FedNow Is Magic For AR Payments, But Will It Have Takers?
A comprehensive look at the potential and limitations of FedNow in revolutionizing receivables management
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businesses get paid late
50%
drop in check usage
$37
trillion in instant payments
47%
users want better payment experience
Are you ready to revolutionize AR management with instant payments?
FedNow the US Federal Reserve’s instant payment service, is the latest talk of the finance town.
It promises to change the way businesses get paid. With funds available immediately upon invoice payment, companies can streamline their AR processes like never before.
Join us as we explore how FedNow will shape the future of AR management.
What is FedNow?
FedNow is an instant payment service developed by the Federal Reserve to enable businesses and individuals to send and receive payments within seconds. It is available 24/7/365.
Launched in July 2023, this is the only government-regulated instant payment service available in the US. Fifty-seven financial institutions and service providers including JP Morgan Chase, Wells Fargo, U.S Bank, and Finastraare part of this platform.
FedNow acts as a high-speed highway that facilitates the transfer of payments from one financial institution to another.
The tech behind FedNow Service
The Federal Reserve’s FedNow Service is driven by three core pillars of technology – security, performance and resilience.
FedNow’s payment system, like other Federal Reserve payment systems, is accessible via FedLine solutions. FedNow utilizes the ISO 20022 payment messaging standard and IBM’s MQ Client library to support the exchange of messages between participants.
The Federal Reserve is also developing API access to the FedNow platform to promote easy connectivity and continued innovation in the instant payments market.
FedNow vs. ACH vs. Wire Transfer vs. RTP
The most common payment options used by US businesses to clear their payables are checks, ACH, credit cards, and wire transfers.
In addition to these, we also have the real-time payments platform, RTP offered by a consortium of large banks. RTP is very similar to FedNow. Here’s a quick comparison of how the different payment options stack up on key parameters.
|
Payment Method |
Cost Per Payment |
Settlement Time |
Transaction Limit |
Bank Coverage |
Is payment revocable? |
|
ACH |
$0.20 – $1.50 |
2-3 Days |
$99,999,999.99 |
Every Bank |
Yes |
|
ACH Same Day |
$1 – $5 |
1 Day |
$1,000,000 |
Every Bank |
Yes |
|
Wire Transfers |
$25 – $50 |
Within minutes |
$9,999,999,999.99 |
Most Banks |
No |
|
RTP |
$0.25 – $1 |
Instant |
$1,000,000 |
Some Banks |
No |
|
FedNow |
$0.045 |
Instant |
$500,000 |
Some banks |
No |
Will FedNow revolutionize receivables management?
93% of businesses get paid late by customers, resulting in cash flow problems.
Will FedNow help solve this issue?
When NACHA released its same-day ACH transactions in 2016, only 6% of the first 2 million transactions were B2B payments.
There is a general hesitancy among businesses in adopting real-time payments. CFOs plan their working capital management by aiming to float their capital for a longer period. The longer payment processing time of checks and ACH payments allows them to keep cash in hand for longer.
Hence, even if most businesses offer FedNow as a payment option, B2B customers would not be eager adopters.
Additionally, the current restriction of $500,000 per FedNow transaction makes it a non-viable option for many B2B transactions (e.g. large IT deals, real estate purchases) where the invoice value is much higher. Since FedNow payments are irrevocable, the trepidation to use it would be higher as well.
|
Benefits |
Limitations |
|
Funds are transferred and made available in seconds. |
The $500k transaction limit hinders B2B payments |
|
FedNow services are available 24/7/365 |
Irreversible payments increase risk for high-value transactions |
|
Improves customer experience and operating efficiency of payment processing |
Technical complexity is higher due to the need to build and connect your systems with |
FedNow and Accounts Receivable Management in 2030
While FedNow may not instantly revolutionize the B2B payments landscape, it is set to evolve it.
In the last 15 years (2004 – 2019), the use of checks in B2B payments dropped by 50%. Most transactions moved to the ACH platform.
A similar transition is likely to happen in this decade, with a substantial proportion of the current ACH, credit card, and wire transfer payments moving to FedNow and other instant payment platforms.
Deloitte predicts instant payments will divert up to $37 trillion away from checks and ACH in the US by 2028.
Key drivers of a transition to instant B2B payments
Several factors are expected to drive the volume of real-time B2B receivables payments on FedNow and other similar platforms.
- Better payment experience: B2B payments are complex, requiring multiple steps and back-end paperwork. Simplifying it helps both customers and suppliers. 47% of US finance executives believe creating a B2B payment experience similar to P2P payments is an important transformation needed.
- Easier payment reconciliation: Many RTP systems including FedNow use ISO 20022 messaging standards that support two-way communication. This supports faster account reconciliation by auto-matching purchase orders with invoices.
- Better cash flow: Instant payments enable you to get cash inflows in real-time. You can redeploy capital immediately and cut your reliance on short-term funds. Better cash flows also drive business growth and improve the cash conversion cycle and DSO.
- Lower costs: FedNow service charges per transaction are much lower than those of ACH and wire transfers. This can help reduce overall payment processing costs to a large extent.
- Better visibility: The speed of real-time payments will give businesses the flexibility to pay and receive payments closer to the due date. Improved transaction reporting supports real-time visibility into account balances. It also helps mitigate check kiting (a type of check fraud that takes advantage of the float time to make use of non-existent funds).
More SMBs are likely to adopt FedNow compared to enterprises
Small and mid-market businesses including mom-and-pop stores would likely be quicker in adopting FedNow because of the service’s lower costs and ability to improve cash flow.
Enterprises might lag behind in adopting instant payment services in order to be able to use the float time to their advantage. The hesitancy could also stem from the need to revise business models to fit in a new payment type.
Conclusion
Countries like Brazil and India make several billion dollars of transactions every day through instant payment platforms.
The adoption of FedNow and other instant payment platforms in the US, especially among B2B businesses, will be gradual.
This quote from Eric Segal, MD at CFO Consulting Partners, sums up what finance leaders feel about FedNow today.
“FedNow comes to us like a blessing and a curse. Finance departments are going to be getting information in their bank statements quicker. Payments are going to clear pretty much immediately and if that happens, I need to be aware of that in managing my cash.”
FedNow is not going to be a complete replacement for existing payment channels. But, it will eat into the share of checks and ACH transfers in the next 2 – 5 years because of its speed of processing, lower costs, and reliability.
