Immediate Payments for Real-Life Circumstances

Fast payments add round-the-clock convenience but require attention to detail

By Amy Bobson, Meredith Thomas, and Tom Reilly

n July 2023, the Federal Reserve introduced a new payment method called FedNow, which works as an instantaneous transfer of funds between participating institutions. As one of the first banks to implement this payment system—along with the launch of Real Time Payments, or RTP, from The Clearing House earlier in the same year—we have seen both business and consumer clients benefit from the convenience and increase in speed of immediate payment systems.

It is important to note that, at this time, FedNow and RTP have not yet been adopted by all financial institutions in the United States. It is expected that the majority of US financial institutions will adopt this feature rapidly, as real-time payments are already common in other areas of the world. Each institution should be contacted individually for information on when they will adopt these new payment systems. Conversely, FedNow and RTP’s counterparts—such as Automated Clearing House, or ACH, wires, and checks—are accepted by every US financial institution.

The central benefit of immediate payments, both FedNow and RTP, is that money will be available to the payee as soon as it is released by the sender. By contrast, funds sent by ACH may take one to three days to be credited to the recipient’s account and may be returned due to non-sufficient funds. ACH payments are processed in large batches by the Federal Reserve rather than in real time. Checks, even if they are sent electronically, have a similar clearing process, and the processing timeline can extend significantly if they are sent through the mail. Finally, transfer of funds via wire is also not instantaneous due to processing time between financial institutions and the Federal Reserve, although it is required that the funds are available when the wire is initiated. Another benefit of immediate payments is that the payments are always available, even when the Federal Reserve is not open—such as after hours, on weekends, and on national holidays. This has helped 1st Source clients who work non-traditional hours and need flexible payment options.

The Federal Reserve currently allows each financial institution to set their own maximum payment, with a limit of up to $500,000. The fees associated with a transfer will differ from bank to bank, although in general they tend to be less expensive than a wire or overnighting a check. Like ACH, you can schedule immediate payments to make recurring disbursements, which may be convenient for some routine expenses.

When considering funds transfer methods, it is important to understand that all come with inherent risks. Instantaneous payments are no different. A sender might have time to report an incorrectly sent wire or stolen check due to the processing time; however, there is no buffer time to reclaim an immediate payment using FedNow or RTP. Once money is transferred into a recipient’s account, it can be accessed immediately. As with all fund transfers, 1st Source advises that proper precautions should be taken to make sure all recipient details are correct and verified, especially in the case of immediate payments like FedNow and RTP.

The process to use FedNow and RTP is as simple to access as other common banking payment services. When a financial institution has adopted the service, it will be available through their website or app, similar to features like Zelle or Venmo.

Immediate payments through 1st Source Bank, leveraging both FedNow and RTP payment systems, is an opportunity for the contracting industry specifically, as quick payments can be made for equipment purchases. While no payment method is one-size-fits-all, immediate payments is a service that every contractor may want to investigate, as it offers an opportunity for the US banking system to work quickly and dexterously to help businesses succeed.