In an era of always-on, digitized consumer experiences, people expect to make payments and receive money instantly. The ability for businesses and individuals to transfer money between accounts, pay bills the day they’re due and send money to friends and family in a matter of seconds continues to grow in demand.
Recognizing these changing expectations, the Federal Reserve launched its FedNow Service in late July. It provides participating financial institutions of every size across the U.S. the ability to provide safe and efficient instant payment services to both businesses and consumers. Banking customers can send and receive money in real time, around the clock, every day of the year.
The numerous potential use cases for the FedNow Service demonstrate that the flexibility and convenience of instant payments is universally appealing. For individuals, for example, the FedNow Service provides new opportunities for making payments to businesses large and small, putting control over cash flow into the hands of consumers.
“When bills are due, if a person can make that payment instantly, it can keep someone from getting hit with late fees, or worse, having services like water or electricity interrupted,” says Daniel Baum, senior vice president and head of payments product management for the FedNow Service.
Individual business owners who would like to be paid as soon as their work is complete, such as a plumber or lawn care provider, can be paid instantly through the FedNow Service. “These are the types of small business owners that have typically been paid by check,” Baum says. “We’re in an age when people are expecting a digitized experience. So to have to rely on writing a check – which is no longer familiar to a big part of the population – isn’t ideal.”
Better control for small businesses
A key benefit in the business-to-business use case for the FedNow Service is control over working capital and cash flow. For smaller companies in particular, cash flow management might well be the difference between a business that succeeds and one that struggles, Baum says.
“If you think about it, the small business that delivers pastries to the local coffee shop prefers to be paid that day, cash on delivery,” he says. “These small businesses are managing tight cash flows and looking for quick turn on the revenue generated by the goods or services they provide. The immediate receipt of those funds is important.”
Since the launch of the FedNow Service, financial institutions have been making it available for small businesses to send and receive money instantly. “The idea of just-in-time payments makes sense when you consider that small companies often operate closer to the margin,” Baum says. “There’s a real benefit to managing cash flow to the last possible second.”
When it comes to the business-to-consumer scenario, an increasing demand among workers for earned wage access — also known as on-demand pay — is a significant driver. “Paying employees at the end of a shift or workday could help a business garner more employee satisfaction and result in better retention,” Baum says. Employees want to be able to spend the wages they’ve earned, but often a payroll cycle doesn’t sync up with an employee’s bill due date. “The ability for a business to pay an employee instantly is quite attractive,” he says.
Instant payments are also poised to be useful in institutional responses to stressful episodes. During the Covid pandemic, for example, an array of government entities responded by opening pandemic relief programs and funds for small businesses and households alike. Once support program applications are approved, the FedNow Service could allow those government entities to disburse those funds within seconds, including on weekends.
Baum says the Federal Reserve is doing its part to make the back-end technology and platform for the FedNow Service seamless and easy to use for financial institutions. “There’s a lot of pent-up demand for these faster payment solutions,” he says. “The Federal Reserve is committed to working with the whole payments ecosystem to serve our mission and meet that demand.”
