by Ben Dwyer It seems like there are constantly advances in payment technologies, and keeping up with all of them can be a challenge. But one that’s gotten more attention lately is FedNow, the Federal Reserve’s “real-time payment system.” In this article, we’ll look at what FedNow actually is and how it affects your business.
What is FedNow?
FedNow is a real-time payment system created by the US Federal Reserve that went live in the summer of 2023. Its purpose is to enable instant money transfers between banks and other financial institutions, but there are person-to-person (P2P) elements as well. Banks could choose to allow instant payments between users, mimicking features offered by digital wallet transfers services such as Venmo.
The system’s instant transfer capability is designed to eliminate the delays that traditional banking hours have caused in the past.
Steps Involved in Accepting Credit Cards
If you’ve been accepting cards for a while, you probably already know that the transactions have several steps before you actually receive the money for the sale. But for a quick refresher, here’s what happens:
A customer swipers their card and the payment system checks the account for sufficient funds to cover the purchase. This is the Authorization step.
At set intervals, typically once a day, your business “batches” the transactions and sends them for processing. The transaction is then “settled” and the funds are transferred to your account. In a few days, the money will be available to you.
Some business owners choose to pay for instant funding or faster settlement, but if you don’t elect to do that, settlement typically takes 1-3 business days. If processors and banks chose to use FedNow, you could see instant settlement of transactions on the FedNow rails.
How does FedNow change credit card usage?
In reality, the impact is likely to be minimal. FedNow is designed for bank-to-bank transfers, so from a customer’s point of view, nothing is different. They can continue to use their credit cards as they always have.
If FedNow is offered by a customer’s bank as a P2P option to pay someone immediately (similar to Venmo or PayPal) the customer will need to have those funds available. With a credit card, the customer is paying on credit. There are different use cases for both of those options, so FedNow is unlikely to be a direct replacement of or direct competition for credit cards. Additionally, many credit cards offer rewards programs like cash back or airline miles, which are regular consumer favorites. The FedNow or any P2P system doesn’t offer that type of reward program.
Credit cards also have better dispute options. P2P payments, especially those with immediate settlement, frequently warn that transactions are ‘final’ and cannot be reversed, urging you to be sure you’re comfortable spending that money. With credit cards, if there’s an issue with your purchase and the business won’t work with you, there’s an option to dispute the charge with your credit card company. This is also true if someone uses your card unauthorized – you can dispute the charge and typically get your money back. If a scammer gets hold of your payment details to make instant payments, there is little to no recourse to get your money back.
Are there competitors to FedNow?
Yes. The most direct competitor is The Clearing House’s real time payment (RTP) Network, which offers real-time payments between participating financial institutions. It has been operating since 2017, but is not government-backed.
FedNow also competes with the Automated Clearing House (ACH) which does not settle transactions in real time, but has an established history as a trusted payment service.
On the P2P side, Zelle allows for some limited business transactions in addition to person-to-person payments, but it is not a direct competitor on the bank-to-bank payment settlement side. The same is true for PayPal and Venmo, both of which have options for P2P instant transfers, but are not designed for bank-to-bank transfer.
In P2P competition, FedNow may have an advantage over Zelle, Venmo, and PayPal, which all require customers to have a separate “digital wallet” or account with those services, and keep money in it for instant transfers. With FedNow, the customer’s actual bank account would suffice for transferring money instantly, so customers would not need another app or account login. However, FedNow doesn’t offer that service directly to the consumer and thus isn’t direct competition. But banks could choose to offer that service to their customers, through the FedNow instant payments system.
Obstacles to Adoption
FedNow has other possible obstacles that could prevent wider use. Banks make significant amounts of money through interchange fees, which are charged when consumers use their credit cards. They will not have any incentive to steer customers away from credit cards and those lucrative fees to using instant transfer style payments from their bank accounts.
Another obstacle is that many businesses simply don’t require instant access to their funds. Since many processing companies now offer next-day funding at no additional cost, businesses are getting yesterday’s money today anyway. So transactions completed today will be in accounts tomorrow, meaning there is no considerable gap in cash flow once a business starts processing consistently. And in the cases where a business may need instant access to funding, some processing companies offer that for a fee. There may not be much demand from the business side for real-time transaction settlement.
Lastly, real-time settlement is much harder (or impossible) to reverse, making it more attractive to fraudsters. Some businesses and consumers may not be comfortable with the heightened risk (or perceived heightened risk) of real-time settlement.
Benefits for Businesses
The actual benefits of FedNow largely depend on your banking institutions and credit card processors. If they were to make use of FedNow for instant clearing, you could see money from your business transactions sooner.
FedNow Costs
You won’t have fees from FedNow itself, but the banks and financial institutions utilizing FedNow will. Those fees are per-transaction, and would likely get passed to you from your bank or processor. On its website, FedNow publishes its fee structure. Some in the financial world claim that FedNow could actually reduce processing costs. Anything is possible, but in my many years in merchant services, I haven’t seen many examples of the banks and processors lowering pricing. If their own costs to facilitate the transactions go down, they often simply pocket the difference as additional revenue for themselves. That’s why it’s so important to ensure that you’re on a “true pass-through” pricing model when it comes to credit card processing. That’s the model we require processors in the CardFellow marketplace to use, for your own peace of mind.
If you want to know what you’d pay if your processor used FedNow for real time settlement, you’ll need to contact them directly. If you’re looking for a processor or want to ensure you’re paying as little as possible for processing, sign up for a free, no-obligation CardFellow account to compare quotes in real time.
