Fast Forward Into the FedNow Instant Payment Service (1)

The FedNow instant payment service is reshaping the US payment system, according to an industry expert March 18. As employers aim to attract and retain top talent, the ability to offer instant and reliable payment options has become a game-changer for payroll professionals, he said.

The Federal Reserve Financial Services, the Federal Reserve’s payment division that manages the US payment system has expanded its instant payment network to over 1,200 financial institutions, said Daniel J. Gonzalez, vice president of customer relations at the Federal Reserve Financial Services.

The FedNow instant payment system, designed to enhance the speed and efficiency of payment processing, allows employers and employees to conduct transactions instantly any hour of the day, every day of the week, Gonzalez said. “Payment has evolved over time, and the way people think about payment has also evolved,” he noted.

“Instant payment differs from faster payment. The difference lies in the speed of fund settlement,” Gonzalez explained.

Faster payments are near-instant payments that require additional steps for funds to settle in a customer’s bank account, Gonzalez said. Examples of faster payments include cash app and Venmo transactions, which involve the initiation of another transfer from the payment application to a customer’s bank account for the fund to be fully settled in the customer’s bank account, he continued. Faster payments are also subject to delays and potential fees, which highlight their limitations, he added.

In contrast, the instant payment service operates as a credit-push-only system, Gonzalez said. It does not require additional steps for funds to settle in a customer’s bank account. Once a fund transfer is completed, the funds settle in a customer’s account within seconds, he explained. The instant payment service is available 24/7, and the funds are immediately accessible and irrevocable, he added.

With approximately 60% of consumers in the US living paycheck to paycheck, businesses that offer same day pay and earned wage access can attract and retain more talent, he noted. “Consumers don’t just ask for instant payments. They expect them,” Gonzalez emphasized.

The FedNow instant payment service provides numerous benefits for payroll, such as improved precision, visibility, timely payments, and enhanced customer experience, Gonzalez said. It can open avenues to drive revenue growth and create new revenue streams, he noted.

There has been notable growth in several payment categories with the FedNow instant payment service, Gonzalez said. This includes business-to-business payments, business-to-customer transactions like immediate payroll, account-to-account payments such as mobile wallets, and consumer-to-business payments, he continued.

Earned wage access, payroll funding, and invoice and supplier payments have the potential for the greatest reach for instant payments adoption, Gonzalez said.

Payroll providers can benefit from the FedNow instant payment system through instant payroll processing, he continued. “If you miss the payroll funding deadline, you can use the FedNow instant payment service to rectify it.”

The FedNow instant payment services also feature built-in risk management capabilities, including message authentication, data encryption, tokenization, transaction limits, and flexible participation options, which help protect the network from fraud, Gonzalez noted.

Gonzalez spoke at PayrollOrg’s Capital Summit, held in Arlington, Virginia.

(Updated number of financial institutions in the Federal Reserve’s instant payment network)