Open Banking or FedNow: Where to Start?

Contributed by David Whitcomb, Vice President of Product, MX

Last month, the Federal Reserve launched its new FedNow Service for instant payments. While any financial institution can use FedNow to instantly transfer money for their customers at any time of day, on any day, only a small fraction of institutions have signed up to be early adopters. This means that for a system that requires both the sending and receiving institution to be signed up, actually sending a FedNow transaction in these early days will be like finding a needle in a haystack. 

So what will it take to accelerate adoption of FedNow? Should financial institutions focus their energy here first? 

We think investing in Open Banking and Open Finance should be the first priority. Open finance APIs can create the foundation to support a more secure, seamless instant payments ecosystem. Here’s why:

Open Finance Ensures More Secure, Reliable Connections: Current data-sharing methods like screen scraping, put a customer at higher risk unless careful security protocols are in place. Screen scraping requires consumers to share their credentials (username and password) and places a heavy technical burden on bank infrastructure, which creates unstable customer experiences and a lack of transparency for the end user. 

With Open Banking and Open Finance, APIs allow consumers to share and access their transaction data without the need to provide usernames and passwords — or in the case of making a payment, account details to send money. The best direct connections replace credentials with tokens, delivering higher levels of security, faster speeds, and higher connection success rates.

Open Finance Improves Data Accuracy: Leveraging APIs can also ensure higher data quality by eliminating the need for manual data entry by the consumer. Account data and account owner information — as well as available account balances — can be more quickly verified using Instant Account Verifications, account owner verifications, and real-time balance checks. Screen scraping can provide multiple options for account numbers, and API based sharing ensures the right account number is used.

Open Finance Helps Support Fraud Reduction Efforts: Faster payments mean faster fraud. In fact, Assistant Secretary for Financial Institutions Graham Steele from the Department of Treasury recently remarked, “With the ability to move money instantaneously between accounts, we face potential fraud scenarios that are more complex and intricate than in traditional deferred settlement payment systems. To mitigate this, we need to consider how we can harness technology and policy to help mitigate risks.”

Financial service providers are not just custodians of consumers’ money but also custodians of data and trust. Open finance APIs enable greater insights into the financial lives of consumers, making  it easier to spot anomalies and potential fraud, reducing risk for both the organization and customer.

The bottom line is that leveraging open finance APIs can give institutions greater confidence that payments will be more successful than those that use riskier methods like screen scraping and microdeposits.