Overview
With the recent launch of the Federal Reserve’s FedNow instant payments service, there is renewed focus on payments networks. Whether it’s FedNow, the Clearinghouse’s Real-Time Payments, same-day ACH, or another network, banks interested in any new payments technology (instant or otherwise), should focus on three areas:
- Operational Preparedness: Different networks may require technical and operational refinements to the bank’s existing stack and staff. Where payment networks, for example, require pre-funded accounts, the bank will need to be able to manage its customers’ pre-funded account positions, oftentimes in real time and 24/7. Likewise, new payments functionality may necessitate augmented or new BSA programs, approval procedures, or complaints management programs.
- Vendor Risk & Contracting: Banks not only need to understand and agree to the network rules, but they also often need to engage a third party (i.e., a software or middleware) solution to submit and receive properly-formatted payment requests. As with all vendors, the bank should diligence the vendor and carefully construct contract terms.
- Customer Agreements & Disclosures: Before launch, the bank will most likely need to update its customer agreements (such as its treasury management agreement) and customer-facing disclosures. This is crucial for ensuring the bank does not incur unwanted liability—particularly as instant and faster payments networks are often targeted or utilized by fraudsters and other bad actors.
We have addressed trends in this area in previous BFKN Alerts and publications regarding third-parties, vendors, contracts, and payments:
- BFKN Alert: Enhanced Compliance Scrutiny of BaaS Fintech Relationships
- Is Your Bank Fintech Ready?
- BFKN Alert: OCC Scrutiny Reveals FinTech Roadmap
- BFKN Alert: FinTech Partnerships Under the Regulatory Microscope
- BFKN Alert: Lessons From Citibank’s $900 Million Payment Error
- BFKN Alert: FDIC Publishes Conducting Business with Banks: A Guide for FinTechs & Third Parties
- BFKN Alert: New FDIC Guidance on Technology Service Provider (TSP) Contracts
- BFKN Alert: Data Breach Highlights Importance of Bank Vendor Management
We Can Help You
BFKN Financial Institutions Group attorneys have helped evaluate, prepare for, and negotiate and contract with many payment networks and vendors. Please contact us if you are interested in discussing any new payment products or networks.