While services like PayPal and Venmo are already revolutionizing the world of instant, person-to-person payments, FedNow’s mission is to increase accessibility, efficiency, and widespread adoption from regional banks, too. The FedNow service will incorporate clearing functionality into the process of settling each payment, meaning that financial institutions will be able to instantly exchange the necessary information to debit and credit customer accounts. As a result, banks will also be able to notify customers of completed or failed payments faster.
Similar to RTP, the FedNow service enables instant fund transfers between two bank accounts, even on bank holidays, weekends, or outside of business hours. What sets FedNow apart from RTP and other instant payment services is that FedNow will service all federal reserve banks through the FedLine® network, which provides payment and information services to over 10,000 financial institutions.
Currently, hundreds of different banks and payment processors are taking part in FedNow's pilot program. The hope is that widespread adoption of the FedNow service, specifically by smaller regional banks, will make instant payments more accessible to the general public in the years to come.
Who Can Use FedNow?
FedNow has been built to potentially serve a number of business, consumer, and government use cases.
For businesses, FedNow can streamline payments to customers, consumers, and employees, as well as speed up B2B transactions. For consumers, faster payments like FedNow will be a solution for sending funds between accounts, paying friends and family, paying bills, and more. And the government’s use of FedNow could radically alter the financial landscape of the United States—tax returns, as an example, could be processed in record time.
As the newest faster payments rail, FedNow will potentially benefit a range of use cases.
What Are the Business Use Cases for FedNow?
In the coming years, businesses will be able leverage FedNow for B2B and B2C transactions.
Business-to-Business (B2B) Payments can be a game-changer in maximizing access to capital for businesses, especially via Requests for Payments (RFP) (or other e-invoices). RFPs that will allow businesses to bill customers directly and the customer can approve and send payment from their banking app with one step.
Business-to-Consumer (B2C) Payments via FedNow will potentially have immense personal value for consumers and end-users. As an example, while claimants currently need insurance claim payouts fast, those payments are usually made via paper check (plus insurance payouts can take up to 70 days or even an unspecified “reasonable time”). The use of FedNow for insurance disbursem*nts would dramatically improve access to funds for those who need them quickly.
Per a recent survey from the Federal Reserve, more businesses see the utility of faster payment rails like FedNow. Interest spans companies of all sizes and is present acrossuse cases.
For B2B and B2C payments, businesses will also want to make sure that they have a ledgering system set up to handle and track FedNow payments. Since faster payments are immediate, you can’t wait to record and reconcile those transactions. Thorough, well-running Know-Your-Customer (KYC) and Anti-Money Laundering (AML) policies are also a necessity.
How Does FedNow Work?
A “faster payment” like FedNow is characterized by three qualities: instant transaction settlement, 24/7/365 availability, and immediate confirmation of the payment for both sender and recipient.
Faster payments can operate in either “closed loop” or “open loop” systems. In closed loop systems, transactions are processed through a single provider—both sender and receiver must have an account with that provider. Examples of closed loop systems include apps like Venmo, Cash App, and Paypal.
In open loop systems, transactions can occur between accounts at different banks—participants don’t need accounts with specific apps or financial institutions (FIs). Open loop payments are made via a shared network—like FedNow, the RTP Network, and Zelle—that routes and settles payments for FIs enrolled in that network.
With this new infrastructure, people and small businesses can make real-time transactions through reserve banks accounts of participating banks. The key here is that transactions are only possible between FedNow participating banks. The hope is that FedNow will be adopted by more local banks—providing equitable access to more people.
The question remains how many financial institutions will adopt FedNow right away, and how long the rollout phase may take.
How Is FedNow Different From ACH (and Other Traditional Payment Rails)?
Faster payments like FedNow require rails that are distinct from traditional bank rails like ACH in three primary ways.
1. Processing (Batch vs. Transaction)
Traditional rails use batch processing for ACH, meaning relevant FIs compile and batch ACH transactions before sending them to a clearing house in bulk. Because of the high volume of ACH payments being processed on a regular basis, batching makes sense.
However, batch processing results in delays. With transaction processing, on the other hand, —payment files are processed in real-time, as they come in, on a per transaction basis. This dramatically increases the speed of money movement; the anatomy of a faster payment like FedNow includes progress through initiation, authorization, transmission, acceptance, and receipt at a nearly instant clip, payment by payment.
