FedNow

Introduction to FedNow

FedNow is a new bank payment system in the U.S. that was introduced by the Federal Reserve in July 2023. It enables real-time bank-to-bank transfers and payments that are processed and settled within seconds, similar to Faster Payments in the United Kingdom. It is designed to allow individuals and businesses to send and receive payments immediately – 24/7, 365 days a year. This is a major improvement over traditional ACH transfers, which take 1-3 business days to settle.

FedNow is part of a wider effort by the Federal Reserve to modernize the payment infrastructure in the U.S. It is the first new payment scheme in the U.S. since the launch of the Automated Clearing House (ACH) in 1972.

‍

How FedNow works

FedNow is an "open loop" system, allowing transactions between accounts at different banks that are part of the FedNow network. This is in contrast to a "closed loop" systems wherein payments are processed by a single provider with whom both the sender and recipient have an account, such as apps like PayPal and Cash App. Consumers and businesses access FedNow's instant payment capabilities through their participating bank's online banking or mobile app, rather than directly.

Operated by the Federal Reserve, FedNow charges participating financial institutions a monthly fee, though specific pricing details are not publicly disclosed. Unlike services such as Venmo and Zelle, which already provide instant person-to-person (P2P) payments, FedNow aims to broaden real-time payment access to a wider range of banks, including smaller institutions.

‍

FedNow versus Real-Time Payments (RTP)

FedNow and RTP are separate payment systems. They are the two major instant payment services in the United States and offer similar functionality and benefits. FedNow, launched in July 2023, is managed by the Federal Reserve. In contrast, RTP, which launched in 2017, is overseen by The Clearing House, a banking association and payments company owned by the largest commercial banks.

Both RTP and FedNow have similar pricing structures, with the Federal Reserve initially waiving some fees for FedNow to encourage adoption. The main differences between the two systems are outlined below.

Transaction settlement

• RTP relies on a centralized system where all transactions flow through a central clearing house.
• FedNow operates under a decentralized model without a central clearing house.

Transaction limits

• RTP can handle payments up to $1 million.
• FedNow currently has a default limit of $100,000 per transaction, with the ability for banks to request up to $500,000.

Access and reach

• RTP is accessible to institutions holding around 90% of U.S. demand deposit accounts, but only 62% have opted in so far.
• FedNow aims to be more inclusive, providing access to smaller community banks and credit unions through the Federal Reserve's network.

‍

Benefits and drawbacks of FedNow

One of FedNow's principal benefits is its support for a wider range of financial institutions, including smaller community banks. RTP, by contrast, is not universally available and is currently supported by select banks in the U.S. While many banks and non-bank payment services like Venmo and PayPal offer instant payments or transfers through the RTP network, they often charge additional fees. FedNow aims to broaden access to instant payment services for more banks.

As a government-operated system, FedNow is required to break even rather than generate a profit. This could lead to more competitive pricing compared to other payment systems.

With over 400 banks on board as of early 2024, FedNow's adoption has been growing steadily since its launch in 2023. However, this is only a small fraction of the roughly 9,000 eligible banks in the U.S.