Get Paid in 20 Seconds

By Larry Chester, President, CFO Simplified

If I told you there’s a service that your customers can use to send you money with confirmed, usable cash in your account in 20 seconds, would you use it?

What about if a unique supplier — the only one with the item that you need — won’t ship until they have money in hand? And it’s Saturday, the bank’s closed and there’s only 20 minutes left before the FedEx truck leaves their dock. Would you use a service that would put money in their account in 20 seconds? What if I told you that it only cost $.045 per transaction?

Of course you would use it. And that’s what the Federal Reserve Bank’s new FedNow^® program is all about. It’s designed to allow the transfer of money from one company’s account to another company’s account almost instantly — 24/7 — whether your bank is open or not.

After years of meetings and a period of fielding public comments, the Fed announced FedNow in August 2019 and has been conducting pilot runs with financial institutions ever since.

There were several early adopters that signed up to be part of the testing and immediate launch of this service. Among them are JP Morgan Chase, US Bank, Wells Fargo, Bank of America, and Citigroup, in addition to many others.

But not every bank is jumping on the band wagon. In talking to one local bank, they are waiting for their interbank service company to gear up to work with this new system. They can’t make it available to you until it’s available to them.

In another case, I called a very large bank that was not on the early adopter list, and their response to me was “we plan to support FedNow next year, but we have had little demand from our commercial clients for instant payments.”

What’s interesting is that there has been so little advance publicity about FedNow that only a few people that I know have even heard about it. I’ve talked to business owners, accounting firms and a few financial consultants. OK, it was an informal survey, but none of the people I talked to had even heard about the program.

No wonder nobody has asked for it!!

The US banking system is just a little behind the curve. The European Payments Council launched an Instant Credit Transfer System in November, 2017. By March of 2022, more than 12% of all bank transfers were done by their Instant Credit Transfer Scheme. In the US, the Fed started contemplating an instant payments system in 2013, and in 2015 established a Task Force to map out a plan. Six years after they first started thinking about it, the Fed announced FedNow in August 2019, and has been running pilot runs ever since. They finally gave it the green light, and formally launched the program on July 20th, 2023.

But the private sector has not been sitting around, waiting for the Fed to act. In 2017, the Real-Time Payments (RTP) Network was formed and has been used by some of the larger financial institutions to transfer funds.

There are a number of phone-based money transfer systems available for consumers and businesses alike, but the only one that uses this RTP Network is Zelle. The others, like Venmo, Samsung Pay, Apple Pay, PayPal and others don’t directly transfer from one bank to another. It might take 1-3 days for the money to end up in your bank account.

And some of these services hold the money until you specifically request that the funds be transferred to your bank. Is that for convenience? That’s what they’re going to tell you, but the float is huge. This is the money that they have that belongs to you. But you can’t use it until it is transferred to your bank. With a service like FedNow, the money is transferred directly from your bank to their bank. And it only takes 20 seconds to arrive.

What is the downside? Surely every program that is supposed to make things easier has a shortcoming, right? The shortcoming of programs like FedNow or Zelle is that you can’t take the transaction back. There are no do-overs, no mulligans, no “oops, I sent it to the wrong person.” If you write a check to the wrong someone, you can stop the payment at your bank. And, even if you send your check to the right person, the recipient doesn’t get immediate use of the funds either. They need to wait till it clears. It will take 24 — 48 hours.

So that gets you to the one downside that is obvious. There is no float. If you write a check to someone, depending on how you deliver the check to them, you could end up with a whole week until there is really money being taken out of your account. If you make a payment to someone using FedNow, the money comes out of your account right now. In talking to a reporter about the FedNow system, he said that was a reason why most companies won’t sign up for it.

I don’t agree. The only person that benefits from a slow payment system is the person that doesn’t have enough money in their bank account to cover the checks that they have written. If you really want to pay the supplier, you would have done it long ago. And that’s the benefit of a program like FedNow.

Any CFO or Company owner will tell you that the speed with which money changes hands is beneficial to all businesses. The movement of money is the completion of any commercial transaction. If you’re on the receiving end, you want the money fast, and you want good funds at the same time.

The promise of money from your bank is just as worthless as the promise of money from a slow paying customer. You can’t pay your bills with promises.

The secret to cash flow planning is knowing when those receipts will show up. Only when you see the green in your account do you have money that you can use. And the faster the transaction, the better.