FedNow, the payment and settlement train from the US central bank, will boost liquidity, especially for supply chain participants and small firms who can receive immediate payment for their goods and services.
In order to eliminate any waiting periods for transmitting and receiving payments, the US Federal Reserve (Fed) is getting ready to introduce a new financial network. Almost 100 market players are now testing the technology. It is intended to launch in July after it has been in pilot since January 2021.
What is FedNow?
To make it simple, FedNow is a digital payment system based on federally insured accounts that can be debited for payments and it can be regarded as Zelle for banks and companies.
Via FedNow, companies won't have to wait hours or days to get payment after billing a consumer for goods or services.
A request-to-pay message, for instance, can be delivered to a client by an insurance company. The user receives that notification through their online banking program, where they can check the bill and decide whether to pay it or not. The FedNow technology instantaneously debits the client's account and immediately pays the insurance provider.
Since the recipient also receives information about who submitted the payment and why—in this case, an insurance premium payment—FedNow aids in reconciliation.
Because it boosts liquidity, FedNow would be particularly helpful for expediting supply chain payments. Participants in the supply chain, especially small enterprises, can profit from that liquidity since they would appreciate rapid payments for the manufactured parts they supply in hard times.
According to Buckland, small businesses profit when they receive quick investment. They don't have to wait three or four days, which is great for the customer paying the bill because they won't be charged late fees as the company requested payment before the due date had passed.
If there are no funds available in a primary or linked account for payment, any transaction will be unsuccessful.
Ensuring the legitimacy of transactions
The US is among the last countries to put in place a real-time payments network based on a central bank system. An RTR payment and settlement network for banks and companies is now being implemented in Canada.
As of right now, some banks have been hesitant to utilize a real-time payment and settlement system that isn't supported by the financial system of the Federal Reserve, according to Buckland. A transaction's legitimacy would be ensured by this.
The FedNow real-time payment and settlement service will embed clearing capabilities into each payment, enabling banks and businesses utilizing it to quickly verify if the payor has the cash to cover an acquisition.
When one person sends money to another, that amount is immediately available since it is deposited from the sender's account into the recipient's. The inverse is also accurate. When someone pays you for a service, the money is immediately taken out of their account.
FedLine, an IP-based network and messaging system that already offers payment and information services to over 10,000 financial firms, will power FedNow.
First vice president of the Federal Reserve Bank of Boston and FedNow program executive Ken Montgomery said, "With the launch nearing, we urge financial institutions and their industry partners to proceed with preparations to join the FedNow Service at full speed.
What companies must do right now
For the system to accept live transactions, early adopters will need to finish a testing and certification phase.
According to the FedNow Pilot Program, more than 110 banks, including U.S. Bancorp, Citi, JP Morgan Chase, Capital One Financial, TD Bank, BNY Mellon, Goldman Sachs, the Bureau of the Fiscal Service of the U.S. Department of the Treasury, and Wells Fargo, participated in the settlement system's pilot.
Businesses are advised to start thinking about how they may employ a real-time payment and settlement system. For instance, do your customers tend to be younger and pay their bills later more frequently than other consumers? Would a system for quick billing and payment benefit both consumers and businesses?
Incorporating an immediate payment network into a business strategy is also possible. Instead of waiting until the 15th and 30th of each month, contract and gig workers, for instance, could get paid as soon as a task is finished.
FedNow or some other payment systems?
Automated clearinghouse services (ACH) and wire transfers, such those provided by Western Union or the Federal Reserve's own Fedwire service, are the two main ways that FedNow differs from conventional payment methods. A business day's worth of ACH transactions settle only once. Although speedier, wire transfers cost money. For remittances or international payments, wires can take several minutes or several days. They are also not utilized for numerous or batch transactions, and they are still not real-time.
When real-time payments and settlements are required, FedNow is a supplement to the current ACH and wire networks. The FedNow Service will also be subject to a cost.
The Federal Reserve has been looking into various options for developing a real-time payment system. It is also looking into how a central bank digital currency (CBDC) may function as the structural foundation of a brand-new, safe real-time payments and settlements system.
The Federal Reserve started taking into account a Central Bank Digital Currency as the foundation for a brand-new, safe real-time payments and settlements system in February 2020.
According to Lael Brainard, a member of the US Federal Reserve's Board of Governors, the banking sector and fintech companies are pushing the development of a type of government-backed digital currency by testing or preparing to test cash-backed digital tokens.
According to a Gartner analysis, US payment fintech firms intend to develop new goods and services to compete with banks using a real-time payment system sponsored by the Fed. The company stated that in order to preserve a competitive edge in an industry that is developing, banking executives "need to implement real-time payments soon."