small business banking

Why Fintech is a critical piece to meet SMB FedNow demand

Historically underserved by financial institutions, the small business ecosystem has been typically vulnerable. More than 20% of private-sector businesses fail in their first year, and just under 50% fail in the first five years. The challenging economic conditions of 2023 have made cash flow even more critical. 

The introduction of FedNow in July, for some, has the potential to bring some much-needed support to the sector. Smaller banks and fintechs that serve the community of SMB s have seen the potential in the new payment rail to meet their customers’ needs. 

Herman Man, Chief Product Officer of Bluevine
Herman Man, Chief Product Officer of Bluevine

“The different payment rails matter a lot to the ability of our customers to move money between them and their payees and their vendors,” said Herman Man, Chief Product Officer of Bluevine. “Today, in the traditional form, checks continue to be a very big thing along with ACH and wire rails… The advantage here with FedNow is it’ll help our customers with their need to move money. It’ll help with the speed of money movement and, therefore, their cash flow and everything else.”

In the SMB world, cash flow is king. It brings with it the stability to face challenges and implement growth, which can be critical for survival. According to studies conducted by consultancy firm, CapCo 80% of US businesses have expressed a desire for more efficient payment systems and would switch financial institutions for improved servicing. 

“When money movement is instant, they can plan more predictably,” continued Man. He explained that an environment of instant payments for businesses would give them a simpler understanding of their financial situation and power over their cash flow, which can be elusive with existing payment rails. 

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High Demand That Hasnt Yet Been Fulfilled

FedNow isn’t the first real-time payment system in the US. Both The Clearing House’s Real Time Payments (RTP) network and Zelle, with its “instant” service, launched in 2017 and have since become important pieces of payments infrastructure. However, the apparent demand for faster payments is yet to be fulfilled.  

Many smaller businesses rely on smaller community banks for their financial services. Too small to be considered worthy engagements for large banks, SMBs have turned to smaller, specialized banks to meet their varied needs. However, this, at times, has come with a lack of access to capabilities like instant payments. 

Connections to Zelle have, for some smaller banks, been too costly an undertaking to price competitively, and some are dissuaded by its private ownership by banks they may consider competitors. FedNow presents an opportunity to access real-time payment technology through the federal system already integrated into their institution.

“What’s unique about FedNow, particularly for small businesses, is that they won’t have to go to a third-party provider to facilitate the payment,” said Luther Liang, Director of Product at Grasshopper Bank. “They’ll be able to work directly with their bank that they already have an operating account with to get that real-time payment capability, over time, at a much lower cost than some of these other offerings.”

However, due to the limited resources of smaller banks, fintechs are being considered a critical piece in the technology’s adoption, and banks’ ability to serve SMB clients with real-time payment options. 

“Fintechs are, really, the glue that brings the two parties together. For now, FedNow is targeting banks. But it’s not just banks, it’s the end customer, and the fintechs that support the customer that really play an important role,” said Mihail Duta, Director of Solution Consulting and Transaction Banking at Finastra.

“Smaller institutions rely heavily on fintechs to provide them with the tools to enable FedNow. They don’t always have their own development team to build things themselves. Fintechs will play a very important role in supporting those regional community banks and credit unions, in building those applications to ultimately enable their ultimate customer to have access to instant payments.”

  • Isabelle Castro Margaroli

    Isabelle is a journalist for Fintech Nexus News and leads the Fintech Coffee Break podcast.

    Isabelle's interest in fintech comes from a yearning to understand society's rapid digitalization and its potential, a topic she has often addressed during her academic pursuits and journalistic career.