Introducing FedNow: The Future of Real-Time Payments

While digital wallets and mobile payment services have facilitated fast online transactions, the banking industry has remained decidedly slower — until now. FedNow is an instant payment infrastructure developed and offered through the Federal Reserve. It allows banks and other eligible U.S. depository institutions to offer instant payments. That means individuals and businesses can make instant payments by bank any time of day or night, 365 days a year. Read on to understand how FedNow works and its implications to revolutionize the financial industry. 

Financial institutions and their service providers can use the service to provide innovative instant payment services to customers, and recipients will have full access to funds immediately, allowing for greater financial flexibility when making time-sensitive payments.

What is FedNow? 

FedNow payment system is a faster, nearly instantaneous payment transfer system developed and backed by the U.S. Federal Reserve. It allows banking institutions to send and receive instant or nearly instant transactions. The flexible, neutral platform is designed to support various types of instant payments.

Until now, the idea of real-time payments in the U.S. was basically nonexistent, despite appearances to the contrary. Both the European Union and the U.S. launched initiatives for instant payment services in 2014. While Europe has had a banking system that enables instant transfers from individual or business bank accounts since 2017, the U.S. has lagged behind. 

When you swipe a card or your card number is populated onto a website, and you hit “send” or “buy now” by all appearances, the transfer is instant. However, what goes on behind the scenes is a carefully orchestrated multi-step process. Funds often do not post or settle in consumer bank accounts within hours or days. While credit cards may mask this, watch how long a charge typically takes to go from “pending” to “current” on your credit card account. Typically, it’s one to three days. 

The FedNow service fulfills this essential need, facilitating banking and making transactions not only faster but more secure and transparent. FedNow is the long-awaited answer to the modern need for consumer-friendly, secure, instant payment systems. 

How Does FedNow Work?

FedNow takes the U.S. one step closer to real-time payments. While the interface is similar to other real-time payment systems, consumers can access FedNow by logging in to their bank account with a participating institution. The bank or financial institutions will provide security measures to protect consumer data and financial information. The banks will also screen payments and manage account changes and reconciliations.

FedNow differs from other payment systems in the payment transfer process between financial institutions. Instead of using the ACH or WIRE networks, for example, FedNow acts as an intermediary between the sender's and receiver's financial institutions. FedNow will validate payment messages and perform the debiting and crediting from relevant accounts within seconds.

In that way, FedNow enables smoother, quicker transactions between participants. End users may experience higher banking costs because of the increased control, centralization and increased need for security measures to protect sensitive consumer data. 

FedNow will use the ISO 20022 standard and can operate alongside other real-time payment systems.

What Are the Key Features of FedNow?

The key features of the FedNow system are:

• Real-time payments for individual consumers and businesses

• No need to log in or make payments during regular business hours

• Faster processing times, with the possibility for enhanced security

The advantages of real-time payments for consumers, businesses and financial institutions are numerous. It can speed up the cost of business. While FedNow may lead to initial higher costs, over time consumers can expect to see lower costs of bank-to-bank and real-time transfers.

Pros and Cons of FedNow

The benefits and downsides of FedNow to consumers and businesses vary, although in general, FedNow is a major advantage for consumers, businesses and the U.S. economy.

Pros of FedNow:

• Fast payments
• Convenient because you only need to log into your bank account
• Limited time for hackers to intercept transfers
• Businesses could increase transactions and sales efficiency

Cons of FedNow:

• Payments are irreversible
• No international transfers
• Possible new security risks
• Potential higher costs

What It Means to Different Stakeholders

The impact of FedNow on various stakeholders such as consumers, businesses, financial institutions, government and regulatory bodies is huge. For consumers and businesses, the overall impact is positive, with the possibility of faster, more secure transfers to facilitate business. 

For the government and regulatory bodies, FedNow can serve to build the economy but may require additional regulatory oversight and security measures to address new security risks and hacking.

Using FedNow

While the FedNow rollout is still somewhat limited, you can expect to see increasing adoption in the next six months to a year. If you're a business owner, opening a bank account with a bank or credit union that uses FedNow can facilitate payments. FedNow offers new payment opportunities to suppliers or from clients. Looking for payment alternatives, you can also check out the best banking apps, budgeting apps or PayPal alternatives here. 

Frequently Asked Questions