Compared to the rest of the world, the U.S. has lagged behind in rapid B2B payments technology, but that’s about to change. The Federal Reserve’s FedNow service is coming soon!
The Fed says its more modernized payment infrastructure will launch in July (a specific date has not been announced), operating alongside the Clearing House’s Real Time Payments network. Different enhanced capabilities (no word yet on what those will be) will be deployed in phases, depending on industry demands and tech developments, the Fed said.
FedNow will allow financial institutions of every size across the country to provide what the Fed describes as safe and efficient payments in just seconds. As a result, businesses will be able to send and receive invoice payments in real time, around the clock, 365 days a year regardless of bank holidays.
It’s a potential game-changer for cash flow. Having full access to receivables funds immediately means avoiding late fees and more financial flexibility for making payments to vendors and other payees.
It can also be a valuable tool for speedily handling unforeseen supply chain needs and large disbursements up to $500,000 related to contingencies.
Who can use it?
FedNow is supposed to be flexible enough to potentially serve a broad range of business, consumer and government use cases.
In addition to streamlining payments to suppliers, customers and employees, the Treasury Department’s use of FedNow could lead to faster tax return processing.
How FedNow will work
For the time being, FedNow will only be available for making domestic payments. Think of it as an open-loop clearing and settlement platform using the ISO 20022 request for payment standard, where payments are routed between financial institutions on a shared network. Necessary information for debiting and crediting accounts is instantly exchanged.
When bills are due, A/P receives immediate confirmation that the payment has been accepted (or that the payment failed). A/R also receives immediate confirmation when payments have been sent.
Financial institutions participating in FedNow can opt into different services within the system. They might, for example, choose to receive funds only. They can also opt into settlement service transfers, where funds are transferred between their FedNow account and Federal Reserve master account to ensure they can continuously process real-time payments.
Additional options include requests for payment capability and tools to support participants in their handling of payment inquiries.
Because FedNow participation isn’t required, now’s the time to touch base with your banking partners to see if they’re opting in or if they’re standing by to see how it pans out for the early adopters. If their strategy is wait-and-see, direct them to the FedNow Community to stay up to date.
What it means for your Finance team
Back office benefits of FedNow include more efficient tracking and posting of incoming funds and payments, with fewer errors.
But if your financial institution opts into FedNow, you’ll need to make sure that Finance has a ledgering system that can adequately handle and track instant B2B and B2C payments. Recording and reconciling those transactions has to happen without delay and you may need to consider an automation solution.
Because settlement happens in real time, and fraudulent transactions will be nearly impossible to reverse, it’s also going to be necessary to have thorough internal controls in place, such as know-your-customer and anti-money laundering policies.
What about fraud risk?
It should be noted that the National Consumer Law Center is skeptical about whether FedNow will have enough fraud safeguards in place. Therefore, extra security readiness for FedNow will be crucial.
Some best practices for fraud prevention include:
- Examine your risks using the Fed’s Fraud Classifier Model
- Huddle with I.T. to assess your current tools and processes: Do you need to make adjustments? Do you need to add new tools, such as digital identity solutions or behavioral biometrics? In addition, check out the fraud prevention services on the Fed’s Service Provider Showcase page.
- Check out informative resources from the Fed, such as FedNow Explorer, the Synthetic Identity Fraud Mitigation Toolkit and guide to mitigating authentication fraud
- Review your organization’s process for handling fraud if it arises
- Collaborate with your vendors on ideas to help mitigate fraud risk
- Define what role your banking partners will play in minimizing fraud and ask if they’ve seen the FedNow requirements
- Consider dual approvals, requiring two authorized users to approve transactions above a certain threshold
- Train your team members to verify the source of a payment request (e.g., a supplier or biller) and any changes to payment accounts by calling a trusted contact’s phone number, especially if they’re using an unfamiliar device or IP address or using a channel or payment type that they don’t regularly use
- Educate team members on the irreversibility of real-time payments
- Educate team members on protecting login credentials and ensuring credentials are strong and unique, and
- Educate team members about the risk for potential fraud and scams.