Instant Payment Processing Modernize Payroll

FedNow, the Federal Reserve’s instant payment platform, has expanded to over 600 banking institutions since its launch in July 2023, said Tim Boike, vice president of industry relations for the Federal Reserve Bank of Chicago.

The FedNow platform provides immediate and uninterrupted processing of financial transactions between businesses, individuals, and governments. Transactions on FedNow are settled immediately, with most transactions settling within “three to five seconds,” Boike said. “If you send a transaction on Christmas day, it’ll instantly arrive that same day,” he said, noting the platform’s year-round availability, even on holidays.

Speaking to attendees at PayrollOrg’s Capital Summit, Boike noted the need for instant, year-round transactions, highlighting the need many employees have for instant paychecks. He said, “37% of Americans are living paycheck to paycheck,” citing a 2023 study on Economic Well Being by the Federal Reserve.

For now, the service is limited to domestic transactions, but plans for covering international transactions are on the horizon. Boike said. The service also includes optional features like fraud prevention tools, among other tools aimed at supporting secure transactions.

Since its launch on July 20, 2023, 600 banking institutions and 30 service providers have joined the platform, Boike said.

Some of the most common scenarios for instant transactions in payroll departments include “use cases specific to immediate payouts for terminated employees, one-time bonuses for new employees and executives, as well as service and sales reimbursements, among others,” Boike said.

Employers interested in implementing instant payments should first ensure they “find the right bank and right partner,” said Boike. “It’s key.”

A Growing Instant Payment Network

RTP continues to grow its Real Time Payment network with a focus on smaller regional banking institutions and credit unions, said a representative for The Clearing House.

Launched in 2017, RTP is a real-time instant payment platform, owned and operated by The Clearing House, a banking association and payment company. Instant payments “can enhance the payroll experience from beginning to end,” said James Colassano, vice president of product development and strategy for The Clearing House.

Instant payments are beneficial to both the employer and employees, said Colassano, empowering the employee with greater sense of financial security while giving employers better control over the use of funds. “The fastest growing use cases for RTP is payroll. It can enhance the payroll experience from funding to disbursement,” Colassano said.

Transactions made on the RTP or FedNow platform are final and generally irrevocable. FedNow offers users the ability to recall funds, so long as the receiving bank agrees to comply with the request. “It’s completely optional for banks to comply,” said Boike, who spoke alongside Colassano at the Capital Summit.

Some attendees raised concerns about the irrevocable and immediate nature of the transactions, fearing it may lead to an increase in fraud. “If someone is getting defrauded, and they authorize the transaction, it’s hard for the network to monitor and control it,” he said, noting “most fraud occurs outside of the platform.”

Safer transactions require “education on the part of consumers” said Colassano, stressing the importance of due diligence in helping avoid common phishing scams that may encourage users to transact with strangers under the guise of a business transaction.

In addition to educational outreach, banks are implementing safety mechanisms to “ensure parties in a transaction know each other,” Colassano said, along with tools within the platforms to protect user identity and decrease instances of fraudulent transactions. “The faster you make a report, the easier it will be to get your money back,” he emphasized.

Employers were encouraged to consider instant payments to help attract talent. “The next generation of employees won’t ask for instant payments, they’ll expect it,” said Colassano. “If employees have a choice between an employer that offers [instant payments] and one who doesn’t, they’ll most likely go with the employer who does.” he said.

“Yes, change is tough and its difficult” said Colassano, “but change is hard to get in the way of.”