Two to three business days is a long time. Amazon Prime has given many the expectation that this is how long it should take to ship physical goods, not conduct digital business. The speed of online business and apps like Venmo, Cashapp, and Zelle have also likely given many the perception that anything that isn’t physically moved can be sent instantly.
Starting July 1, real-time transfers between financial institutions through the FedNow payment network will bring that same level of speed to the business world. This will be accomplished in part by implementing ISO 20022, the latest International Standards Organization standard for electric data transmission between financial institutions.
FedNow will also enable electronic transfers around the clock and seven days a week, although implementing that will be left to individual institutions.
Speeding up these transactions, which are currently one of the hard limits on the speed of business, is the goal of the FedNow program, which seeks to provide “real-time”cash transfers between financial institutions, businesses, and consumers. It could mean that employees get paid seconds after payroll is completed, that businesses no longer need to plan around weekends when transmitting payments and more, all while increasing security.
The Federal Reserve characterizes FedNow as a major improvement to the infrastructure of the American financial system, one of the most significant since the 1970s. Similar capability was rolled out for clearing houses in 2018, but after June 1 banks and other consumer facing institutions will begin implementing it.
When reached for comment about what FedNow will mean for small businesses, a Federal Reserve spokesperson referred to speech by Vice Chairman Lael Brainard.
“While everyone stands to benefit from instant payments, the benefits could be especially important for households and small business owners who face cash flow constraints,”Brainard said. “Many small businesses cite immediate access to working capital to finance inventories or pay employees as their number one constraint on growth. Smaller businesses and merchants would benefit from instant payments because of their need to tightly manage how much of their capital is tied up in unused material or inventory. If a small business could count on its customers’ payments being immediately accessible in its bank account, it could reduce its need for short-term financing to cover the costs of ordering materials and goods well in advance.”According to Joe Hussey, the product manager for PRI Payables and Receivables at Wells Fargo, many financial institutions, including Wells Fargo, are excited about the changes that FedNow will represent.
“We look at this as a great opportunity to expand our ability to get to more clients and allow them to receive an almost instant payment. Whether from their insurance company, their wallet, or enabling same day payroll,”Hussey said.
Individual consumers will not need to take any steps to start receiving real-time transfers under FedNow, according to Hussey. The transactional pilot beginning in June will come at the end of a long period of testing, which Hussey said revealed no surprises.
Businesses of all sizes will benefit from instantly sending and receiving payments 24/7, but Hussey did note that it does represent a significant change in the way that business is done.
“From the businesses owner’s side, I think that they should be talking to their bankers today,”Hussey added. “Almost all of [the banks] that are participating in the pilot are talking to our clients about how they’ll integrate real-time payments and the FedNow payment network into their systems.”Internal finance teams and payroll departments will likely have the largest adjustments to make, according to Hussey, but he stressed that Wells Fargo, like other banks, will be there to assist. He also noted that business professionals who are eager to take advantage of FedNow’s new capabilities should also speak to their bankers to indicate their interest as well.
