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What is FedNow?

By Spencer Tierney 

There’s a new payment service coming to the financial industry this year. The Federal Reserve will offer instant payments that can be sent anytime. Still, unlike consumer-facing transfer services such as Venmo or Zelle, the service’s availability will depend on whether your bank opts in. Let’s break it down.

What is FedNow?
FedNow is the Federal Reserve’s new instant payment service that will enable customers at participating banks and credit unions to send and receive money within seconds, 24/7 and every day. You’d be able to complete payments or transfers on weekends, holidays and after banks’ business hours, which isn’t the case for standard online transfers such as those through the Automated Clearing House Network.

ACH transfers are processed in batches and tend to take one to three business days to complete.

“What FedNow will do is it will enable all the banks, any bank in the United States — not just the big ones — to offer instantly available funds and real-time payments to their customers,” said Fed Chair Jerome Powell before the House Financial Services Committee on March 8.

FedNow will be available to all banks and credit unions, but there’s no requirement for them to join. Consumers, businesses, and non-bank payment providers won’t be able to use FedNow directly, but they can through a participating financial institution. Neobanks, which aren’t banks, would need to partner with a participant bank.

When will FedNow launch?
The Federal Reserve plans to launch FedNow in July 2023. More than 120 banks and payment providers have been part of the pilot program since 2021.

How FedNow works
Payments between banks typically require clearing and settlement. Clearing means that banks exchange information about a payment and can include other activities such as checking for fraud. Settlement involves moving money to the recipient’s account. FedNow will make clearing and settlement occur within seconds, according to the Fed [1].

Transfer speed:
Instant. The Fed defines an instant payment as a recipient having full access to funds within seconds of the payment being sent.

As with other Fed payment services, FedNow will charge fees to its participating institutions, but it’s unclear if banks will pass on FedNow costs to its customers.

Amount limits:
The Fed will cap transfer amounts at $500,000 and set the default transfer limit at $100,000 for a financial institution, which can raise or lower its limits.

Other limits:
FedNow will be initially limited to domestic payments between U.S. financial institutions. Consider wire transfers through a bank or money transfer firm — or multicurrency accounts for long-term travelers — if you need to make overseas transactions.

What FedNow may mean for you
Two uses for FedNow at its launch include bill payments and account-to-account transfers. Being able to send money instantly could be helpful, especially if you’re on a tight budget and susceptible to late payment fees. 

You could pay right when a bill is due and receive immediate confirmation that a payment is accepted. And there’s no risk of overdrawing your bank account or paying overdraft fees since your bank has to verify sufficient funds before initiating an instant payment. Instant account-to-account transfers would allow you to manage your accounts across banks easily.

Why FedNow matters
FedNow is not the first real-time payments service in the U.S., but it will likely expand the reach of instant payments to more institutions nationwide. The Fed already provides access to its payment services to more than 10,000 banks and credit unions, either directly or through an intermediary. In contrast, the privately owned entity The Clearing House has operated the RTP network for real-time payments since 2017, but only about 300 financial institutions participate. The RTP network is available to nearly any bank or credit union[2].

Peter Tapling, payments industry consultant and managing director of PTap Advisory, LLC, speculates that FedNow adoption among financial institutions will take time. One promising sign, he said in an email, is that the U.S. Department of Treasury’s Bureau of Fiscal Service is on the list of participants in FedNow’s pilot program. The department is responsible for issuing payments, such as tax refunds and Social Security benefits, to the public on behalf of the federal government, among other financial operations. The U.S. Treasury’s use of FedNow, Tapling said, may create urgency for more banks to join the service once it’s available.

[1] – Board of Governors of the Federal Reserve System. FedNow℠ Service: Frequently Asked Questions. Accessed Mar 16, 2023.
[2] – The Clearing House. RTP: Real-Time Payments for All Financial Institutions. Accessed Mar 16, 2023.

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