Fed Gauges Businesses’ Payments Policies

September 6, 2021
The COVID-19 pandemic has caused U.S. businesses to need faster access to funds and they are starting to look strategically at payments, according to a Federal Reserve survey.

The COVID-19 pandemic has caused U.S. businesses to need faster access to funds and they are starting to look strategically at payments, according to a Federal Reserve survey.

In a survey of 2,010 businesses of different sizes and industries, the Federal Reserve has found that U.S. companies are looking strategically at payments and are planning to engage in “readiness activities related to faster payments” in the next year.

As businesses search for ways to remain competitive in the post-pandemic world, many have decided to offer additional digital or online payment options to their customers. Indeed, they hope that their sales and revenue will increase if they make payments faster.

“Businesses are looking strategically at payments and expecting payments to do more to help them solve the challenges they face,” the survey finds.

Approximately 90 percent of the businesses in the survey consider it important to have immediate access to funds and receive notifications when the funds are available.

More than half of the businesses would like to have access to funds within three hours of payment initiation, although 37 percent consider same-day access sufficient.

At the same time, 16 percent of the businesses would be willing to pay a small fee for access to funds within ten seconds of initiation.

Almost 90 percent of the businesses expect to adopt faster payments by 2023 and half of them expect to need a year or less to be ready to support “24x7x365” payment operations once they decide to make faster payments.

Three-quarters of respondents are planning to “engage in readiness activities” in the next year. This means that they will speak to providers and software vendors, plan projects, set aside dedicated budgets, embark on efforts to make customers aware of the new products and train their own staff. Alternatively, they might test and implement their projects straight away.

Various factors may hinder their plans to adopt, or increase the use of, faster payments. The most important barrier for small and micro-businesses is cost.

Some 66 percent of micro-businesses and nearly 60 percent of small businesses are unlikely to adopt faster payments if their costs exceed the bank fees that they pay at the moment. At the same time, more than half of them might switch to faster payments if doing so will help lower their costs.

Although cost is their biggest concern, they are also worried about the task of convincing customers to use the services and the idea of having to share bank account information with customers and suppliers, along with the risk of fraud and uncertainties related to the pandemic.

By contrast, medium-sized and larger businesses are much more likely to see “limited network reach issues” as barriers.

Although cost is also an important factor in their assessments, they are more concerned than smaller businesses about being able to convince their suppliers to use faster payments and about the IT resources that they might need to integrate faster payments into their back-office systems.

Large businesses are most motivated to use faster payments for the sake of more efficient processes, better relationships with suppliers, more flexible payments, better reconciliation processes and “24/7 service”.

The survey also reveals that most businesses already have experience of sending and receiving some forms of faster payment in the past 12 months.

In most cases, these included the use of digital wallets and Same Day ACH, followed by push-to-card and interbank A2A networks.

Three-quarters of firms in the survey consider it important that their banks offer them faster payment services and nearly two-thirds might consider access to faster payments as a factor when deciding whether to switch banks.

Although businesses do not change their preferred forms of banking relationships often, the survey has found that 40 percent of the respondents have changed banks in the last five years and more than 80 percent would consider changing again for access to improved payment services.

The Federal Reserve is planning to run an instant payment service called FedNow in 2023 and add extra features to it over time. The new infrastructure will support instant payments on a “24/7/365” basis with instant settlements and allow financial institutions to offer innovative instant payments to their customers.

Similar to Canada’s recently released Lynx, FedNow will use the ISO 20022 message standards and best practices to support routing interoperability with other instant payment services.

A private form of instant payment, however, already exists in the U.S. The Clearing House, which the world’s largest banks own, opened the RTP network — a real-time payments platform — in 2017. This offers immediate payments to funds and allows any federally-insured depository institution to participate.

Businesses may also use faster payments solutions, such as Nacha’s Same Day ACH, to send and settle payments faster than via traditional payment means.

The Same Day ACH, which will mark its five-year anniversary on September 23, has undergone astounding growth, according to Nacha, the operator of the faster payments method.

Businesses that want to send or receive funds more quickly in the U.S. may also use push-to-card payments, which process transactions through card networks and credit every payee’s debit-card account within minutes of payment initiation.

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