Learn about the recent launch of FedNow and how it can be a core advantage to increasing the efficiency of running your business.
The way instant payments can be sent and received recently took a major leap forward with the launch of the FedNow Service (FedNow). Developed and operated by the U.S. Federal Reserve, FedNow is an instant payment system that allows for people and businesses across many industries to move money immediately, any time of day, every day of the year.
Prior to FedNow’s launch in July 2023, instant fund transfers were possible through services offered by The Clearing House, a consortium of private banks that operates RTP, a real-time payments network. The Clearing House’s RTP payments network enables account holders to transfer funds in real time between a network of participating banks, giving recipients immediate access to payments.
However, only 62% of banks participate in the RTP system, diminishing its usefulness, explains Jessika Wood, SVP, Head of Commercial Payment Products at Fifth Third Bank. "Imagine if you could only write a check for 60% of your bills or only use a credit card at 60% of the places you shop," Wood said. "That lack of widespread adoption is limiting effectiveness."
The Federal Reserve is promoting the service in the hope of achieving near universal adoption by banks and credit unions. This enormous reach, coupled with the security of the U.S. government’s backing, will give businesses a faster alternative to current money transfer options such as ACH transactions and wire transfers as well as payments through private sector providers like Cash App, PayPal, and Venmo.
Because FedNow will supplement rather than replace existing payment service offerings, it also has the potential to ignite innovation across the sector. "It’s additive in the sense that FedNow will be a second option for banking customers," said Maria Mason, Senior Treasury Management Product Manager at Fifth Third Bank. "As these two networks compete against one another, they may challenge one another to deliver success and bring more value to the market."
How Does FedNow Work?
RTP and FedNow Service are interbank payment systems, meaning that payments are routed and settled within a shared network of participating banks. Both instant payment services allow bank customers to send and receive money instantly and can be accessed 24/7 and 365 days a year, so businesses can process transactions and move funds in the evening and on weekends and holidays, allowing for greater flexibility and more efficient liquidity management.
With the FedNow system, settlement is immediate, transfers are irrevocable, and payment integrity measures ensure secure as well as immediate access to funds. Businesses should also be aware that the FedNow network is limited to domestic-only transactions, which allow a maximum of $500,000 per transaction.
Fifth Third Bank was an early adopter of instant payment services, becoming an RTO participant bank in 2017. Fifth Third is the seventh largest provider of instant payments and is the 10th largest receiver. The bank was also an early adopter of request for payments (RFP) services that allow banking customers to send requests asking their clients for payments.
Fifth Third also is able to process instant payments using batch and API. For example, if a company has a payroll of 250 people, the payment information is sent as one "batch" file and is processed as one unit. With API, Fifth Third does all the work in evaluating the batch file by each line item and then processes each individual item. Your staff gets paid the same day instead of two days later by ACH.
What FedNow Instant Payments Mean for Your Business
For business owners, one core advantage of around-the-clock, immediate clearing of payments is the financial flexibility to manage cash flow more efficiently. Greater control over the timing of transactions enables CFOs to manage costs by holding payments until their due date, optimizing cash balances across accounts, and increasing efficiency by automating vendor payments.
The service addresses a perennial pain point for financial managers, who routinely cite managing cash flow as among the most impactful issues facing their organizations, according to an annual survey by the Fed. Nearly half of respondents reported believing that faster payments would lower their costs, primarily through more efficient processing with remittance data attached.
Instant payments facilitate improved liquidity management. For example, businesses can take full advantage of payment terms by holding payments until the end of business on the date due. For example, most companies that use ACH for payroll have to make the funds available two days ahead of payment. But with instant payments, they can process the payments just five minutes before they are due, holding the money longer and being able to make better decisions about liquidity. Instant payments also are essential for making emergency payments or just-in-time payments.
In addition to more efficient financial operations, shifting transactions to instant payments may eliminate expenses related to paper transactions and costly credit card processing fees. Businesses also reduce the risk of an overdraft because the bank will verify funds before initiating an instant payment.
What’s more, the ability to process payments instantly can boost customer satisfaction by allowing service representatives to validate payments during a sales call or chat session, speeding service and delivery times. For example, instant payments can be a competitive differentiator in the gaming industry, said Wood. "When a player has a big win, the ability to unload money from a digital wallet is important to them." Employees and gig workers who can be speedily reimbursed for expenses and paid for their services also benefit.
Instant payments also help small and medium-sized merchants who are often at a competitive disadvantage to larger stores that get paid seven days a week. "With instant payments, if you make a sale today, you get paid today," Mason said. "When you cash out your receipts for the day, the money is in your account a few minutes later. You’re able to reduce settlement time from three days to zero and get access to money sooner."
Another use is for home closings. Typically, if you are buying a house, you have to send money by wire in advance because the money has to be in the seller’s account before they will transfer title. But wire fraud has become a problem. With the buyer and seller present, the title agent can initiate a request for payment during the closing using instant payment and the money settles immediately.
Fraud mitigation is another potential advantage FedNow brings business owners. Real-time payment monitoring allows CFOs to swiftly detect and respond to suspicious activity, helping them combat unauthorized transactions. Fifth Third’s proprietary fraud prevention system adds an extra layer of protection of real-time fraud monitoring, including white-listed pages to ensure that a payee is approved.
Because instant payments are irrevocable transactions—meaning that once moved, the money is gone—businesses need to have precautions in place to reduce risk. Fifth Third uses real-time monitoring and screening processes that exceed industry security standards in its payment systems.
"We use end-to-end encryption, safety protocols, and API keys," Mason explained. "Only the person at that business has the encryption keys, and each payee IP address needs to be white-listed. If a payee isn’t on that list, we don’t open the door unless we have a conversation with the individual authorized to approve it. We’re able to evaluate that transaction and verify if it’s a good payee within three seconds."
How to Prepare for FedNow
There are many considerations to weigh when deciding whether to introduce instant payment services. Businesses should start by identifying areas of opportunity, such as ways that instant payments can improve efficiency, provide cost savings, improve the customer experience, or offer other benefits.
Steps such as checking with suppliers and business trading partners on their plans to adopt instant payment capabilities can help position companies to streamline the transition. Fifth Third plans to make FedNow’s payment service available in early 2024, but businesses new to instant payments can start exploring the capabilities now by utilizing the RTP network services the bank currently offers.
"What works for your business really depends on your business processes, and different systems may make sense for different use cases," said Wood, who added that Fifth Third will continue to offer those and other payment methods after rolling out FedNow. "Speed isn’t always paramount. There may be times when ACH is the perfect option for cost reasons, and other times, switching to instant payments makes sense. When you approach it that way, there’s room for all the various payment methods."
Fifth Third’s treasury management experts can help your business develop the right instant payment strategy and work with your IT department for a smooth implementation.