On July 20th, 2023, the Federal Reserve launched FedNow, a groundbreaking instant payment service that enables financial institutions to offer their customers the ability to send and receive payments in real-time, 24/7/365. FedNow is the first government-created and -backed platform for real-time transactions in the U.S., and it has the potential to transform the way businesses and individuals manage their money and make time-sensitive payments.
Currently, access to FedNow has only been given to select financial institutions, so many companies, like us at The Ash Group, must wait until it is available more broadly to access it. Whether it’s available to you right now or not, it’s a game-changer for the U.S. payment system and for the companies that use it. Let’s delve into FedNow: what it is, what benefits it offers, and its impact on employment and staffing.
FedNow was developed in response to the growing demand for faster and more convenient payment options in a rapidly evolving digital economy. As more consumers and businesses adopt online and mobile payment solutions, such as Venmo, Cash App, and Zelle, they expect to have instant access to their funds and to be able to pay anyone, anytime, anywhere. However, the existing payment systems, such as the Automated Clearing House (ACH) and Fedwire, are not designed to meet these expectations, as they operate on a batch-based or limited-hour basis, resulting in delays, costs and risks for both payers and payees.
FedNow aims to address these challenges by providing a safe and efficient infrastructure that facilitates instant funds transfer and settlement between financial institutions in near real-time. This means there is no buildup in interbank obligations, and end users can instantly send and receive money through their depository institution accounts. FedNow also provides a platform for innovation that banks, credit unions, service providers, and others can use to develop and offer various instant payment solutions that provide flexibility, speed, and efficiency to their individual and business customers.
FedNow operates on the core principles of security, reliability, ubiquity, efficiency, and innovation. It uses the existing Fedwire network to connect financial institutions and leverages the ISO 20022 standard for messaging. It also incorporates security features such as encryption, authentication, fraud detection, and transaction limits to ensure payment integrity and data protection.
Here is a short video from the Federal Reserve Financial Services that gives an overview of FedNow:
FedNow is not the first real-time payment system in the world. Many countries have implemented or are developing similar systems to support faster payments. For example, the U.K. has Faster Payments Service (FPS), which was launched in 2008 and processed over 2.8 billion payments worth £1.9 trillion in 2020. Similarly, India has Unified Payments Interface (UPI), which was established in 2016 and processed over 2.3 billion transactions worth ₹4.3 trillion in June 2021. These systems have enabled consumers and businesses to enjoy the benefits of real-time payments, such as improved cash flow management, reduced transaction costs, increased payment efficiency, and enhanced customer experiences.
FedNow aims to bring these benefits to the U.S. market by enabling financial institutions of all sizes and locations to offer instant payment services to their customers. A survey by the Federal Reserve revealed that:
- 62% of surveyed consumers overall expect to be using faster payment options more extensively in the future, particularly options that offer robust fraud protections.
- More than 60% of consumers want a real-time view of their account balance and immediate posting of payments they initiate.
- Nearly 70% of consumers feel it is an important satisfaction driver to have access to enhanced faster payment capabilities from their current financial institution(s).
These findings indicate strong demand and opportunity for financial institutions to leverage FedNow to meet customers’ needs and expectations. By adopting FedNow, financial institutions can offer their customers a modern and convenient way to pay and get paid instantly through their bank accounts without relying on third-party providers or intermediaries that may charge fees or impose restrictions. FedNow can also help financial institutions enhance customer relationships, loyalty, and retention by providing more value-added services and features that leverage FedNow’s functionality.
General Benefits of FedNow
FedNow could have a wide range of potential benefits for companies that use it. Here are some of the major ones:
Faster and Efficient Vendor Payments:
With FedNow, companies can instantly settle payments to their vendors and suppliers, eliminating the delays associated with traditional payment methods. By bypassing batch settlements and wire transfers, businesses can significantly reduce their accounts payable cycle time. This accelerated payment process fosters stronger vendor relationships, enabling companies to negotiate better terms and discounts, ultimately leading to cost savings and improved financial stability.
Improved Cash Flow and Working Capital Optimization:
The speed and efficiency of FedNow payments contribute to better cash flow management. Companies can access funds instantly, allowing them to deploy capital more effectively and make timely investment decisions. By optimizing working capital, businesses can reinvest funds into growth initiatives, innovation, and expansion, thus securing a competitive advantage in their respective markets.
Cost Per Transaction Savings:
FedNow has a highly competitive cost-per-payment structure at $0.045. For comparison, the ACH cost per payment is $0.20 – $1.50. Compared to the $1.00 – $5.00 cost per payment for ACH SameDay, which is settled on the same business day, companies could see significant cost savings by switching to FedNow. This helpful chart from Alloy compares FedNow with its competitors:
Enhanced Supply Chain Management:
Real-time tracking and monitoring of inventory levels, orders, and shipments become possible with FedNow. Businesses can say goodbye to manual or paper-based processes, which often cause inefficiencies and inaccuracies in supply chain management. By accessing real-time data, companies can optimize inventory levels, minimize carrying costs, and respond promptly to demand fluctuations, ensuring a seamless and cost-effective supply chain operation.
Fraud Mitigation and Secure Transactions:
Real-time payments through FedNow offer heightened security, reducing the risk of fraud and unauthorized transactions. The system’s robust authentication and verification processes ensure that only valid and authorized payments are processed promptly. As a result, businesses can safeguard their financial assets and protect themselves from potential cyber threats, fostering trust among customers and partners.
