FedNow Is Coming! So What?

  • By Peter Tapling, PTap Advisory, LLC
  • Published: 5/16/2023
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For corporate practitioners dealing with money movement, it would have been hard to miss news of the pending launch of FedNowSM

The Federal Reserve has been working on this instant payment offering since 2019. FedNow is the first major new payment capability delivered by the Fed in more than four decades. As of this writing, FedNow is slated for delivery in July 2023.

Instant payments are a global phenomenon with instant payment schemes in or coming to market in over 65 countries. The U.S. has, if anything, been slow to make this innovation available. The Clearing House released RTP®, the private sector instant payment offering, in 2017. RTP has seen a 70% CAGR in transaction volume since 2020. Clearly, someone in the U.S. is interested in instant payments!

Still, the excitement expressed by the Fed and many financial institutions about instant payments and FedNow doesn’t seem to be shared by the corporate community. In my interactions with corporate financial professionals, the reaction has been a resounding “ho-hum.”

Backing up a bit — what is FedNow? FedNow is a new payment rail being developed by the Federal Reserve as a product to be offered to financial institutions. Financial institutions, in turn, will offer the capabilities of FedNow to their customers: consumers, small businesses, enterprises, governments, etc. FedNow payments vary from payments that are familiar to corporates in four important ways:

  1. Credit push only — Payments under FedNow require good funds availability on the part of the sender and only move in one direction — from the sender to the receiver. There is no concept of a debit-pull transaction.  
  2. Real-time gross settlement — FedNow payments are cleared and settled, one at a time, between all parties at the time of the payment. “Real-time” means within several seconds. So within several seconds, funds move from a sender’s account to a receiver’s account and are available to use.
  3. 24x7x365 — Gone are the days of payments only taking place during “banking hours.” FedNow will operate at all hours, every day of the year.
  4. Irrevocable — FedNow payments are final when executed. There is no structured way of returning funds for any reason. Make sure your payment instructions are correct!   

These characteristics change the nature of bank payments and bring their behavior in line with “always on, always available” modern experiences. Instant payments create electronic payments that behave like cash.

When asked the question, “Do you want your money now or do you want your money later?” there are few reasons to not answer that you want your money now. Instant payments hold this promise. So if “everyone” wants to get paid instantly, why the reluctance on the part of corporates? The answer to this question is complex, but here are a few ideas:

  • Lack of availability — Not every financial institution will offer FedNow in July. There will be perhaps 10s of banks live at the beginning and maybe 100 or so by the end of the year. The excitement about FedNow is moot if you can’t get access to the product.
  • Uncertainty about trading partners — Even if you have access to FedNow through your financial institution, there’s no guarantee your trading partners have access. Both sides of a transaction need to have access to the instant payment scheme in order for an instant payment to work.
  • Exception handling — For the foreseeable future, FedNow payments will represent exceptions in your various payment flows. FedNow being utilized for only certain payments to/from only certain partners means your systems need to understand and properly process the exceptions.
  • Lack of demand — Few corporates are being asked to support instant payments — either by customers/partners or by internal stakeholders. Adding this capability will need a reason and a champion.

FedNow is indeed a BIG THING. FedNow and RTP represent a modernization of payments that has been a long time coming and will certainly be a very good thing for corporate payments. Eventually. Corporate practitioners should work to understand what instant payments can — and can’t — do for them.

  • Speak with your bank about their plans to offer FedNow. When will you be able to receive instant payments? How will you be notified? What information will be included to help you reconcile the payment? When will you be able to send instant payments?
  • Understand your payment “tentacles” — the ways in which your operational systems affect and are affected by payments. Are your systems capable of per transaction, 24x7x365 posting? Are your systems ISO 20022 capable? (ISO 20022 is a topic worthy of discussion on its own!)    
  • Understand the money flows that will benefit from instant payments. Do you have activities that need a weekend/off-hours payment? What obligations require payment finality? Are there payments that carry a regulatory requirement for instant availability (e.g., final payroll for departing employees)?
  • Identify areas of innovation.

As you continue learning more about instant payments, AFP will always be a great resource. Here are some other industry resources to help you understand more about FedNow and instant payments.

Instant payments will arrive on your doorstep in unexpected ways. Don’t panic about the July launch of FedNow. But do get educated and prepared as you will be processing instant payments regularly within a few years.

Looking for more on payments? Check out these resources:

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