FedNow’s Million-Dollar Leap: Driving B2B Payments and Modernization

By John San Filippo

The Federal Reserve’s FedNow Service recently doubled its transaction limit from $500,000 to $1 million, a move that Temenos Chief Product Officer Sai Rangachari believes this increase is primarily aimed at expanding FedNow’s reach into business-to-business (B2B) use cases. In an interview with Finopotamus, Rangachari discussed the implications of this change for financial institutions (FIs), particularly credit unions, and the evolving landscape of money movement.

The Strategic Shift to B2B Payments

Sai Rangachari

The initial lower limits of real-time payment systems like FedNow typically cater to business-to-consumer (B2C) transactions, Rangachari explained. However, the widespread adoption needed for B2C success, where various banks and credit unions must support the service for seamless real-time transfers, is a significant hurdle, he noted. Given the dominance of established peer-to-peer (P2P) services like Zelle and Venmo in the B2C space, FedNow’s increased limit signals a clear pivot.

“I think one of the big drivers of a motivating factor here is to go after more B2B use cases,” Rangachari stated. He elaborated that a “good majority” of B2B transactions fall within the sub-million-dollar range, making the $1 million limit a practical step. “I think raising it to a million bucks allows them to go after more of those use cases,” he added, predicting that “$5 million is probably the next number” if the trajectory continues.

FedNow’s Potential to Rival Wires

The conversation also touched upon whether FedNow could eventually replace traditional wire transfers. While hesitant to predict a complete replacement, Rangachari sees a significant opportunity for FedNow to capture the domestic wire market. He highlighted the cost-effectiveness of FedNow compared to wires. “FedNow is a fraction of the cost” of the “few bucks to a few tens of bucks on the wire fees” that are typically associated with corporate wire transfers, he said.

Beyond cost, FedNow offers instant settlement and enhanced visibility, providing a distinct advantage over wires, which, despite being real-time in nature, can still take a few minutes for confirmation. “The visibility that FedNow can provide can actually be a big advantage, especially compared to wires domestically,” Rangachari explained. Furthermore, the 24/7 availability of FedNow is a major benefit, especially for B2B transactions and treasury operations, allowing for payments to be made outside of traditional banking hours, including weekends and holidays.

Encouraging “Send” Adoption Among Credit Unions

A persistent challenge for FedNow, particularly in the credit union sector, has been the disproportionate interest in receiving payments versus sending them. Rangachari acknowledged this trend, drawing parallels to the early days of The Clearing House’s RTP network. He explained that businesses often prefer to hold onto their cash for as long as possible, which is why checks, despite their anachronism, persist.

However, FedNow’s faster, cheaper nature can turn this dynamic into an advantage. “What if you can actually hold onto your cash until the very last second and then leverage a low-cost, real-time payment rail like FedNow to send it out?” Rangachari posited. This “just-in-time” payment capability allows businesses to optimize their cash flow without missing payment deadlines. He believes this opens “exciting opportunities for credit unions, especially around B2B and allowing their members to hold on to their cash even longer.”

Preparing Infrastructure for Real-Time Transactions

For credit unions looking to support larger real-time transactions at scale, Rangachari emphasized the need for them to prioritize member value and then align their infrastructure accordingly. The primary goal, he stated, is to enable a “truly last second” payout experience for small businesses, agnostic of time or day.

Many credit unions operate on legacy core systems, presenting a challenge for real-time payment integration. Rangachari highlighted the need to ensure the new payment rails can seamlessly interact with existing core banking providers to accurately reflect debits and credits. He suggested that while building the infrastructure internally is an option, partnering with an experienced vendor can facilitate this integration. “Modernizing the core system offers multiple benefits, including enabling more real-time rails and preparing for future innovations like stablecoins,” he said. Additionally, he stressed the importance of “intelligent controls” to manage velocity, fraud, and routing, especially with higher transaction limits.

The Role of AI in Real-Time Payments

Artificial intelligence (AI) is poised to play a crucial role in securing and optimizing real-time money movement. Rangachari pointed out that AI can help ensure every payment is linked to a Know Your Customer (KYC) token, approved by both the bank and the customer, thereby enhancing security. Beyond individual transactions, AI can identify patterns across numerous clients, such as discovering that “payments sent on Saturdays take shape X versus payments sent on Sundays.”

He cited a past example where an AI application discovered that pay by bank payments made on Fridays were more likely to carry a non-sufficient funds (NSF) risk than Monday or Tuesday. This insight led to a recommendation for same-day ACH for Friday payments to mitigate risk. Rangachari concluded that “AI can have a very strong role in KYC fraud monitoring and also like pattern learning.”

Navigating a Future of Commoditized Money Movement

As money movement becomes faster and cheaper, financial institutions face the challenge of declining revenue from traditional transaction fees. Rangachari asserted that the answer lies in finding “other streams of value that you can take to your accountholders to make money.” He believes that the core value proposition for FIs will shift from merely moving money to helping customers manage that money “better and smarter.”

This could involve services that optimize payment routing for cost-efficiency, automate payouts by integrating with accounting systems, or offer advanced cash management solutions. “Can you help me hold onto my money longer? Can I make sure you don’t miss your payment timeline regardless?” he suggested as potential value propositions. Rangachari emphasized that FIs have a significant advantage in their “trust and brand equity” with clients, allowing them to go “upstream in value” and offer services that touch money management.

The Urgency of Modernization

The accelerating pace of innovation in money movement necessitates that financial institutions proactively modernize their systems. Rangachari acknowledged the difficulty in performing a cost-benefit analysis for modernization, especially when factoring in the “cost not to change” and the innovations left behind. He advised institutions to consider modernization as a “strategic bet” to keep pace with the future.

He further suggested that FIs can start by latching onto innovations that allow for “bolt-on” solutions, which can integrate with existing legacy systems. This approach allows institutions to “prove to themselves that this is worth investing in” before undertaking more significant overhauls. Ultimately, Rangachari urged FIs to act now, while they are “alive, healthy,” and optimistic about their business, rather than falling further behind as the industry continues to evolve rapidly. “The pace of innovation is only going to increase,” he warned.