As a result, this can change how transactions are ledgered and can present new challenges for compliance programs, since better controls, counterparty risk assessment, and transaction monitoring are required. This article walks through best practices for minimizing potential fraud associated with FedNow.
2. Settlement Times
With ACH, clearing via traditional bank rails happens at scheduled intervals. For faster payments like FedNow, clearing occurs transaction by transaction in adherence with ISO20022—this messaging cadence and an agreement between FIs allows payments to be credited in real-time.
ACH is processed via deferred settlement wherein settlement happens at designated times or on a schedule. FedNow will use real-time settlement; this means settlement will happen on a per transaction basis, at nearly the same time as clearing.
This type of settlement is also called a gross settlement, where FIs clear and settle funds transaction by transaction. For ACH, deferred settlement uses netting (or net settlement), which requires aggregating transactions between the same parties to prevent the depletion of reserves. Real-time gross settlement (planned for FedNow) is much faster with different implications than deferred net settlement related to liquidity and credit risk.
3. Finality vs. Reversibility
Whereas an ACH can be reversed or returned, with faster payment rails, transactions are final, and thus, money is guaranteed. Since the bulk of FedNow payments will likely be credit (or push) payments, there is security that a payer will only be able to initiate payment if they have sufficient funds. This protects businesses from chargebacks on returns like insufficient funds (NSF).
For RFPs, the more robust the data and parameters of the RFP, the less likely errors will be—similar errors in the case of ACH might warrant a reversal. If the amount requested in the RFP, for example, is correctly entered by the payee and can’t be edited, mistakes are much less likely. For FedNow, “amount due” will be required as a field in all RFPs.
Watch Connie Theien, SVP at the Federal Reserve System, lay out the difference between FedNow and other payment rails.
How Much Does FedNow Cost?
In early 2022, the Federal Reserve released pricing and fee details for their real-time settlement network. Because FedNow is government-operated, it’s mandated to break even and not turn a profit. A possible advantage of this is that FedNow may offer more competitive pricing than other payment systems, which encourages widespread adoption at a faster rate.
The anticipated fees include:
- A $25 monthly participation fee for each routing transit number (RTN) that receives credit transfers.
- A $0.045 per credit transfer fee that is paid by the sender, including returns.
- A $0.01 fee for a request for payment (RfP) message that requestors must pay. This includes both new payment messages and returns.
A default credit transfer limit of $100,000. Financial institutions (FIs) can lower or raise their credit transfer limit to $500,000. The Federal Reserve will evaluate the credit transfer limit on an ongoing basis and adjust as appropriate.
What Are the Benefits of the FedNow Service?
One of the biggest benefits of FedNow is that it offers support to more financial institutions, including smaller, community banks. While RTP is equally efficient, it is not ubiquitous; it is currently supported by select banks in the U.S. Many banks and non-bank payment services like Venmo and Paypal already offer instant payments or transfers through the RTP networks, but often at an additional fee. FedNow is designed to open up instant payment services to more banks.
FedNow noted that they are, “uniquely positioned to build an instant payment infrastructure, given [their] long history of operating payment systems to promote a safe, efficient, and broadly accessible payment infrastructure.”
As FedNow adoption grows, more people can benefit from instant payments. Businesses can operate more efficiently with instant settlements, knowing exactly how much they have in their budget at any given time. This is also ideal for individuals who can access their paycheck faster. When sending money is cheaper and settling is faster, both businesses and individuals benefit.
Business benefits include better efficiency, fewer errors, and increased customer convenience. In addition to back office benefits afforded by fast, non-reversible availability of funds, FedNow could help teams in B2B scenarios (especially those in A/P and A/R) correctly track and post incoming funds (and thus avoid having to reverse errors). FedNow could also be a boon for customers who may need to closely manage outgoing funds. In the case of B2C, instant payments could radically transform the spending (and lives) of customers, especially those living paycheck to paycheck.
The will also include some optional features, including fraud prevention tools, QR codes, the ability to join initially as a receive-only participant, requests for payment capability, and tools to support participants in their handling of payment inquiries.
The Federal Reserve has announced a release date of July 2023.
To learn more about FedNow, check out the following FAQs:
