The federal reserve offers 7 use cases for FedNow, but the system is slightly fluid, as it comes out in phases and there is some overlap in the consumer to business examples they provide. While there is limited functionality now, there will most likely be more flexibility and uses in the future. At the moment, the focus is on account-to-account payments and bill payments. They also indicate that FedNow is use case agnostic. In other words, the service should work no matter what use you put it to.
In a nutshell, the Federal Reserve is offering the FedNow service as a means for financial institutions of all sizes, the opportunity to develop and offer instant payment solutions which are flexible, speedy, and efficient to their business and individual customers.
An analogy to be drawn is between FedNow and central bank digital currencies (CBDCs) where the Fed is providing the service and the institutions will create their own products and services. The Fed is essentially outsourcing the innovation of new products within the structure that they are providing. The Fed even refers to it as a “springboard for innovation” where they provide the platform for banks, credit unions, and service providers to offer a variety of instant payment use cases for their customers.
The first phase of the roll-out is where the service is functional and then the Fed wants to focus on A-to-A (Account-to-account) and C-to-B (Consumer-to-Business), also referred to as Bill Pay. So, individuals can instantly transfer money between accounts held at different financial institutions, including funding a newly opened account.
Account to Account (A-to-A) Payments
This is a typical transaction between two individuals and can’t get much simpler. Then individuals can also fund reloadable cards, similar to a VISA pre-paid card, but without any waiting period.
Individuals will be able to fund and de-fund their mobile wallets and fund their brokerage accounts at institutions other than the one they have their funds in. This will all take place instantaneously without a waiting period or going through an ACH process.
Corporate cash pooling is another form of A-to-A where corporations consolidate their funds in a single account to facilitate payroll payments or for other purposes. This will ensure that employees, for instance, receive their funds immediately whether they bank with the same institution as their employer or not or if they are paid on a daily basis.
Consumer to Business (C-to-B) Bill Pay
The FedNow facility will allow you to settle your loans and utilities as well as a variety of other accounts instantaneously.
The thinking behind this is that it will help individuals avoid late fees and help them to better manage their cash flow. This would remove the necessity for card holds, where a hold on the funds in your account is placed to the value of the transaction but the funds only move out of your account once the holding period is over.
A possible use for this could be that you pay for your utilities as you use them, rather than making a payment once per month. But how this will be implemented in terms of a per day or per hour or unit rate is unclear.
Companies could also send a request for payment via an e-billing process through this system, and the payment can be made instantly.
So, the FedNow service would be acting as a messaging service from the end-user viewpoint. The consumer can respond to the bill by contacting their bank through a cellphone app, for instance, and request that the amount be transferred, and it will include all the relevant details for bookkeeping and matching purposes. The receiving bank will authenticate the transaction and accept or reject the payment based on the details forwarded via the system.
This can be used for services such as landscaping or where a contractor comes to you to fix something in the home and bills you immediately upon completion of the job.
Peer-to-Peer
Another use case would be peer-to-peer payments where you could pay a portion of a bill, for instance, a family splitting the dinner bill. They could do this instantly with a variety of on-demand services, such as babysitting or dog walking.
B-to-B
Then there are the business-to-business transactions where companies can pay suppliers on receipt of products or services, thereby freeing up capital.
E-Invoicing is another option where the business can send a request for payment and the remittance can happen in real-time, instantly.
This can also work for e-commerce, where you purchase things online.
B-to-C
If you have an insurance payout, for instance, the company can make use of an instant payment facility using FedNow to facilitate direct and immediate payment to you. Rebates and refunds could also form part of this system.
This system will also allow for instant employee salary or wage payments daily, for example. This can be seen some already, just obviously not using the FedNow service. Some businesses, mostly seen with fast food restaurants, will pay their employees daily in order to prevent turnover. This is due to a cumulation of multiple economic dynamics going on at the time of this writing (late 2022) that are not related to the usage of FedNow, however, it does exemplify that a need for these daily payments is already present.
For a more historical example, we can look to the Deutsche Mark in the 1920s, as it was losing so much value due to hyperinflation that employees were paid twice a day to help them pay for groceries before the price went up for the various goods they were buying.
Government and Municipal Payments
Finally, this system will allow individuals and businesses to make a tax payment to the government and receive time-sensitive payments in return, such as tax refunds.
The risk here is that there’s no buffer between you and the government taking as much money as they want. With the current system, if taxes are raised there is a waiting period before the taxes become due, but with this system, the funds can be withdrawn instantly, which takes away your ability to decide on the timing of when you make the payment.
The focus here is on all the positives of using the FedNow system in that you can make payments instantly. But it neglects the negatives that are worth talking about.
The lack of a time buffer springs to mind as, currently, it provides opportunities for you to arrange your financial affairs so that you can take advantage of the period in which you still have control over your money.
You can, for instance, use the excess cash available until the settlement is due to invest in financial vehicles (like T-bills), which will give you a return on your money that you will now miss out on if the settlements take place immediately.
In any event, these are the current 7 use cases for FedNow that the Federal Reserve system is focusing on, and over time, these will increase as the various financial institutions innovate new services to make use of the FedNow service.
For more on FedNow:
Learn how it started HERE
Learn what the key features of FedNow are HERE
