Why every business should care about FedNow

 Stephany Kirkpatrick photo
Stephany Kirkpatrick Founder and CEO, Orum
3min read

The Federal Reserve hasn’t changed its payment system in more than 50 years. And while it’s operated with relative stability for that duration, the needs of businesses and their customers have evolved.

In today’s digital world, consumers' expectations for “real-time” access are rising – in fact, 75% of consumers feel it is important to receive payments and have access to funds instantly (a percentage that grows substantially among younger generations). While innovations in the consumer technology landscape have meant that people can now send money with the click of a button, there remains a massive opportunity to speed up the actual movement of funds, enabling people to access earned wages outside of traditional bank hours.

But all that’s changing this summer. For the first time, the Fed is upgrading its infrastructure with a new payments rail that will enable instant payments, aptly called FedNow. These changes will have far-reaching implications for businesses everywhere — and it couldn’t be arriving at a better time, given rising interest rates, inflation, and broader macroeconomic uncertainty. Here are 5 key things businesses need to know about what’s coming and what they can do to make the most of FedNow’s arrival.

  1. Instant clearing and settlement means more efficient operations. FedNow will be an instant clearing and settlement service for payments. Banks on either end of a transaction will be able to instantly exchange associated information and move money between relevant customer accounts. Thanks to instant processing, the sender and the receiver of a transaction can get notified immediately on whether the payment was successful, introducing unprecedented transparency into the money movement process while giving access to funds immediately. This will ultimately lead to increased flexibility and cash flow control, which frees businesses up to make faster (and more informed) financial decisions.

  2. 24/7 availability removes barriers of traditional banking hours. One of the key improvements over current payment rails, like ACH or wires, is that FedNow will process transactions 24/7. That means it will clear and settle payments on weekends, bank holidays, at night or any time of day. This is important because it means both consumers and businesses can access funds outside of normal banking hours – consumers can make urgent payments or settle bills without being hamstrung by business hours, while businesses can pay suppliers or employees, regardless of the date or time or day.

  3. Cheaper processing costs for transactions across categories means less reliance on ACH. ACH (and other bank-to-bank transfers) has experienced a resurgence of sorts in recent years as businesses push back against the ever increasing fees associated with card payments or wires. Because the Federal Reserve is not for profit, it can offer more competitive pricing, removing barriers to entry.

  4. Potential for faster payroll. For decades, running payroll has been a multi-day event. People typically don’t get access to funds until days later, and well after the period they actually worked. The rise of the gig economy has put pressure on this model, and today’s labor market means every business is thinking about how best to retain employees. Payroll providers that have historically relied on ACH, may provide businesses the opportunity to pay employees faster via FedNow. After all, more than half of Americans can’t pay an unexpected $1,000 bill, and almost 4 in 10 adults have less savings than they did a year ago. That means millions of households are one emergency away from potential financial disaster — and getting money more quickly will reduce overall money stress, which has been shown to improve employee productivity and loyalty.

  5. Integration with the Federal Reserve’s larger network offers an opportunity for inclusivity. FedNow will be, in some ways, similar to another recently introduced payment type, Real-Time Payments (RTP) from The Clearing House. While both RTP and FedNow seem to be similar – in that they clear and settle domestic USD payments 24/7, there are some key differences. FedNow will support smaller community banks around the country, which means that its introduction may be most acutely felt by local financial institutions and their account holders (though it ultimately depends on which banks chose to join the FedNow network at launch). Wide adoption will likely take time, but the promise of a more inclusive financial ecosystem is especially exciting.

With the launch of FedNow around the corner, opportunity abounds for businesses in search of making the promise of faster payments a reality. While it won’t solve all our time-to-money problems, it will certainly lay the groundwork for a more efficient financial future.