Real Time Payments With New Federal-Reserve-backed FedNow Service

In a world with several online payment options and countless payment merchants to choose from, it might seem crazy to think that the federal government has just now rolled out its own way of getting with the times. But that’s exactly what the Federal Reserve has planned to do after a successful pilot of its FedNow software.

FedNow was designed to provide businesses and consumers with flexible, real-time payment options. Today, we'll cover the potential benefits or effects this new payment platform may have on businesses as a whole.

Read on to learn about what the FedNow service is, how it works, and how the adoption of this fast payments service stands to impact the way your company operates.

The rollout of new digital payment technology has made receiving and transferring funds easier across all sectors of life, from how an employer pays members of its payroll to giving money back to a friend when they paid for dinner. The speed, ease, and accessibility with which people can perform financial transactions determine how readily customers adopt new financial technology.

As the first government-backed payment processing system, FedNow’s platform strives to overcome common problems that many other platforms experience when attempting to deliver real-time payments, such as payment delays. It also plans to offer more support to smaller financial institutions, which often get left behind in the adoption of new financial technologies.

With an anticipated rollout now solidified in July 2023, both individuals and businesses will be able to reap benefits from the new service.

What is the FedNow Service?

The FedNow Service is a Federal Reserve-backed financial service that aims to provide individuals and businesses alike with true real-time payment (RTP) options. Currently, the only other fast-payment option for banks is through the Real-Time Payments (RTP®) network. The RTP® network is a private-sector service established in 2017. While there are 100s of banks enrolled in the service, they are generally only larger financial institutions. Zelle is the only app currently using the RTP network. 

The FedNow service will be available to 10,000+ financial institutions, making it more available to smaller regional banks with greater consumer adoption.

Unlike other RTP providers, such as Zelle, whose funds might take a few minutes to a few days to process, FedNow enables the instant transfer of funds between two or more bank accounts between financial institutions 24/7/365. With a network of over 10,000 banks and growing, FedNow promises availability to transfer funds, verify credit and debit information, and notification of failed or completed transactions regardless of the time of day, including on weekends and holidays.

 The service will provide both clearing and settlement capabilities that allow for funds to be transferred from one account to another in real-time. Regardless of whether transfers are initiated before, during, or after regular business hours or on recognized holidays, the process is intended to take only seconds to complete.

One big advantage of FedNow is its availability to smaller financial institutions, such as community banks and federal credit unions. Although Zelle and Venmo have seen widespread adoption in recent years, smaller financial institutions cannot afford to pay the hefty costs that come with the benefits of real-time payment processing. FedNow provides them the technology and support to offer their customers instant access to funds 365 days a year.

How Does FedNow Work?

FedNow’s service operates based on a few characteristics that set it apart from other money transfer products. These characteristics include instant transactions, constant availability, and confirmation receipts that trigger immediately for both the sender and recipient.

In some ways, FedNow resembles existing payment processing and money transfer services. Users can access bank accounts they own and send money to a myriad of recipients (businesses, friends, other bank accounts, etc.) by using an app. They can also request and receive money quickly and conveniently without the hassles that accompany traditional money transfers.

The fast payment capabilities FedNow utilizes can be serviced through either an open or closed loop for added convenience. Closed-loop systems refer to transactions that process through a single financial provider. To use these systems, the sender and receiver need to have an active account, much like using PayPal or Cash App.

Alternatively, open-loop systems refer to transactions that can be processed between accounts even if those accounts are from different banks. In an open-loop system, the sender and receiver don’t have to have accounts tied to a single service. A popular example of an open loop system is the Zelle payment tool that allows accounts from various banks to send and receive money from accounts tied to other banks.

However, for individuals and businesses to take advantage of FedNow services, the accounts they plan to send and receive money from will need to be associated with financial institutions that offer FedNow options. Though this service is still relatively new, the near future may see many more banks adopting and offering FedNow in order to make instant money transactions accessible to as many customers as possible.

Who Can Use FedNow?

FedNow was designed with the intent to serve a wide variety of users, from individual consumers to businesses and government entities.

The types of services available through FedNow include:

• Person to Person- Money exchanges between friends, family, and colleagues (ex: splitting a bill after going out to dinner)
• Account to Account- When a consumer transfers money from one of their bank accounts to another account they own (ex: moving funds from a checking account to a savings account)
• Consumer to Business- Money exchanged when a consumer receives a product or service and pays the business for the item (ex: paying for landscaping services)
• Business to Consumer- Company payments to individuals, such as employee paychecks or issuing refunds for returned products
• Business to Business- Money exchanged between companies, which may include paying a consultant or supplier
• Consumer to Government- Individuals paying for government services or obligations, such as tax payments or motor vehicle registrations
• Government to Consumer- Government payments made to consumers, such as tax returns or social security benefits checks
• Business to Government- Money paid to government entities by establishments, such as covering business taxes or paying fees

How Does FedNow Affect Businesses?

Business owners wonder whether FedNow can play a role in improving customer relationships, assisting company growth efforts, and maintaining timely, accurate financial records. Here’s what you need to know as a business leader.

The rollout of FedNow services can affect businesses in a number of ways.

For one, by speeding up financial transactions, organizations can ensure timely payments to and from employees, government entities, other businesses, and customers. In addition, the potential conveniences and streamlining of financial processing can significantly decrease the time that businesses spend waiting for funding that’s necessary for company expansion.

In terms of business-to-business (B2B) and business-to-consumer (B2C) transactions, FedNow stands to introduce significantly positive changes.

Faster, easier B2B payments can make it far simpler for companies to maintain access to the capital the company needs. Take, for example, payment requests and invoices, which can be issued to vendors and other enterprise customers directly. Account managers can then process and approve the payment in a single step. This will help to improve cash flow, especially for smaller businesses.

For business payments to individual consumers, FedNow aims to enhance customer convenience and reduce the time spent waiting for funds to post. For example, if an insurance company is providing a payout for a claim, using FedNow has the potential to take a process that can take up to two months to complete and shorten it to less than a minute. Faster payment processing would not only make it easier for consumers to access their funds, but this service also stands to increase customer satisfaction significantly.

Most consumers value convenience and the ability to receive the money they need as soon as possible, and when businesses strive to provide this possibility, customers develop greater brand loyalty. Customer retention and company growth are simply additional perks that may accompany the adoption of FedNow services.

Innovative payment processing starts with MonerePay

As FedNow rolls out and the merchant services it offers become more widely available, consumers and business owners alike will be able to explore the potential value of the platform through first-hand use. The release of many new financial applications and tools tends to introduce a period of adjustment for new users, which is likely to happen as FedNow expands. Time will reveal whether the product will deliver the benefits it describes.

With over 20 years of experience, the team at MonerePay seeks to advise and become an industry leader in business payment processing. We elevate the financial technology field by providing our customers with quality service, an expansive network of partners, and unbeatable prices that we guarantee for as long as you stay with us.

Our streamlined payment platform makes transactions easy, secure, and lightning fast. Say goodbye to clunky interfaces and hello to seamless payments. 

We do things differently by paring down the number of routing transactions that must go through to receive approval, all while prioritizing your security. Eliminate missed payments from customers with a payment processor that can update customer credit card information as they pay. Get valuable insight into customer behaviors with thorough, data-driven reports on the information you need when you need it.

Learn more about MonerePay, or contact us to learn how Monere can power your business.