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The Future of Payments is Instant

Ken Montgomery
Ken Montgomery, first VP and COO of the Federal Reserve Bank of Boston, leads the central bank's new FedNow program.

Change in the payments industry has been accelerated by COVID-19. Merchants have responded by making it easier than ever for their customers to make in-person contactless payments and purchase goods online from the safety of their homes.

The Federal Reserve intends to support payments change with its first major new payment system in four decades. Merchants will be among those to reap the benefits.

Through financial institutions participating in the FedNow Service, businesses and individuals will be able to send and receive instant payments in near real time, around the clock, 365 days a year. Recipients will have full access to funds within seconds, giving them greater flexibility to manage their money and make time-sensitive payments.

This immediacy differentiates truly instant payments from traditional retail payment methods, including those that appear to occur within seconds from the sender’s perspective, but actually can take days before funds are available to the receiver and the banks settle the funds. This instant clearing and settlement enables these transactions to be final and irrevocable, which provides assurance and certainty to both the sender and receiver.

How would merchants be able to join the FedNow ecosystem and tap into its benefits? Working with their banks and service providers, merchants could potentially leverage the FedNow Service as a springboard to provide innovative instant payment services. To name just a few examples:

  • Instant payments, powered by QR codes and wallets, can help deliver safe and easy online buying and in-store contactless point-of-sale purchases.
  • Merchants can use instant payments to provide on-the-spot refunds to customers, eliminating the costs and frustrations associated with tracking and customer support.
  • Instant payments can offer a secure and convenient way to load funds onto gift, reward, or pre-paid debit cards without customers needing to provide sensitive financial account information.
  • Merchants can make payments immediately when they're due, helping to optimize cash flow management and ensuring timely payments to suppliers for inventory, rent, goods and/or services.
  • Instant payments can facilitate payroll that is issued daily or on demand – a feature that is especially attractive to part-time, temporary or seasonal employees. This could enhance merchants’ ability to hire and retain staff.

Merchants should begin working with their industry partners now to ensure they are able to use the FedNow service when it becomes available.

Other Benefits for Every Type of Business

Instant payments can offer benefits to corporate treasurers, accounts receivable and accounts payable departments in any type of business.

Checks comprise more than 50% of business-to-business transaction volume according to a 2018 MasterCard study. As a result, accounts receivable and payable departments generally dedicate significant time to handle exceptions, manually track invoices, locate corresponding remittance information, manage disparate emails and conduct manual payments approval processes. Instant payment systems in the United States and elsewhere use the widely accepted ISO 20022 standard. This standard provides a common foundation for exchanging payment messages and supports the exchange of “rich data.” For example, companies can send a request for payment (e-invoice) and remittance information to automate invoicing and account reconciliation, reduce exception handling, make more timely payments and increase the likelihood they can adhere to contractual terms.

Merchants and other businesses that operate on weekends and evenings also may improve their cash management efficiencies using instant payments. For example, peak retail sales days generate a significant amount of cash that cannot be moved over the weekend to accounts that earn a higher return. In contrast, instant payments provide interbank settlement that enables funds transfers from a sender’s bank account to a receiver’s bank account immediately and at any time.

Instant payments are prevalent in other countries, but are just now beginning to gain traction in the United States, due in part to the size and complexity of the U.S. financial system. Payment system application and service providers will use instant payment systems as a springboard to develop new services for merchants and other end users. The world is moving at a fast pace, and instant payments will enable it to move even faster.

About the Author

Ken Montgomery

Ken Montgomery is the first VP and COO of the Federal Reserve Bank of Boston and the FedNow program executive leading development of the service.

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