FedNow is the real-time payment (RTP) network backed by the U.S. Federal Reserve. In August, the serviceĀ announcedĀ its launch is planned for the spring/summer of 2023. Governments fromĀ numerous countries around the globe already have an RTP network live, including the U.K., Spain, Hong Kong, China, Brazil, Ghana, Mexico and Sweden, so it's safe to say the U.S. is arriving late to the party.
RTP Network Basics
An RTP network is a service that allows individuals and businesses to send and receive secure, instant payments to and from their bank accounts. These networks are typically designed for domestic local currency payments, which is why most are set up country by country instead of internationally. Some exceptions includeĀ SEPA Instant Credit TransferĀ (SCT Inst) in the Eurozone and a recently launched partnership between Singapore and Thailand where government initiatives haveĀ linked two RTP networks together.
Both public and private sectors offer RTP networks. In the private sector, providers like Zelle and Venmo as well as banks' RTP services are all built on the RTP network of The Clearing Houseāan entity owned by banks. In the public sector, you see SEPA Instant, U.K.'s Faster Payments and, soon, the U.S.'s FedNow.
Public and private networks provide similar RTP services. Most private-sector offerings are bank-backed. These offerings work well but are not always fully inclusive of all industry participants, which can call into question whether they present a fair competitive environment for end customers. In contrast, government-backed networks are neutral and eliminate any speculation of unfairness or bank favoritism.
Current Adoption Among Corporations
Companies are already using RTP networks today. According to a 2022Ā survey from BNY Mellon and Aite-Novarica, 67% of European corporations are using instant payments. Adoption among North American corporations is lower at 46%ālikely because FedNow is not yet available.
The survey states that "86% of European and U.K. non-users of instant payments note that they have some level of interest in using the transaction method in the next 12-24 months, with 68% of non-users in North America in the same camp."
Impacts Of FedNow On Corporate Finance
1. Another channel for sending truly urgent payments.Ā Some payments cannot wait, like insurance payouts to policyholders experiencing a disaster. For these urgent payments, FedNow can provide a government-backed, trusted option.
2. Reduce credit card processing fees.Ā Businesses accepting payment via FedNow willĀ reduce the feesĀ they pay for credit card processing. For companies like retailers with a high volume of credit card transactions through POS systems, this is a key opportunity to achieve a material reduction in operating costs. FedNow can provide the same confidence as Visa/Mastercard and the same 24/7 availability but eliminate massive interchange fees imposed by credit card companies. Additionally, unlike credit card settlements, funds received via RTP are available to the business to use instantaneously.
3. Potentially reduce existing RTP fees.Ā FedNow fees may be lower than other RTP networks and may force private-sector providers toĀ be more competitive. By sending payments through FedNow instead of private-sector RTP networks, corporates may see a decline in the overall fees they're paying for RTPs.
4. Larger payments.Ā Private-sector RTP networks are often limited toĀ smaller dollar amounts, typically under $5,000. FedNow is expected to allow larger payments.
5. Further reduce the use of risky, expensive payment methods.Ā Many companies still send payments in expensive and risky formats like paper checks. This can be particularly problematic for important payments like payroll. FedNow can provide another alternative to paper checks. Companies that adopt RTP because of FedNow will see a reduction in issues stemming from paper checks, including failed, duplicate and missing payments.
6. Increased acceptance by businesses and consumers.Ā Those concerned about the security of an RTP network may be more open to trying FedNow since it is government-backed. Corporations may choose to transition some payments away from expensive, risky methods to real-time payments since more vendors and clients will accept them via FedNow.
7. Embedded in existing tools.Ā Open banking and bank API initiatives can enable new bank payment offerings to be easily embedded and integrated with third-party applications. These RTPs can enhance experiences by providing faster and alternative payment methods for consumers as well as powering digital wallets and digital currencies.
Additionally, the market share for the Society for Worldwide Interbank Financial Telecommunication (SWIFT) will be further eaten into. The dramatic increase in corporate adoption of bank API connectivity is expected to take a big bite out of SWIFT's business, and with FedNow, customers of payment companies like Remitly and Wise can take advantage of offering faster "cross-border" payments.
Even with these possible impacts, there are still potential stumbling blocks ahead. FedNow currently lacks 100% participation by U.S. banks and credit unions, which will add complexities for payers having to first validate whether a recipient can receive FedNow payments. Since FedNow's closest competitor, The Clearing House, is owned by banks, this could create friction and resistance to adoption.
How Corporate Finance Can Prepare
In order to take advantage of FedNow's benefits when it launches, companies must begin getting their houses in order. Here are some steps to take:
1. Assess whether treasury and finance teams are set up to take advantage of this new infrastructure. Does the tech stack support modern communications? How will this benefit employees? Spread the message throughout the organization in order to increase adoption. For example, when it comes to payroll, highlight that employees can get their money sooner. Additionally, include materials on participating banks to ensure due diligence is done.
2. Analyze payment trends for vendors. Are there vendors where new and existing limits are not exceeded, which could allow the use of these services sooner rather than later and leverage these cost-effective methods of faster payments?
3. Discuss with your bank to understand how to leverage what they have today and what FedNow will offer in 2023.
FedNow is comingāand with it, several changes to the way businesses and consumers process payments. The launch of this new payment system will have far-reaching implications for everything from corporate finance to the overall economy. What other changes do you anticipate?
