The Federal Reserve has launched an instant payment system that allows businesses and consumers to send money in real-time, 24 hours a day, 7 days a week. FedNow, which launched on July 20, 2023, is currently available to banks in the United States. Several financial institutions are already on the network.
How FedNow Works
Banks and credit unions can enroll in the FedNow service to transfer money for their customers. When businesses and consumers want to send money, they can do it instantly any time of day, even on holidays and weekends.
FedNow is similar to instant transfer apps in terms of its speed, however, it’s more like an infrastructure than a third-party service. Banks will be able to transfer funds between accounts at different banks on behalf of their customers, without relying on another service or app.
For individuals and businesses, you wouldn’t sign up for FedNow the way you might sign up for a service like Paypal. Instead, FedNow payments are an option that would be available only through your bank or credit union.
FedNow vs. ACH
ACH payments are processed in batches, leading to delays in clearing. FedNow uses transaction processing where transaction files are processed in real-time. All transaction steps—initiation, authorization, transmission, acceptance, and receipt—occur instantly.
ACH transactions also clear and settle on a scheduled basis to avoid depleting a bank’s reserves. FedNow clears and settles transactions nearly instantly on a transactional by transaction basis.
Unlike ACH payments, faster FedNow payments can’t be returned or reversed. Once a transaction settles, it’s final.
FedNow has a default transfer limit of $100,000. Banks can lower or raise their credit transfer limit with a maximum of $500,000. The Federal Reserve will regularly the transfer limit regularly and make adjustments as needed.
What’s the Point?
Simply put, to modernize payments.
As people increasingly adopt electronic payments and expect faster processing, the U.S. payment infrastructure hasn’t been designed to provide this speed while ensuring safety, security, and reliability.
While it often seems like payments are moving quickly because pending transactions may appear in an online bank account, that’s not usually the case behind the scenes. Instead, a bank may, in a sense, issue a credit to an account to make money available faster. Whenever banks make funds available for spending prior to receiving the covering funds, they assume risk. Too much risk in the banking industry can lead to a financial crisis.
As the country’s central bank, the Federal Reserve can facilitate interbank transfers without using credit or increasing liquidity. With FedNow, transactions can be processed in seconds instead of days.
In addition to faster payments, FedNow expands instant payments to more banks. While there are already instant transfer platforms like Zelle and the RTP Network from The Clearing House, these services aren’t widely available. Other platforms that offer instant payouts using the RTP Network, like Venmo and Paypal, charge a fee. Plus, these closed loop platforms require both the sender and receiver to be on the platform to send money.
Consumers will have up-to-the-minute balance information and the ability access their paychecks more quickly. Non-reversible funds will provide businesses with a more accurate view of their cash balance and the ability to manage their cash flow more efficiently.
As more banks adopt FedNow, we’ll likely see increased availability of instant payments for both businesses and consumers. Additional products and services may become available as banks continue to build and innovate new services.