The Federal Reserve Thursday officially launched its long-awaited instant payment service FedNow, which allows consumers and businesses to send and receive money in seconds.
The system lets Americans pay for groceries instantly, businesses pay their suppliers, or people pay each other. It will be available 24 hours a day, every day of the year, with full access to funds immediately.
FedNow isn’t offered directly to individuals and businesses, but it will serve as the basis of infrastructure for instant payments by linking banks. Transactions occur between bank accounts and enable funds to be transferred from a sender’s bank account to a receiver’s bank account immediately.
The limit per customer credit transaction will be $500,000, but the initial setting of the transaction limit will be $100,000. The money can move from consumer to consumer, from consumers to businesses, or from business to business.
"The Federal Reserve built the FedNow Service to help make everyday payments over the coming years faster and more convenient," said Federal Reserve Chair Jerome Powell.
"Over time, as more banks choose to use this new tool, the benefits to individuals and businesses will include enabling a person to immediately receive a paycheck, or a company to instantly access funds when an invoice is paid."
FedNow is different from apps like Venmo, which require holding balances in the app rather than sending and receiving money directly to or from your bank account. And it isn’t instantaneous.
"Consumers might also have the impression that sending money through Venmo is instant, but Venmo doesn’t do real-time settlement," said Rusiru Gunasena, SVP of RTP Product Management and Strategy at The Clearing House. "There’s no money in hand in your wallet. There’s a lot of gymnastics behind the scenes needed to settle the payment, and thus [it's] not true real-time payment."
FedNow is also different from traditional payment rails of check, ACH, and wire services. ACH transfers are electronic bank-to-bank money transfers processed through the Automated Clearing House network.
The service launches with the participation of 35 banks of different sizes, including JPMorgan and Wells Fargo as well as credit unions.
The Fed is focused on increasing the number of institutions that use FedNow for sending and receiving payments. The US isn’t mandating that financial institutions offer the service.
Some banks will need to upgrade older payment infrastructures, accounting procedures, and other back-office processes to accommodate the expanded 24/7 operating hours.
The Fed believes when FedNow is fully available and widely used, individuals will be able to instantly receive their paychecks and use them the same day, and small businesses can more efficiently manage cash flows without processing delays.
The Fed maintains that making funds immediately available will help Americans living paycheck to paycheck or small businesses with cash flow constraints by avoiding late payment fees and freeing up working capital to finance growth. Over the coming years, the Fed says customers of banks and credit unions that sign up for the service should be able to use their bank’s app or website to send instant payments.
In a speech earlier this month, Cleveland Fed President Loretta Mester noted that FedNow will offer the public more flexibility to manage their money and to make time-sensitive payments whenever needed.
She said the payment service would help households avoid late fees when making payments and could help individuals who aren’t on a regular payroll, such as gig workers, get faster access to their wages. Mester also said the payment service could help the federal government disburse support payments faster during emergencies.
Analysts say FedNow could also cut demand for payday loans as consumers won't have to wait for a check to clear. For businesses, there could also be upside for paying suppliers on time, and businesses could embrace it as a less costly, and more certain, way to accept consumer payments.
Fed Governor Michelle Bowman has said that FedNow could offer some of the same benefits as a central bank digital currency.
FedNow comes after the private sector instant payments service, The Clearing House’s Real-Time Payments (RTP) was created in 2017. The RTP network has a $1 million transaction limit, and over 150,000 businesses are already actively sending payments through the RTP network.