Six ways FedNow may affect businesses’ cash flow
The launch of instant payment service FedNow last Thursday could have major implications for CFOs and how they will manage cash flow, accounts payable and accounts receivable functions in the future.
The service, which offers businesses the ability to transact near-immediate payments that flow 24 hours a day, seven days a week, will transform companies’ cash flow, allowing faster paychecks and easier expense reconciliation. FedNow payments are also irrevocable, unlike automated clearing house (ACH) transactions, which can be reversed.
To be sure, most treasurers and CFOs won’t be using FedNow immediately. Banks aren’t obligated to be part of it, and it’s unclear if or when a critical mass of them will adopt it. At launch, more than 50 banks, service providers and other entities are certified to use FedNow. In addition, the ACH network, the electronic payment network used by all banks and credit unions in the U.S., isn’t going away anytime soon. The private real-time payments network, or RTP, rolled out in 2017 by a consortium of large banks, currently reaches 65% of U.S. demand deposit accounts.
The advantages of FedNow for companies, however, are widely acknowledged: instant payments could facilitate better cash management and quicker payments to suppliers and vendors. There are planning considerations, with CFOs needing to address how it might affect liquidity and relationships with vendors, analysts say. FedNow also makes payments possible on evenings and weekends, which could change the way businesses are run.
FedNow “comes to us like a blessing and a curse,” said Eric Segal, a managing director at CFO Consulting Partners. “Finance departments are going to be getting information in their bank statements quicker…payments are going to clear pretty much immediately and if that happens, I need to be aware of that in managing my cash.”
Here are six ways CFOs and analysts say FedNow could affect businesses and their operations:
1. The disappearing ‘float’
The concept of “float,” defined as the amount of time between the initiation of payment and clearing — which can take as long as a couple of days with ACH — is a lever some CFOs rely on to manage cash, said David True, a partner at payments consultancy PayGility Advisors. With faster payments, however, that cushion goes away.
“If it costs me a lot more to borrow money, or call or the other side, if holding money earns me more with a higher interest rate, then I want to hold on to as much cash as I can for as long as I can before I pay somebody,” said True.
CFOs, as a result, may need to adjust models and account for quicker outflows of cash.
“They’re going to have to take those models and adjust them to essentially say, ‘If this percentage of my customers move over to faster payments, then the amount of [available] dollars I have is going to decrease,’” he said. “This is something that they should have been thinking about and if they haven't, they should start immediately thinking about.”
Within companies, CFOs need to review processes to figure out how faster payments around the clock will affect operations, said Segal.
“It’s good old fashioned process mapping,” he said. “It's just a matter of understanding the implications of the change in the way payments flow, and how that impacts your processes.”
2. New business expectations.
FedNow’s ability to enable payments all the time might raise customer and business expectations. For example, if accounts receivable departments require payments on a Friday, “if [payment] comes over the weekend, will it give someone a grace period?” said Kate Scolnick, CFO of medical device company Owlet. It could also affect mergers and acquisitions, since transactions can continue during off hours, she added.
Since the availability of FedNow may result in vendors dictating faster payment terms, companies also need to ensure it’s compatible with their technology systems that facilitate automated bill payments.
“It would not affect us materially, as long as we were able to set it up with our existing systems and … into our enterprise resource planning systems and into our workflows,” said Michael Tannenbaum, CFO and COO of payments firm Brex.
3. Faster payments mean heightened scrutiny.
Faster payments come with a need for more rigorous risk assessment of every actor that touches a payment transaction, including the banks involved, explained Peter Lorimer, CFO of New York-based financial technology firm Betterment.
“We’re doing a little bit more diligence on them, just in the spirit of the fact that money can move a lot faster in the system,” he said.
FedNow adoption could also mean shoring up fraud prevention approaches.
“When the velocity of money increases dramatically, opportunities for fraud are obviously higher,” he said. “You're still relying on your same kind of fraud risk management playbooks, but it just kind of stresses the importance of building out that institutional muscle.”
4. More efficient brand-supplier alignment for direct-to-consumer retail CFOs.
Fortune & Frame, a New York-based online jewelry retailer, said real-time payments enabled by FedNow could allow for quicker production and delivery to consumers.
“We're often dealing with tight deadlines between production and delivery to customers. The payment delay and reconciliation process with factories can add anywhere from three to five business days to their shipment time, which can translate to significant delays, said Kieran Powell, the company’s CFO. “With a factory in Rhode Island, they’re not going to start production until they’ve received the funds and reconciled it, which can take a couple of days.”
Real-time payments could also allow the company to take advantage of lower commodity prices, including the spot prices of gold and silver, he added.
5. Easier expense reconciliation.
Business expense reconciliation will get easier with FedNow, because the information included with each transaction will be more comprehensive, and it will happen faster, said True.
“It will decrease the administrative work necessary to manage your payments, both on the sending and receiving side, that's a very, very good thing that's coming about,” he said.
Faster payments will give brands more visibility into their expenses for a given month, and cut down on time and effort required for the monthly reconciliation process, according to Powell.
6. CFOs will need to lean on their banks for support.
FedNow is hardly a top discussion topic among finance chiefs right now, Tannenbaum said.
“There's not a ton of people chatting about it yet,” he said. “I don't think there's been a lot of clear guidance about how it actually is going to work, and I haven't seen the banks pushing it.”
As a result, it will be on CFOs to seek guidance from their banks to understand the implications.
Jim Colassano, senior vice president of product development and strategy at The Clearing House, a banking association and payments company that is owned by the largest U.S. commercial banks, suggested CFOs should consult with their financial institutions, especially since the transaction limit is currently capped at $500,000. (RTP, the real-time payments network that was rolled out in 2017 by The Clearing House, has a $1 million transaction limit.)
“This transaction limit means businesses using FedNow cannot implement certain use cases that may require transactions larger than $500,000, such as payroll funding, corporate payments to suppliers, or some real estate transactions,” he said.