FedNow’s Impact on Employers and Staffing Companies
FedNow’s most significant impact on employment and staffing comes from its disruptive effect on payroll processing. Currently, most companies use the ACH system to process their payroll payments. With FedNow, companies can send payroll payments in real-time, anytime. This has many implications, which could provide a competitive edge in recruitment, employee satisfaction, retention, increased access to the global labor market, payroll processing cost, and payroll errors & fraud.
Let’s delve into each:
Faster Payments to Employees
With FedNow, employers can offer same-day pay to their employees, which means they can receive their wages on the same day they work. This can improve employees’ cash flow and financial well-being, especially those who live paycheck to paycheck or face unexpected expenses.
By offering instant payment services to their employees and contractors, FedNow creates competitive advantages for companies. According to a survey by PYMNTS.com, 85% of U.S. workers said they would prefer to work for an employer that offers instant payments over one that does not. These numbers are even higher among millennials (92%) and Gen Z (95%), representing the largest U.S. workforce segments.
The same survey also found that “85% of gig economy workers would work more often if they could get paid faster”. Increased work hours for the gig economy could have ripple effects across the labor market and give an advantage to the employers that utilize FedNow.
FedNow also opens the door to on-demand pay: a system where employees can access their earned wages whenever needed, without waiting for the next payday. This can give employees more financial flexibility and security and reduce their reliance on payday loans or overdraft fees. Since freelancers and gig economy workers highly seek on-demand pay, offering it could immediately boost recruitment success.
Payroll for International Contractors
For many companies, the complexity and difficulty of international payroll processing create a barrier to entry for the global talent pool. FedNow can help businesses access worldwide talent and streamline payroll processing for companies already using a dispersed workforce or international contractors.
FedNow enables businesses to send payments across different time zones and jurisdictions without worrying about delays, cutoff times, or holidays. It also supports cross-border payments by enabling interoperability with other real-time payment systems worldwide.
Reduce Payroll Processing Cost
FedNow can reduce payroll processing fees by eliminating the need for intermediaries or third-party providers that charge a percentage of each payment transaction.
According to a study by the Association for Financial Professionals, the average cost of an ACH transaction for a small business is $0.29, while the average cost of a FedNow is $0.045. This can result in significant savings for companies that process large volumes of payroll payments.
To illustrate the benefits of FedNow for payroll processing, let’s look at how a hypothetical company might benefit from adopting FedNow:
- XYZ Corp., our hypothetical company, operates in multiple industries and countries. It is looking into FedNow as an option to pay its 10,000 employees and 5,000 contractors. The company used to pay its employees monthly and its contractors quarterly through a combination of ACH, wire transfers, and checks, which incurred processing fees of $31,900 per month ($0.29 x 10,000 + $25 x 1,000 + $1 x 4,000).
- With FedNow, XYZ Corp. would pay its employees and contractors in real-time through their bank accounts, reducing processing fees by $31,225 to $675 per month ($0.045 x 15,000). At the same time, XYZ Corp. would eliminate the risks of fraud, errors, delays, and lost or stolen checks associated with the previous payment methods.
Reduce Payroll Errors & Fraud
By sending instant confirmations and receipts for each payment transaction, FedNow can reduce payroll errors and disputes. This can help companies avoid costly and time-consuming reconciliation processes and improve employee trust and satisfaction.
Conclusion: Reviewing FedNow’s Implications
The introduction of FedNow marks a significant milestone in the evolution of payment systems in the United States. As the first government-backed platform for real-time transactions, FedNow has the potential to reshape the way businesses manage their finances, engage with their workforce, and conduct day-to-day operations.
The adoption of FedNow can empower employers to redefine their relationships with their employees and contractors. By enabling same-day payments, companies can address the financial needs of their workforce in real-time, enhancing their economic well-being and overall job satisfaction. Instant access to wages can reduce the stress associated with financial uncertainties, offering employees a stronger sense of stability and control over their finances. Moreover, the appeal of instant payments extends beyond mere convenience; it is a powerful recruitment tool that can attract top talent, especially among the younger generations who value this flexibility.
The gig economy stands to benefit significantly from the introduction of FedNow. The ability to receive faster payments can incentivize gig workers to take on more assignments, increasing their overall engagement and contribution to the labor market. This shift could lead to a more agile and responsive workforce, benefitting both employers and employees alike.
Furthermore, the impact of FedNow transcends domestic boundaries. International payroll processing, often a complex and expensive endeavor, can become more streamlined and cost-effective with the integration of FedNow. This can facilitate global talent acquisition and allow companies to tap into a diverse pool of skills without the previously existing logistical and financial barriers.
Cost savings emerge as a key advantage of FedNow, as companies can reduce payroll processing fees and reliance on intermediaries. The potential to save on transaction costs while enhancing security and efficiency presents a compelling case for businesses to embrace this innovative payment platform.
FedNow is poised to disrupt traditional payroll processing and reshape the dynamics between employers, employees, and contractors. Its real-time capabilities align with the modern demands of a fast-paced digital world, offering unprecedented benefits to all stakeholders. As businesses adapt to this new era of instantaneous payments, they not only position themselves as leaders in the evolving employment landscape but also contribute to a future where financial transactions are seamless, secure, and empowering for everyone.
To learn more about FedNow or access resources, go to: https://www.frbservices.org/financial-services/fednow