FedNow – Instant Payments to Launch July 2023

Written by Luke Arnett, CPA

In this day and age, businesses and consumers want everything at the click of a button, including the ability to receive and send payments.  The Federal Reserve has acknowledged the growing demand for instant payments and has been working behind the scenes since 2019 to bring this to fruition. In July 2023, the Federal Reserve will launch the first phase of FedNow, its new instant payment infrastructure that allows financial institutions of every size across the U.S. to provide efficient and safe instant payment services. A recent release from the Federal Reserve reiterated that the FedNow service is not a form of digital currency, nor is it a move towards eliminating cash. Instead, FedNow provides an avenue through participating financial institutions for businesses and individuals to send and receive instant payments in real time, 24/7, 365 days a year.

What exactly is an instant payment?

With an instant payment, financial institution settlement and clearing occurs in real time for each individual transaction. The transfer of funds between the payee and payor’s accounts at financial institutions occurs within seconds and funds are final and irrevocable, providing payment transparency and certainty.

On what technology platform will these instant payments take place?

The FedNow instant payments will be transacted through your respective participating financial institution’s app.

Benefits of Instant Payments

The immediate nature of any time instant payments can bring benefits to not only businesses and consumers but can also play an important role to help financial institutions remain competitive, create new products, and meet the needs of their members.  Instant payments can help businesses improve the efficiency of corporate payments, better manage cash flow, and streamline reconciliation processes. For individuals, instant payments give the ability to receive and send money with confidence and reduce the risk of late and overdraft fees.

FedNow Phase 1 Use Cases

The first release of the FedNow service will provide a baseline functionality that will support needs for the following growing demands.

• Account to account (A2A or me to me) – Allows consumers to instantly transfer funds between accounts at different financial institutions. Businesses will be able to consolidate funds into a single account for payroll or other purposes and consumers can reload prepaid cards, fund mobile wallets, and more.
• Bill pay – Enables customers to immediately send and receive bill payments that include remittance details. Businesses and individuals can pay bills such as loans, utilities, and services.

Request for Payment (RfP)

The RfP feature will have the capacity to carry individual invoice details including highly specific payment terms. This feature also facilitates the transmission of the corresponding remittance details along with the payment. As software vendors include instant payments in their host of services, RfP would allow businesses to incorporate their Accounts Payable and Accounts Receivable systems and automate the reconciliation of these payments, reducing errors and exception item handling. Suppliers benefit because they can automatically update their customer’s account balances when they receive the payment. Their customers benefit because they receive invoice details that can be automatically uploaded into their payables system for processing.

A Possible Look into the Future – Instant Payment Example

The Federal Reserve has provided the below example as to what the future of instant payments may bring. This example brings to life how a local lumber yard and its vendor, the wood distributor, utilize financial institutions and accounting software providers that enable instant payments.

• Invoice received – The lumber yard receives the wood from its distributor. The distributor’s accounting software generates and sends an e-invoice (formatted as an RfP) through a connection with the financial institution. The RfP includes all of the applicable billing details, including the payment terms. The lumber yard receives the RfP via a connection with its financial institution and can upload the details to its accounts payable software.
• Making the payment – With the assistance of its accounts payable software, the lumber yard’s accounting department schedules the payment to be sent on day 30 in order to receive the discount from the wood distributor. On day 30, the software initiates an instant payment instruction through the lumber yard’s financial institution, with remittance details included, that responds to the RfP from the wood distributor. The transfer is made instantly, posting to the distributor’s financial institution account with all the correct remittance data attached.
• Reconciling account information – Through a connection with its financial institution, the wood distributor’s accounts receivable software takes in the remittance data and is able to automatically post the transaction as the correctly discounted payment from the lumber yard for the lumber shipment.

Many Unknowns and Work Still to Be Done

Like most new things, there are plenty of unknowns as to how this may affect you and your business. Also, much work still needs to be done by financial institutions, business software providers, app developers, and businesses to see this new payment ecosystem grow to the capabilities of the above example and beyond.  We cannot be sure how quickly this new system will take hold and evolve in the marketplace, but as business owners, we must stay informed on potentially significant changes like this so we can best align our businesses for future success. If you have any questions or concerns and would like to speak with a BMSS professional, please contact our office at (833) CPA-BMSS or visit our website for contact information.