Time might be money, but money doesn’t always arrive on time. Historically, US payment networks took days to complete a transaction. Now, with the launch of the FedNow service in July, instant payments are more accessible, and this could shake up how payments are handled in the retail industry.
The network, operated by the Federal Reserve, joins other payment networks such as Fedwire and the Automated Clearing House (ACH) in handling electronic fund transfers. The difference between FedNow and its predecessors, however, is that it processes transactions 24/7 and can instantly move money between users.
So far, retailers have been relatively quiet about how and when they will utilize FedNow, but there is still excitement in the industry about the possibilities.
- Both Walmart and Kroger weighed in on the topic during a conference hosted by the US Faster Payments Council this past spring.
“Any sort of new, systemically important payment system like this, especially one that brings new functionality into the payment world, is a great thing for the industry,” Chris Uriarte, a payments expert and partner at consulting firm Glenbrook Partners, told Retail Brew.
Need for speed: Uriarte explained that FedNow’s real-time functionality could help speed up basic back-end operations such as paying out checks to employees or paying a supplier for an order. The Fed also touted these benefits.
“Over time, as more banks choose to use this new tool, the benefits to individuals and businesses will include enabling a person to immediately receive a paycheck or a company to instantly access funds when an invoice is paid,” Federal Reserve Chair Jerome H. Powell said in a statement during the launch of FedNow.
One upside for merchants relates to liquidity. Rather than waiting around for a payment to drop into their bank account whenever a customer buys a good or service, money is on hand immediately, Uriarte said. This change has the added benefit of alleviating risk when it comes to securing payments from customers who may no longer have money available in their bank accounts after the two or three days it takes to process an ACH transaction.
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During a panel discussion hosted by the US Faster Payments Council in March, Matt Howarter, senior director of payments services at Walmart, highlighted another potential benefit of a real-time payment network: faster customer refunds.
“Not having immediate refund capabilities for consumers is unacceptable,” he said, according to the Council’s blog. “Over 45% of calls to our call center are, ‘Where is my refund?’ Faster payments present the perfect opportunity to be able to leverage the technology to improve that customer experience.”
Bumps in the road: Reed Luhtanen, executive director of the US Faster Payments Council, told Retail Brew that the biggest barrier to adoption at this point is the relatively limited reach of the network. Just 35 banks and credit unions and 16 service providers have signed on out of thousands nationwide.
“There’s work to be done in terms of the reach of these networks to make them universal and ubiquitous,” Luhtanen said.
This is especially difficult in the context of the US banking system, which is notoriously vast and complicated. Luhtanen stressed that the US has more than 9,000 banks, whereas countries such as Canada have far fewer.
On the consumer side, Uriarte said new payment technologies tend to succeed when they provide either a financial incentive or a tangible increase in convenience. He cited the examples of Apple Pay, which is integrated with iPhones, and Target’s RedCard, which provides 5% back on transactions at Target’s online and brick-and-mortar storefronts.
“Merchants or other providers need to develop products that fit those two criteria,” he said. “There needs to be some sort of motivation.”