the door, they keep on knocking on the door — they only have to knock once nowadays because they know if I've got it at one place and not at another, I can open an account at that other place, and I don't have to close the rest of the relationship that was so important to me in the past for whatever reason.

Jim Marous (32:17):

And I think that's the biggest concern, if there's not the pain, then there's not an urgency to do things. But the problem is, do you know if the pain is actually there, but you're just not aware of it? Let's have you put on your banker hat for a second. You're going to a mid-size organization that doesn't currently implement FedNow.

Jim Marous (32:38):

Strategically, what would be the first thing that you do knowing that at the end of the day, not only is payments a highly competitive area that is continually evolving, but the further behind you get on the curve, the less likely it is you're going to be able to catch up just because of the momentum of other things going on? What would you do to strategically place this in a top position in your priorities?

Bernadette Ksepka (33:07):

So, I equate this to it's hard to win a football game here if you don't have an offensive and a defensive strategy. And payments are no different. So, you need defensive measures here to retain your customers and not lose the game. But you also need offensive moves to differentiate, to attract new customers. Ultimately, that's what's going to get you the W on the books and get you to the playoffs.

Bernadette Ksepka (33:34):

So, it needs to be a strategy, and it can start with the defense. So, at a minimum, banks need to implement receive functionality, and that's going to give your customers immediate access. And as we talked about through this whole podcast, banks need to evolve to meet the growing customer expectations or they're at risk of losing those customers.

Bernadette Ksepka (33:57):

You don't want to lose your business customers because they value the ability to improve cash flow. They want to reduce operational and administrative costs, and they want to manage their liquidity more efficiently. And those are all things that FedNow can offer.

Bernadette Ksepka (34:15):

And then on the offensive, banks want to gain a competitive advantage. And FedNow, we’re that platform for innovation. We don't restrict use cases. And this is where banks can solve real customer pain points. And the best way to know what those customer pain points is talking with your customers and focus circles and conversations and so forth.

Bernadette Ksepka (34:41):

But banks can bring instant payments back into their digital experience. So, don't have banks go to non-bank service providers for that. Bring them back into your digital experience. They can attract new customers, you can boost satisfaction. And at the end of the day, all a customer wants is a great customer experience.

Bernadette Ksepka (35:04):

And then, we shouldn't forget there's revenue stream opportunities for banks here as well. So, it could be anything from expedited bill payments, offering richer data reporting for businesses using the ISO 20022 that we're using, or they can charge for premium instant services. With instant payments, there's so much opportunity for everyone in the value chain.

Jim Marous (35:30):

Well, I'm going to play off your football analogy here and say that it's important to have both the defensive and offensive game plan, but the reality is you got to play the modern payments game. You can't continue to have the game plan you had in the 1990s or 1980s or even the 2000s.

Jim Marous (35:48):

If you don't have a coach leadership that actually has embraced the modern game of banking, you're going to be left behind. And you're not going to realize it until the fans aren't in the seats anymore because they've gone to another game.

Jim Marous (36:03):

And I shouldn't be doing football analogy because I'm based in Cleveland, and that's a bad place for us to be playing right now. But the reality is, I think your analogy is very strong because the game has evolved so quickly and there's so many elements to the game. Instant payments is but a small part of the overall payments game. But it's such an instrumental part because it sets the tone for the entire rest of the game.

Jim Marous (36:28):

So, you obviously have a great deal of passion for the whole instant payments marketplace and FedNow. Looking ahead in the next two years, where do you see instant payments in FedNow evolving? What new capabilities or use cases are emerging, and what should forward-looking banks do now to at least keep up with the curve and hopefully, stay ahead?

Bernadette Ksepka (36:52):

So, the next two years it's all about getting to ubiquity. We want to get instant payments into the hands of all consumers, all businesses. In terms of use cases, as I said, we are a platform for innovation, there's no use case restrictions. The things that we're seeing, digital wallet defunding, so lots of different wallets. Think like brokerage for example, we're seeing off-cycle payroll.

