The Federal Reserve and The Clearing House Payments Co. LLC will have to put in more work to make their two real-time payment rails work with each other, Clearing House President and CEO David Watson said in an interview.
The Clearing House, a banking association and payments company owned by 22 of the largest US commercial banks, launched the RTP network in 2017. The Federal Reserve Board said July 20 that its FedNow platform was fully live with 35 early adopter US banks and credit unions.
FedNow, first proposed in 2019, settles payments between bank accounts in real time, 24/7, while it typically takes at least one business day for the current main payment rails, such as the Automated Clearing House and Fedwire, to settle transactions.
FedNow and RTP are currently not interoperable, meaning a participant of FedNow cannot send money in real time to a participant of RTP, and vice versa.
"They have a different format. They have different technical specifications," Watson said in an interview. "If we ever want the two to be interoperable, we're going to have to build some kind of translation machine between the two."
Similar to the push for interoperability of other payment rails, building the technical connection between RTP and FedNow will take heavy lifting and likely be years away, Watson said. There will have to be negotiations on the technical formats, on warranty and fraud principles, and both the Fed and The Clearing House will have to make technical changes, Watson said.
Among the 22 owners of The Clearing House, four are participating in the FedNow program: The Bank of New York Mellon Corp., JPMorgan Chase & Co., U.S. Bancorp and Wells Fargo & Co.
The Fed is committed to making FedNow and RTP connect to each other, Loretta Mester, President and CEO of the Federal Reserve Bank of Cleveland, said in a presentation July 12. Mester said interoperability is demanded by payment industry stakeholders, but it is not always "a given" in the US, and "no doubt it will be a challenge for instant payments."
"The Fed continues to engage with RTP to discuss how best to accomplish this goal," Mester said, according to a transcript.
Where connectivity stands
Both networks use the ISO 20022, a global standard for financial information, which means both FedNow and RTP follow the same framework to build messaging systems for sending and receiving banks to exchange information such as the currency and the amount in the same format. Using this same standard lays the groundwork to achieve interoperability between the two.
But there are more details to hash out for the two networks to connect technically. For example, FedNow and RTP use different interpretations of certain messaging formats, Watson said.
"It's not as standardized as people think. Everyone who implements ISOs will implement it in their own way. [FedNow] decided to implement it differently than how we've done it," Watson said.
Still, some banks that have had experience implementing RTP will be able to go live on FedNow faster, said Jessica Cheney, head of product management of digital banking solutions at payment company Bottomline Technologies Inc.
Banks typically need to first select a provider of payment gateways, such as Fidelity National Information Services Inc., Fiserv Inc. and Volante Technologies Inc., to get connected with a real-time payment network. If a bank has already been live on RTP, they often would have already completed the setup with the payment gateway, Cheney said in an interview. It will then only be a matter of months to add FedNow to the existing infrastructure, she said.
"If you are starting from scratch, it could easily take you 18 to 24 months to get ready," Cheney said.
The push for
There is a consensus among payment experts that the interoperability between the two real-time payment networks will benefit customers and enlarge the reach of both RTP and FedNow, especially considering that financial institutions in the US are new to real-time payments compared to their peers in other countries, such as India and Brazil.
Technology vendors have said they are willing to help iron out the wrinkles in interoperability.
Payment solutions provider ACI Worldwide Inc. enables its customers to access both RTP and FedNow through ACI, said Bridget Hall, leader of real-time payments of Americas at ACI.
"They won't have to worry about the nuances of technical standards, as ACI will take care of that for them," Hall said.
Collaborations between the two networks will also help banks navigate how to adjust their operations to commercialize real-time payments. Many banks have been hesitant to deploy real-time payments because they have not figured out clear use cases.
Since RTP's inception in 2017, The Clearing House has grown the number of participating banks and credit unions to 350. In the second quarter of 2023, the RTP network processed 58 million transactions worth $29 billion. The Clearing House aims to at least triple the volume in the next five years, Watson said.
"We will continue to work together for what is better for the industry," Watson said.