FedNow, the new instant payment service backed by the Federal Reserve, has gotten a lot of people talking. Some are downright excited, calling the solution a "revolution" or "game changer" for payment processing.
Those views are understandable, at least to an extent. As the first real-time payment solution backed by the Fed that every financial institution can ostensibly use, FedNow does have the potential to be a big deal.
But the key word there is "potential." In the short-term, FedNow isn't likely to bring major disruption to the way businesses pay each other. And whether it proves to be a big deal in the long term depends on how effectively businesses are able to leverage some of its more advanced features, like request for payment.
Here's a grounded look at FedNow, including why it may not prove as revolutionary as it seems on the surface, and what needs to change if FedNow is to become a true disrupter in the world of accounts payable.
The goal behind FedNow is to provide an infrastructure that allows organizations to send and receive money instantaneously — a big advantage over ACH, which typically takes days to complete payments. Transactions over FedNow will also be substantially cheaper than ACH transactions. In some cases, a payment using FedNow will cost businesses just one-tenth of equivalent transactions via ACH.
Dramatically faster and cheaper payments may sound like a big deal. But when you step back and assess FedNow from a big-picture perspective, it begins to seem less revolutionary, at least in the context of business-to-business payments.
There are several reasons why.
Instant payments aren't new, and FedNow is not actually a first-of-its-kind payment infrastructure. The Clearing House (TCH) has offered instant payments for more than five years.
Currently, TCH is available to any federally insured U.S. depository institution. FedNow, as an initiative backed by the Fed, is also available to virtually any U.S. bank, at least in theory. But in practice only a few dozen banks were using FedNow at the time of rollout, whereas several hundred use TCH.
To deliver true innovation by offering real-time payment that works for any business, regardless of the bank it uses, FedNow needs to become a truly universal solution that every bank subscribes to. That will probably happen eventually; historically, initiatives backed by the Fed have gained universal adoption. But getting all banks to sign onto FedNow could take years, especially given that widespread adoption of TCH means many banks don't have a strong incentive to shift to FedNow immediately. They're already getting equivalent service from TCH.
In theory, FedNow enables instant movement of money for everyone, providing a clear advantage over ACH. In practice, though, FedNow transfers may not be instantaneous for business-to-business payments.
The shift to faster payments–plus frustration over network interchange costs–is increasing merchants' use of services that pull money directly from consumers' bank accounts.
Requests for payment through FedNow need to be approved by the paying customer and validated by the originating bank. This creates friction. It also means that automatic payments won't actually happen in real time, because fintechs and payment application providers need to rely on customers and banks to verify FedNow transactions before they can move funds.
For many business-to-business payments, then, the availability of FedNow won't translate to instantaneous payments. It doesn't change much.
FedNow's low transaction costs relative to ACH may be attractive to some businesses. But the cost of ACH transactions is already so low compared to the sums of money being moved that this difference is not likely to be a compelling reason to adopt FedNow.
Sure, everyone likes saving money. But I don't see a lot of banks shifting to FedNow primarily for the cost savings. The cost difference between FedNow and other solutions is just too negligible in the grand scheme of things.
In short, it's hard to see FedNow as a revolutionary solution because it's not actually much newer, faster or cheaper in many cases than existing payment services.
FedNow does have one feature that could prove revolutionary, though: its ability to allow businesses to request payments directly.
By issuing requests for payment via FedNow, vendors could potentially invoice their customers more efficiently because they could effectively issue invoices directly and have them paid as soon as possible. That would beat the complexity and slow speed of traditional invoicing.
For this system to work, however, you'd need an invoice management provider to sit between vendors and their customers to verify that payment requests are valid. Otherwise, there would be no way of ensuring that requests for payment should actually be approved, since FedNow offers no verification features directly on its network.
Whether this arrangement is possible remains to be seen. So far, we simply don't know enough about how requests for payment in FedNow will work.
Is FedNow a big deal? In the short term, probably not. It offers a new way of doing something — making instantaneous payments — that's not actually all that new, and it's hampered by lack of universal adoption.
Over the longer term, I can see some potential for FedNow to become a game changer for accounts payable processes, but only if the request for payment feature turns out to enable much more efficient ways of handling invoicing.
