FedNow. A big opportunity for community banks and small businesses?

There’s a new instant payment service provider in town: the Fed. Is this a big deal, in and of itself? I don’t think so, at least not at face value. Do we really need another instant payment service? I could live without one. But, delve a bit more deeply into what the new FedNew service could potentially mean to community banks, and the argument for it being a big deal becomes a bit more compelling. Especially when we’re talking about community banks and their bread-and-butter customer, the small business owner.

Backing up just a bit, we all know running a small business is challenging. As we’ve discussed before, small business owners often find themselves walking a tightrope of financial stability. Meanwhile, the community bank’s battle for small business accounts grows more intense every day as competitors pursue them with innovative, agile solutions in the areas of payments, lending, financial management, and more. Small business owners need solutions like these more than anyone, as they rely heavily on the timely movement of funds in order to meet operational expenses, pay suppliers, and maintain inventory levels. 

These big tech disruptors, like Square Banking, QuickBooks Cash, and Shopify Balance, as well as fintech innovators such as Kabbage, BlueVine, and Brex, continue to wreak havoc in the community banking landscape, working overtime to create a wedge between small businesses and, yes, you, the community banker.

A larger group of payees

So, is FedNow really that different from most of the instant payment services out there? It doesn’t seem to be… at first. For starters, unlike services like Paypal, Venmo, or Square Cash, which are nonbank “closed loop” systems, FedNow provides a faster, interbank payment system. Interbank systems typically enable payers to pay much wider groups of payees, including those who have an account with a different financial institution.

Healthy competition among providers

What’s wrong with a little bit of healthy competition? Nothing. In fact, competition can often result in efficiencies related to pricing, service quality, and innovation… all of which benefit service providers and end users. 

A more even playing field for small businesses

Traditionally, big businesses have had the advantage over small businesses when it comes to quickly accessing funds, giving them an edge in negotiations and opportunities. FedNow's real-time payment capabilities break down this barrier, allowing small business owners to compete on a more level playing field. Whether it's securing a deal with a supplier or making time-sensitive investments, FedNow empowers these entrepreneurs to act swiftly, capitalizing on opportunities that might have otherwise slipped through their fingers. 

Reducing Transaction Costs

In the realm of financial transactions, time is money. Traditional payment systems often come with a price tag attached to expedited transfers. For small businesses operating on thin margins, these transaction costs can accumulate, eating into profits. FedNow offers a cost-effective alternative by providing real-time payments without the premium. By eliminating the need for intermediary services and reducing processing fees, the service becomes an invaluable tool for small business owners to optimize their financial operations and redirect savings toward growth-oriented initiatives.

Building trust and customer relationships

Customer satisfaction and trust are cornerstones of any successful business, especially community banks. For small businesses, nurturing client relationships can make the difference between thriving and merely surviving. FedNow contributes to this effort by giving businesses the ability to provide immediate refunds, disbursements, or reimbursements to their customers. In cases where customer dissatisfaction arises, prompt redressal through instant payments can rebuild trust and maintain a positive brand image. This level of responsiveness can foster customer loyalty and enhance the reputation of small businesses in a highly competitive market.

Not just a payment system. A foundation for something much greater

Also – and more importantly – according to the Federal Reserve’s FedNow website1, FedNow is (or, at least, is going to be) “much more than simply a new instant payment infrastructure. It is designed to be a foundation for the broader payment ecosystem.” Here’s where, perhaps, the “big deal” comes in.

What does this mean, for community banks? It means that, down the road, participating banks will benefit from what the Fed calls “a wide range of modern, innovative, and safe instant payment services supported by real-time gross settlement.” Simply put, the FedNow Service features and functionality will be used as a springboard for developing additional new services including, for example: Bill pay, immediate payroll, e-invoicing, funding a brokerage account, and claims payments. But, there’s more. Through partnerships with a wide range of industry stakeholders – financial institutions, end users, and technology service providers – the Fed’s goal is to “establish a robust ecosystem that will drive development of instant payment capabilities across the value chain,” with subsequent-release functionalities related to fraud prevention, error resolution, and case management.

It is a “big deal,” after all

Beyond its convenience for individuals, the FedNow service holds immense significance for small business owners and with them, community banks. By enhancing liquidity, leveling the playing field with bigger businesses, reducing transaction costs, fostering trust, and serving as a foundation for innovative new services, FedNow can provide small businesses with the tools they need to thrive in an increasingly uncertain economy and competitive marketplace.  As more individuals and enterprises embrace this transformative service, and FedNow evolves with innovative functionalities, it will undoubtedly play a critical role in shaping the future of finance and business.

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To view our marketing creative, both print and digital – ranging from product and brand ads to social media and in branch signage – visit bankmarketingcenter.com.  You can also contact me directly by phone at 678-528-6688 or via email at nreynolds@bankmarketingcenter.com. As always, I welcome your thoughts.


1Federal Reserve.  FedNow Instant Payments.