This year, a new payment service is coming to the financial sector. The Federal Reserve will provide instant payments that can sent at any time. However, unlike other consumer-facing transfer services like Venmo and Zelle, this service will only be available if your bank opts into it. Let’s take a look at it.
FedNow, the Federal Reserve’s instant payment service, will allow customers of participating banks and credit unions send and receive money in seconds, 24 hours a day. This would allow you to make payments and transfer money on weekends, holidays, and after hours. This is not possible with standard online transfers like those made through the Automated Clearing House Network. ACH transfers take between one and three business days to process.
Jerome Powell, Fed Chair, stated before the House Financial Services Committee that FedNow would allow all banks in the United States to instantly make available funds and to pay their customers.
FedNow will be accessible to all banks and credit cooperatives. However, they don’t have to sign up. FedNow will not be available to consumers, businesses, and other non-bank payment providers directly. However, they can use it through a participating financial institution. Neobanks, which don’t operate as banks, will need to partner with a participating bank.
When does FedNow start?
FedNow will be launched by the Federal Reserve in July 2023. Since 2021, the pilot program has been used by more than 120 banks and payment service providers.
How FedNow works
Clearing and settlement are two of the most common requirements for payments between banks. Clearing is when banks exchange information about a payment. It can also include activities like fraud checking. Settlement is the transfer of money to the beneficiary’s account. FedNow will clear and settle funds in seconds according to the Fed
Transfer speed: Instant. Instant payment is defined by the Fed as an immediate payment that allows the recipient to have full access to funds within seconds after it has been sent.
Price: Like other Fed payment services fees, FedNow charges fees to participating institutions. However, it is unclear if banks will pass along FedNow costs to their customers.
Limits on amounts: For financial institutions, the Fed will set the default transfer limit at $100,000 and cap transfers at $500,000 at $500,000 each.
What FedNow might mean for you
FedNow’s launch features bill payments and account to account transfers. It could be very helpful to be able to send money immediately, especially if your budget is tight or you are susceptible to late payments fees.
It is possible to pay your bill right away and get an instant confirmation that the payment has been accepted. There is no risk of your bank account being overdrawn or you paying overdraft fees. Your bank must verify that sufficient funds are available before initiating an immediate payment. You can manage all your accounts from different banks with instant account-to-account transfer.
Why FedNow Matters
FedNow is not yet the first U.S. real-time payment service, but it will expand access to instant payments to even more institutions. Already, the Fed provides payment services to over 10,000 credit unions and banks through either an intermediary or directly. The Clearing House, a privately held entity, has been operating the RTP network for real time payments since 2017. However, only 300 financial institutions are able to participate. Nearly all banks and credit unions have access to the RTP network.
Peter Tapling, a payments industry consultant and managing Director of PTap Advisory, LLC, believes that FedNow adoption by financial institutions will take some time. In an email, Tapling stated that one promising sign is the inclusion of the U.S. Department of Treasury’s Bureau of Fiscal Service on the FedNow pilot program. This department, along with other financial operations, is responsible for issuing payments to the public, including tax refunds and Social Security benefit, on behalf of the federal government. Tapling stated that the U.S. Treasury’s use FedNow may make it more urgent for banks to sign up for the service when it becomes available.