This is an excerpt from The Future of Digital Banking in North America 2024 report.

Modernising payments by adapting non-traditional payment systems is generally thought of as the way forward for financial institutions. But in order to effectively embrace non-traditional payments, authorities and institutions need to be able to draw from solid foundations. Due to the shifting nature of the financial landscape, it’s crucial to not lose focus on the fundamental infrastructure of payments. In North America, one of the biggest focuses in 2023 has been real-time payments and the introduction of new payment rails.

In a long-awaited move towards modernisation, the Federal Reserve officially launched its new instant-payment rail FedNow in July of this year. Federal Reserve Chair Jerome Powell commented at the launch: “Over time, as more banks choose to use this new tool, the benefits to individuals and businesses will include enabling a person to immediately receive a paycheck, or a company to instantly access funds when an invoice is paid.”

In the first two months after launch, 108 institutions have started sending and receiving on the network, yet considering that over 9,000 financial institutions have access to the FedNow network, we can expect to see efforts to increase participation in 2024. Addressing customer distrust of new solutions as well as concerns for fraud are crucial steps to take in order to increase domestic adoption of the service, especially for smaller, regional banks and institutions.

The Federal Reserve has already announced planned updates, which include select risk management and operational enhancements geared toward providing additional fraud prevention tools, which are expected to roll out in 2024. Another significant factor in the adoption of FedNow is the fact that many businesses already rely on RTP, the Clearing House’s instant-payments network. 2024 will be a key year in proving whether two real-time payment networks can coexist in the US market.

Real-time payment rails were also expected to launch in Canada this year. As part of a multi-year modernisation of Canada’s payments infrastructure, a new instant-payment system, Real-Time Rail (RTR) was supposed to launch in the summer of this year but has been further delayed as Payments Canada announced a second review. This signifies the third delay in the launch of RTR, which was initially slated for 2022, and follows a pattern of delayed modernisation in Canada.

While no information has been released on the cause of the delays, the failure to effectively deliver payments modernisation highlights an important aspect that needs to be addressed by financial institutions everywhere in the upcoming years. The exponential growth of innovation in the payments sector has left many banks stranded with a wide number of isolated systems that serve the need of various new and traditional payment rails.

This leaves them vulnerable to further regulatory or technological changes that will be time and resource consuming and can disrupt business. Building a strong foundation for the future will mean that banks and financial institutions will need to determine how to consolidate payment processes into a single platform and increase their ability to facilitate dynamic routing.

The significance of real-time payments will increase exponentially once the fundamental structures are in place, and with the emergence of new payment rails and multi-rail strategies, banks need to increase their adoption of dynamic algorithms that can optimise payment paths. This will not only increase operational efficiency and decrease time and effort, but it will also streamline the customer experience.

Remaining competitive through open and embedded finance

Current forecasts from Statista anticipate North America to only have 5.7 million open banking users in 2024, compared to 63.8 million in Europe. In the US, open banking still lacks regulation and is strictly market-led, and Canada continues to delay the introduction of its open banking framework. While a roadmap had been laid out for open banking to become operational by January 2023, there have been little updates on the creation of an open banking framework. The delays have sparked pushbacks among Canadian fintechs, who have launched a public campaign to rally public support for government action on open banking and payments modernisation.

Source: Statista

But even though the US has been slower to embrace open finance compared to European countries, we are likely to see changes in the upcoming year. Since 2024 is an election year, regulators are likely to expedite efforts in areas such as open banking. As switching banks has been historically cumbersome in the US, the CFPB director Rohit Chopra announced sweeping changes to rules on consumers' control of their banking data, which will undoubtably have a positive ripple effect on open banking adoption. This proposal is due later this year and is expected to come into effect in 2024.

“We want to make sure that standards are giving the ability for consumers and all market participants to switch. When a consumer has the power to vote with their feet, you'll see how our system will give them better service as well,” Chopra commented during a congressional testimony earlier this year.

Yet as North American open banking adoption trails behind Europe, fintech development and changing consumer demands are continuing to put pressure on banks and financial institutions. In order to keep pace with technological change, embracing open and embedded finance is crucial as we move into 2024.

Source: Temenos and BNY Mellon

The advances of open banking in the US combined with increased demand for digital financial services and heightened user expectations lay the groundwork for growth in embedded finance. Future Market Insights predicts that the embedded finance market in the US will grow to $291 billion by 2033, compared to a projected $63 billion in 2023. Another EY survey found that over 70% of respondents believe that more than half of financial services will be offered via nonfinancial services platforms in the near future. Commenting on the poll, Remy Carole, COO at Treasury Prime, said: “Financial services and nonfinancial services companies should pay attention to embedded finance because it's the biggest opportunity for growth. Embedded financial services in products are starting to become commonplace. There's a future where embedded finance is as ubiquitous as web technology is today.”