How many times has your Finance team seen the word “processing” on their laptop screens this week? Instant payments, both via The Clearing House’s RTP (Real-Time Payment) Network and the Federal Reserve’s 24/7/365 FedNow Service, are poised to change that.
Imagine that a key piece of your business’s equipment has broken down. You need to order replacement parts right away, but they won’t ship until you’ve paid in full. An instant payment can settle with the vendor in seconds, speeding up delivery and significantly cutting the down time.
Since launching in July, FedNow’s modest growth continues, with 72 financial institutions, 20 settlement agents and liquidity providers, and 20 certified service providers on board. Zooming out on the world stage, however, there are predictions of instant payments becoming a major trend between now and 2027:
- Juniper Research in the UK is forecasting a 218% global growth in instant payments, and
- Instant payments will account for close to 28% of all global electronic transactions, according to the 2023 “Prime Time for Real-Time” report from ACI Worldwide.
And by the way, the demise of the paper check is accelerating. The Guardian reported that Australia is officially ending the use of check payments by 2030.
U.S. banks dragging their feet?
In an interview, Nick Chandi, the CEO and co-founder of ForwardAI, said that banks in the USA are far more enthusiastic about receiving instant payments in approximately 20 seconds than they are about sending them. Part of the reason is because it means they’re making less revenue from credit card fees and interest.
“If you look at … major banks in the U.S. … they are the primary insurers of credit cards or debit cards. … Every time you swipe that card, they make money on the interchange. No one wants to lose money that’s coming from an interchange. … If you look at Zelle, most banks, they lose money on Zelle,” he said.
“As it happens with every company … they try to protect the technology they have. It’s very difficult to go out, dump how you’re making money today, and go after a new revenue stream, a new product, and completely rebuild your business model.”
Meanwhile, BNY Mellon and Trustly have created their own open banking solution for faster payments called Bankify.
Chandi expects that almost all major financial institutions will commit to both sending and receiving on FedNow. However, he said, thousands of banks don’t have, for example, $70 million in liquid assets on hand. For them, sending out a lot of high-dollar instant payments is too risky right now. FedNow transactions are capped at a $500,000 maximum, while RTP allows transactions up to $1 million.
“They might be good with receive-only (for instant payments) just because they don’t have the liquidity and they don’t have the funds for the technology upgrades,” he said.
What if small business A/R was as fast as Venmo?
With many banks testing the instant payment waters by receiving payments only for now, that puts the focus on the A/R side of Finance.
A/R software vendors that are paying attention to what’s going on with faster payments may be looking to add FedNow- and RTP Network-friendly instant payment modules similar to ForwardAI’s Forwardly platform, which is geared toward small businesses and accountants and performs automatic reconciliations in Xero and QuickBooks Online (with additional accounting systems integrations forthcoming).
Saving money with instant payments
It’s not just the banks that love credit cards. Businesses that use them to make payments love them for the rewards programs.
But finance leaders are beginning to realize that, in addition to paying invoices efficiently, instant payments are more cost effective than credit cards, Chandi said, mentioning a Federal Reserve Bank of Atlanta study that found most cardholders actually lose money on their rewards programs.
You probably know from experience that you have to spend a lot with a credit card in order to get substantial rewards.
“Unless you have a premium credit card, like American Express Platinum or Capital One Spark or Chase Sapphire … what happens is people end up spending more than what they can afford. And then there are penalties for the late payments. Or if you’re just making a minimum payment, forget about coming out of that debt trap,” he said. “It’s a kind of toll most small businesses … have to pay. But the problem is the toll is like $50 or $100, instead of $5 or $10.”
According to Chandi, Forwardly users cut their credit card fee expenses by 70-80%.
When talking to fintech vendors about their instant payment capabilities, some questions to ask include:
- Are there transaction fees? You don’t want to exchange credit card processing fees for something just as expensive.
- If my bank isn’t on FedNow or the RTP Network, can you at least enable me for same-day ACH transactions that don’t come with big fees?
- What are your fraud protection features and how do they work?