As we await the unveiling of FedNow, which is slated for this summer, banks and their corporate customers are trying to figure out the best ways to integrate instant payments into their daily AP/AR operations.
The press has called FedNow everything from a payment’s savior to a crypto killer and its value proposition has serious breadth. One its intriguing features is the irreversibility element. This means that within seconds of a sender initiating a transaction, it will be settled and cleared. That’s good news for the receiver of the funds as they will not have to adopt a liability mindset and wait for a reversal window to close before they count those dollars. From the sender side, there will be a little bit of queasiness about the finality element, but the benefits of FedNow, as proposed, outweigh the disadvantages.
In the B2B space, FedNow will be a challenge for corporates, and particularly banks that serve those corporates, as it relates to payments liquidity. The first release of FedNow is not slated to have a mechanism that provides proactive messaging about inadequate funds. In other words, companies will not be aware of a low-balance scenario (an underfunded account) prior to a non-sufficient funds notice from the Fed. One banking source indicates to Javelin that their customers would much prefer to have “liquidity technology” that intercepts low funds notifications and borrows short-term funds to cover payments needs prior to an NSF. Note, the Fed will be offering a liquidity management tool in conjunction with FedNow, but this will only be at select times during the day and again, does not solve for a non-forecasted, low-funds scenario. According to ACI Worldwide, “a treasurer’s task becomes even more complex when there is no forecast to rely on and they can’t predict a pattern of spend because they are dealing with a new payment method. How much money should they re-invest, versus keep it available for transactions?”
Banks and corporates will have their hands full with the introduction of FedNow, but a real-time liquidity play is something these entities will need to address expeditiously in the wake of the July release.
Overview by Albert Bodine, Director of Commercial and Enterprise Payments at Javelin Strategy & Research.