The Federal Reserve’s instant payment system, FedNow, went live in late July, and dozens of banks and credit unions have already signed up. Nick Botha of AutoRek explores FedNow’s impact on corporate users of U.S. payment services.
The U.S. is the world’s most advanced market, with an ever-growing need for access to a quick and convenient way to send money. Despite this, it has lagged behind other developed nations in adopting an instant payment system.
FedNow, which the Federal Reserve launched in late July, allows financial institutions and their customers to instantly transfer money. The service means transactions between businesses, or between businesses and their customers, occur directly between bank accounts in seconds. These transfers can be made any time of day, any day of the year, with funds available immediately to recipients.
Early adopters of the service include JPMorgan Chase, BNY Mellon and the Treasury’s Bureau of the Fiscal Service, but as we know, the U.S. itself is far from an early adopter of a government-backed payment system, lagging behind many other countries around the world on that score.
While the Fed is keen to avoid system failures or snags, the key to its success is adoption. There are approximately 9,000 banks and credit unions in the U.S., and the Fed expects them to sign up gradually. Institutions are responsible for adopting the system internally, so they can offer improved service to their customers.
How banks and PSPs will benefit from FedNow
The prime benefit of FedNow is that businesses and customers can use instant payments. This is particularly important for firms or individuals requiring rapid access to funds or when just-in-time payments help manage cashflow between bank accounts.
End customers are the most obvious beneficiaries of the FedNow service, but banks and payment service providers (PSPs) using the system will also benefit. Early adopters can use the service to establish a competitive advantage over rivals who have chosen to delay adoption.
Like banks’ customers, corporate users will be able to instantly send money when a payment is urgent, while benefiting from a secure government-backed service. For example, insurance providers could use the system to deliver payouts to policyholders who need access to money during a disaster.
FedNow also decreases the administrative work needed to manage payments — because the information included with each transaction is more comprehensive, so they happen faster.
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For financial institutions and other corporations, taking advantage of FedNow isn’t as easy as signing up. Companies must get their houses in order. Treasury and finance teams need to be trained to use the system, so it operates smoothly with quick communication.
Technology teams must ensure that the service is compatible with existing systems to meet higher expectations around the speed of transactions. In addition, CFOs will need to consider how the system affects liquidity and vendor relationships.
Banks will also need to improve their security measures, particularly around fraud prevention, to reassure customers and build trust. FedNow transactions cannot be reversed, unlike transactions made with the Automated Clearing House (ACH). This means criminals, including cybercriminals, could use the new service to pressure victims into sending money immediately.
Companies should consider investing in their data management systems. They will need to keep up to date with any new reporting requirements that follow the launch of FedNow, as the increase in transaction traceability brings increased liabilities for banks. Firms relying on manual processes for internal and external reporting could struggle with increased workload as they embark on the journey to facilitating instant payments.
What challenges lie ahead?
FedNow won’t reach its full potential until all banks and credit unions participate; to truly reap the rewards, FedNow needs total adoption. However, full domestic adoption is expected to take several years. Businesses are hoping to use the system for international payments after it has become fully established. But firms will then face further obstacles as they will have to meet regulations imposed by multiple countries in areas like data management and reporting requirements.
These obstacles will not be impossible to overcome, and the potential for the service to facilitate cross-border payments is certainly realistic. Nonetheless, the potential for delays caused by the need for global participation will be off-putting for some U.S. financial institutions, which are already behind those in other nations.
Additionally, ACH, which is the primary system banks use for electronic fund transfers in the U.S., is a direct competitor to FedNow. While FedNow has the advantage of offering quicker transactions (ACH payments sometimes take days to complete), ACH has become well-established among financial institutions since it was launched in the 1970s.
Institutions will need new financial data management systems to operate the new payments technology, or they could be left with corresponding gaps in the financial audit trail.
While banks face multiple challenges in the establishment of FedNow, these are massively overshadowed by the opportunities it presents. Those that invest in automated technology for data management, reconciliations and financial controls will be best placed to take advantage of the opportunities a real-time payment service provides and make confident, data-driven decisions.
Nick Botha is global payments manager at AutoRek, a financial controls and regulatory data management platform. Prior to that, he held multiple roles at Investech, a banking and wealth management group. 
