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 US Federal Reserve, FedNow is an instant payment system that allows for people and businesses to move money immediately.
Prior to FedNow’s launch in July 2023, instant fund transfers were possible through services offered by The Clearing House, a consortium of 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.
The Federal Reserve is promoting FedNow in the hope of achieving near universal adoption by banks and credit unions. This enormous reach, coupled with the security of the US government’s backing, will give businesses a faster alternative to current money transfer options.
Because FedNow will supplement rather than replace existing payment service offerings, it 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 Jessika Wood, SVP, head of commercial payment products 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.”
WHAT IS DIFFERENT ABOUT FEDNOW?
RTP and FedNow 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, 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. The FedNow network is limited to domestic-only transactions, which allow a maximum of $500,000 per transaction.
Fifth Third was an early adopter of instant payment services, becoming an RTP participating bank in 2017. Fifth Third is the seventh largest provider of instant payments and the 10th largest receiver. The bank was an early adopter of request for payments (RFP) services that allow banking customers to send requests asking their clients for payments.
Fifth Third 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 MEANS FOR YOUR BUSINESS
One core advantage of FedNow is the financial flexibility to manage cash ow 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.
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. 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.
Shifting transactions to instant payments may eliminate expenses related to paper transactions and costly credit card processing fees. Businesses reduce the risk of an overdraft because the bank will verify funds before initiating an instant payment.
Instant payments 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, businesses are able to reduce settlement time from three days to zero and get access to money sooner. Merchants can cash out their receipts for the day and receive the money in their account a few minutes later.
FRAUD MITIGATION
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, that exceeds industry security standards in its payment systems.
“We use end-to-end encryption, safety protocols and API keys,” Wood explained. “Only the person at that business has the encryption keys, and each payee IP address needs to be on the allow list. 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 INTEGRATE 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.
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.
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.
To learn more, contact Elsa R. Burton, Los Angeles regional manager for Fifth Third Bank at
[email protected], (818) 259-3108 or visit 53.com/Commercial.
Disclosure: This content is for informational purposes only and may have been derived, with permission, from a third party. While we believe it to be accurate as of the date of publication, it does not constitute the rendering of legal, accounting, tax, or investment advice or other professional services by Fifth Third Bank, National Association or any of its subsidiaries or affiliates, and it is being provided without any warranty whatsoever. Please consult with appropriate professionals related to your individual circumstances. Deposit and credit products provided by Fifth Third Bank, National Association. Member FDIC.
