FedNow: What It Is and How It Works

FedNow is a new instant payment service launched by the Federal Reserve in July 2023. Using the FedNow Service, financial institutions can give customers real-time payment capabilities, executing transactions in a matter of seconds even outside of normal banking hours.

In other words, if your bank or credit union participates in the FedNow program, you can send and receive money instantaneously and 24/7—even on holidays, weekends, and off-hours. FedNow’s seamlessness and around-the-clock availability represent an improvement over the Automated Clearing House (ACH) network, the current standard for transferring funds electronically that takes up to three business days to complete a transaction.

What Is FedNow?

The FedNow Service is an instant payment infrastructure inaugurated by the Federal Reserve in July 2023. Using the central bank’s new platform, participating financial institutions can give their customers the ability to send and receive money within seconds.

In addition to reducing the time it takes to transfer funds, the new platform makes it possible to process transactions anytime, including after hours or on weekends and holidays.

The idea of sending and receiving payments in real time may not seem all that novel to you, particularly if you’ve used services like Venmo, Cash App, and Zelle. These payment-processing apps are unlikely to go anywhere, but if your bank participates in FedNow, you will have an additional option for completing nearly instantaneous financial transactions.

FedNow’s integrated clearing functionality allows it to process transactions much more quickly than the Automated Clearing House (ACH) system—the current platform in the United States that allows consumers, businesses, and government entities to send and receive funds electronically. ACH transactions typically take one to three business days to complete, and although Same Day ACH became available in 2016, even that option is far from instantaneous. 

Given this time frame, the Fed classifies Same Day ACH as a “faster payment” solution, so FedNow earns the title of an “instant payment” platform.

How FedNow Works

The anatomy of a FedNow transaction is much like the process for other instant payment platforms. You initiate a payment using an interface set up by your financial institution. Your bank verifies that you have enough funds to make the payment and then initiates the transaction through the FedNow platform.

Once the payee’s financial institution approves the transaction, FedNow withdraws the funds from your account and deposits them in the destination account. The service also includes a request for payment (RFP) feature with the potential to help businesses streamline their electronic invoicing.

While the process seems straightforward enough, the FedNow system must carry out two key functions to facilitate the transfer of funds:

• Clearing involves the communications about a payment between the sending and receiving financial institutions, which may include checking for fraudulent activity.
• Settlement describes the actual process of debiting the funds from the payer’s account and crediting them to the payee’s account.

The FedNow system executes both of these steps in a matter of seconds.

FedNow uses International Organization for Standardization (ISO) 20022 standards—an international norm for sending and receiving electronic messages that helps make financial transactions more secure and facilitates interoperability with other payment systems.

Benefits and Drawbacks of FedNow

Access to FedNow’s instant payment capabilities provides plenty of advantages. First and foremost, the platform makes sending and receiving money quicker and easier, giving people more options to manage payments more effectively.

This flexibility could prove particularly beneficial to people on a tight budget. For instance, receiving a paycheck or other payments immediately rather than having to wait a few days could eliminate the need to resort to expensive payday loans.

What’s more, streamlining the process of paying bills could help people avoid late fees, and because the FedNow System verifies that there are sufficient funds in the payer’s account before processing a transaction, it offers built-in protection against overdraft fees.

Beyond facilitating on-time bill payments, the ability to transfer funds instantly from account to account could make it easier to manage your cash flow and your overall finances. Similar benefits apply to businesses, which can control and forecast cash flows more effectively, and financial institutions themselves may enjoy a reduction in processing costs while helping their customers.

However, a drawback of the FedNow Service is that in order to benefit from the system, all institutions that are a party to the transaction must be using the service. If, for instance, you are making multiple payments, but some of the institutions on the other end of the transactions are not using the FedNow system, then you could end up with an overdraft because the transactions from the institutions that do not use FedNow will be processed via ACH—possibly triggering an overdraft.

The Future of FedNow and What It Means for You

From a consumer’s perspective, FedNow means that you may receive quicker access to your paycheck or other incoming payments, while you will have a streamlined tool to pay your bills and manage your accounts more effectively.

Your ability to harness the power of FedNow’s instant payment system depends on your financial institution’s participation in the program. The Fed makes the service available to all U.S. banks and credit unions, but financial institutions must opt in to begin offering FedNow-driven transfers to their customers.

While you can’t enroll in FedNow as an individual, you could ask your bank or credit union if it provides you with access to these instant payment services.

Looking to the future, it remains to be seen how financial institutions will adopt FedNow’s capabilities and the full extent of ways for consumers and businesses to reap the benefits of instant payments. The Fed anticipates that, as more banks and credit unions join the FedNow platform, instant payments will solidify their role as “a routine part of everyday commerce.”

The Bottom Line

The Federal Reserve’s FedNow Service allows banks and credit unions to offer instant payment capabilities to their customers, even outside of normal banking hours. From reducing the time it takes to receive your paycheck to facilitating instantaneous bill payments, FedNow has the potential to add flexibility and swiftness to help businesses and individuals manage cash flows and better control their financial lives.