Automation » FedNow: how should CFOs prepare for instant payments?

FedNow: how should CFOs prepare for instant payments?

News of the incoming instant payments system, FedNow, is sweeping the United States. As told by banking experts, what does this new system mean for CFOs and what do they need to know in order to prepare?

In July 2023, the US Federal Reserve is set to bring to market FedNow, its first instant payments offering that enables customers of participating banks and credit unions to instantly send and receive money transfers outside of traditional banking hours. A necessary step for the modernisation of the US financial system.

In the words of Nicole Dilts, VP of Commercial Solutions at MSU Federal Credit Union, “the US has lagged behind other countries regarding sending and receiving instant payments, but FedNow will undoubtedly change how businesses, consumers, and financial institutions manage their finances going forward”.

Unlike other fast transfer systems, like the Automated Clearing House (ACH) or the Fed’s current fast payments offering, FedWire, the new system will allow 24/7/365 payments, including public holidays. It will also be the US’ first introduction to data-rich ISO 20022 messaging, which is quickly becoming the global remittance standard.

This is “the first time the central bank here in the US has gone to market with a new payment type in over 40 years”, says Finastra’s director of the Corporate Banking Payments, Strategic Accounts Executive Team, Kristin Robertson.

People are “probably familiar with The Clearing House, which has their own version called ‘Real Time Payments’, but they are a private clearing. [FedNow] is the first time the Federal Reserve Bank system has a new payment type that ties in to the modernisation of the US payments infrastructure”.

How will FedNow affect corporate finance functions?

Truly instant payments create incredible opportunities for finance professionals to streamline their operations. “It will provide businesses an instant payment option for sending urgent payments, such as if they experienced a payroll issue or need to fund an insurance payout to their customers who need immediate funds due to a disaster”, says Dilts. “FedNow can also reduce credit card processing fees that businesses currently incur.”

In terms of CFOs, Robertson believes FedNow will “have a tremendous impact on corporate finance functions and give [CFOs] better control over their liquidity and better flexibility to move monies outside of the traditional wire processing windows”. The instant nature of payments gives executives incredible elasticity in making decisions right up to the wire, without being penalised by a 1-3 day clearing window.

“When you look at that coupled with removing friction from the business-to-business (B2B) payments landscape, that will be a major initiative as well, because with the FedNow payment type you can get really rich remittance data flowing through the system as well allowing for better, faster cash application”, says Robertson.

Instant payments will not only impact vendor relations but are set to have a tremendous impact on the relationship between corporations and their staff. With the rise of gig based employment, and markets competing to retain staff, being able to perform a short-term engagement and receive instant payment upon completion will be incredibly meaningful to these types of employees.

As Robertson puts it, “a lot of those working in the retail space are looking at same-day payroll. So, when you punch out and you’re done for the day you get paid. I think we’re becoming accustomed to that in the P2P world, so being able to receive that same level of instant payment, instant gratification from your employer is going to be very well received”.

Who will benefit most from FedNow?

FedNow is set to have an incredible impact on the US economy, giving the ability to modernise to a level required to offer competitive products in internal, as well as global, markets. It is becoming essential for businesses and financial institutions to provide frictionless payments and safe settlements for customers, particularly in a B2B setting.

While these types of instant, mostly frictionless payments, are already available to individuals through FinTechs like Venmo, which often settle payments via ACH, now this service will be possible at the Federal Reserve level. This will not only be impactful to individuals, but will offer businesses and the greater economy access to the same flexibility in making transfers.

The Fed has worked closely with The Clearing House, whose service is currently adopted by over 300 banks across the US, to ensure interoperability between the two payment offerings. “The Fed pilot program alone [is partnered with] 120 banks, and they have a prediction that over 200 banks should be live by the end of 2023, with a really rapid adoption into 2024”, says Robertson.

How should CFOs be preparing for FedNow roll out?

FedNow will only be available through participating banks and credit unions, so CFOs should be using their sway to help influence the adoption on a mass scale. “I am working with our team to build out internal and external use cases and examining how the ability to send and receive instant payments will change member behaviour”, says Sara Dolan, CFO for MSU Federal Credit Union. “I’m also communicating internally about the benefits of FedNow and why adoption of the new system is important not only to our membership but also throughout the nation.”

CFOs and other finance professionals need to check the Fed site and see if their partnered banks are participating in the FedNow pilot program, which is scheduled to go live in July 2023. According to Dolan, “Overall, CFOs need to determine if they will manage the liquidity or if they will partner with a funding agent to handle that aspect. It can be challenging to manage funds 24/7, and there is risk involved if an institution could not send a payment that is requested”.

It is also especially important that CFOs understand how their banks are approaching the adoption of FedNow, whether they will be starting with ‘receive only’ and then branching out to ‘send and receive’ later, as this will drastically affect the ways in which banks in the United States will be required to operate.

“[CFOs need to] talk to their banks and understanding their plans, and then consider where they stand in their desire for immediate payments, as this might mean adding additional banks to their portfolio, that are willing to offer that service more readily” say Robertson.

It is imperative that banking customers and participating banks work together to streamline the adoption of this new payment type, for example MSUFCU “are evaluating the communication needed to engage and educate both employees and members, to ensure they provide the resources needed to make [FedNow] a convenient and user-friendly payment channel for everyone”, says Dolan.

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