Bernadette Ksepka (37:24):

So, if an employee needs to be terminated, for example. Things like real estate escrow, instant payments doesn't lock you into banking hours. You don't need to get a cashier's check. The last time I actually went into a physical branch was when I bought a car and I needed a cashier's check. Auto loan disbursement is a growing use case that we're seeing. If you ever bought a car on a weekend, you know how inefficient that process is.

Bernadette Ksepka (37:56):

And instant payments, I think, can dramatically increase that customer experience. And then, I mentioned this already, but I think it's so exciting the US Treasury, they announced that they've added the FedNow service for instant disbursements for federal agencies, and FEMA is the first in this digital payout program. And we only expect to see more and more agencies come on board.

Bernadette Ksepka (38:24):

And this is a game changer, especially in a disaster emergency situation. That's where speed really matters. So, I think over the next few years, we're going to continue seeing that payments pie grows, lots of innovation making payments easier, whether it's through a request for payment or a QR code, but it's going to ultimately take the industry coming together. So, payments is a team sport, and it's going to take the industry coming together to continue growing instant payments.

Jim Marous (38:57):

Well, and to your point, as more organizations get on board, the pressure on those that have not gotten on board gets greater because consumers will have more and more places where they're going, “This doesn't make sense.”

Jim Marous (39:11):

I get frustrated with my insurance company that we've had a couple of disbursements we needed lately, and we've got to wait for checks, we got to have counter signatures. There are ways to do this better, there are ways to do this differently.

Jim Marous (39:23):

And we'll become a differentiator for insurance companies to say, “We've gone this way.” You mentioned the car business. In every part of the banking industry, payments is the foundation. And it's interesting because on the podcast, our audience is mostly front-facing retail bankers.

Jim Marous (39:41):

And not everybody is on a daily basis concerned with that back office. They think this is all back-office function, but the reality is, it's what the front-facing consumers coming into the branch or calling up on the phone and mentioning their frustration with.

Jim Marous (39:57):

And we've got to have better ears in the business and understand that this stuff is happening with or without us. And the further we get behind – and I'm considering the ability to get instant payments on things, a foundational element that that is going to continue to be the meat and potatoes of what we have to do. The cost of opening the doors at the end of the day, it's not enhancement, it's foundational.

Jim Marous (40:24):

And we're going to have a hard time doing other things as we're talking about maybe different currencies, everything else. If we're going to have to change all these elements, it gets that much more difficult.

Jim Marous (40:33):

And I suggest that listeners of the podcast, not only I hope you listen to this entire podcast, but also listen to the other podcasts (we're going to show it on our end cards) that we've done around payments and the modernization of the payments function, be it the fraud element or the actual payments element, because it is what people consider banking to be today.

Jim Marous (40:54):

They don't spend a whole lot of time on the updating of their past books. In fact, not for the last 30 years. They're not spending a whole lot of time on what the CD rates are, they get that regularly. They're opening accounts using digital aspects. But if they open an account digitally on their mobile banking app, they expect payments to be just as fast. They don't expect it to be slower than it was to actually open the account.

[Music playing]

Jim Marous (41:17):

So, Bernadette, thank you so much for being on the podcast today. It's always a joy for me to have a guest that has a passion for what they do the way you do, and you communicated in such great terms. I'm going to remember the football analogy for quite some time. But again, it is one of these things that hopefully, it opens the eyes of organizations that have been delaying or saying it's not a priority.

Jim Marous (41:43):

I think what they have to do is look at what your customers are really doing and don't take it for granted that just because they're still with you, that they're using you for these types of transactions, which are fundamental to the way they get paid and the way they do payments. Thank you so much for being on the show.

Bernadette Ksepka (42:00):

Thank you so much for having me.

Jim Marous (42:03):

Thanks for listening to Banking Transformed, the winner of three International Awards for podcast excellence. If you enjoy what we're doing, we would really enjoy a positive review.

Jim Marous (42:13):

Also, check out my recent articles in the Financial Brand, and the research we're doing for the Digital Banking Report.

Jim Marous (42:19):

This has been a production of Evergreen Podcasts. A special thank you to our senior producer, Leah Haslage; audio engineer, Chris Fafalios, and video producer, Will Pritts.