Get ready for FedNow

Sam Aarons is the cofounder and chief technology officer of San Francisco-based digital business payments company Modern Treasury.

In the U.S., we never kill payment systems. People still write paper checks. But the future of money, especially inside larger enterprises, is instant payments. And the U.S. is about to add a big player in that space, FedNow, an instant payment platform that will be more affordable and more accessible to more people, later this year.

FedNow represents the most significant upgrade to the country’s payments technology in decades. It will provide a better, more convenient way to move money than today’s options at, in some cases, a fraction of the price.

To take advantage, business leaders should prepare for the change — now. This means changing mindsets. CFOs, controllers, treasurers and accountants are accustomed to money movement during working hours. That ends when payments can be deducted from an account 24/7, which FedNow will enable.

They need to get comfortable with continuous accounting. Rather than reconciling books at predetermined periods, embrace technology that updates them every time money moves.

Finally, payment infrastructures need to be revamped to make the most of FedNow and replace batch processes with real-time workflows. Because real-time payments will essentially be irrevocable, fraud checks will need strengthening.

It will be worth it.

Today, most electronic money transfers occur via the Automated Clearing House, or ACH, an antiquated system that doesn’t work at night, on weekends, and can take one to three days to move money. Instant payments, which have gained traction faster in other countries, got a start in the U.S. in 2017.

The Clearing House, a consortium of leading banks, launched RTP. But participating banks account for just 60% of customer checking accounts, and a smaller percentage of business accounts. Cost has impeded adoption: banks charge 25 cents to $1 per payment.

FedNow will be cheaper for banks so there is the probability that it will be cheaper to consumers. FedNow will also work 24/7 and enable requests for payment.

Instead of asking customers for credit or debit card numbers, businesses will initiate a request for payment. The customer clicks an approval button on their phone to pay. The fee will be minuscule versus credit card charges with no chargeback risk. Like a wire, once the money leaves an account, the transaction is final. Unlike a wire, this convenience won’t cost $25 to $50.

As a potentially less expensive public option, FedNow will enable banks to more easily bypass private solutions such as Zelle, and encourage smaller financial institutions, like credit unions, to participate.

With instant payments, companies will have a truer snapshot of finances at a given moment. FedNow payments will be coupled with data, revealing important details, impacting applications from payroll to retail transactions. Instant payments may empower smaller enterprises that struggle with cash flow, and provide an alternative to credit cards.

The changes inspired by FedNow provide opportunities to streamline payments and to innovate. Prepare for this shift.