What is FedNow and How Does It Work?

FedNow is the U.S. Federal Reserves new payment service that allows customers to instantly send or receive payments at participating banks. This is the Federal Reserve’s first new payment system since the launching of the Automated Clearing House (ACH) in the 1970s. This new instant payment platform was created to provide banks with safe, efficient payment activity that happens in real time. It’s 24/7/365 processing.

In the world of modern finance, consumer expectations are changing – fast. Here’s why instant payments are becoming popular. Most want quicker payment services that leave more room for ease and convenience. In fact, nearly 70% of consumers feel that improved payment capabilities play a significant role in their satisfaction with their current financial institution(s). Businesses also want access to fast payment services, so they can more effectively control their cash flow and manage the business efficiently.

To meet both of these needs, the Federal Reserve has a solution with the FedNow. The new real time rail launched in the summer of 2023, so many people have questions about how it will work and what FedNow will look like. In this post, we’ll cover what FedNow is, some of its features and benefits, and how it functions in the real world.

Basic Features

So what is FedNow? It’s a brand new design by the Federal Reserve to create a way for instant settlement and clearing for online payments. Similar to Real-Time Payments (RTP), FedNow allows for instant transfers between two bank accounts. As online payments continue to increase, both consumers and businesses can benefit from having a system that allows for instant processing. 

Currently, ACH and traditional payment rails are limited because they don’t allow transfers on bank holidays, weekends, or outside of business hours. That’s why FedNow is a new development. FedNow allows for transfers on any day of the year at any hour of the day. After a transfer, banks will also be empowered to confirm success or failure to customers much faster. 

Right now, hundreds of banks and processors are testing FedNow services to work out any problems and make the system effective for launch in 2023. FedNow will be available for businesses and individuals across the U.S. domestic landscape. There will be an initial limit of $25,000 for the first transfer, so the early days of FedNow will greatly benefit small businesses.

The Benefits

FedNow is designed to give financial institutions, companies, and individuals benefits that will make instant payments easier. Here are some of its key benefits: 

1. Lower Risk: Always-on instant payments functionality that reduces interbank credit risk and liquidity risk
2. 24/7 Availability: Increased flexibility and cash flow control because of the instant transfers 24/7, 365 days a year. Clears and settles payments around the clock in a Federal Reserve Bank master account
3. Faster payments: Quicker access for individuals who receive direct deposits to their account, with less chance for delayed payment
4. Reduced Costs: Cheaper processing costs for transactions 
5. Support Wide Range of Transactions: Operates on a more domestic scale and will support smaller community banks around the country. Can also support a variety of transaction types including B2B, B2C, and P2P for businesses of all sizes. 
6. Increased Security: Promote payment security through ISO 20022 conformity and the use of payments authentication
7. Competitive Advantage: By adopting FedNow, businesses can stay ahead of the competition by adopting new and efficient payment technologies that appeal to tech savvy customers, enhance user experience, and payment processing. 

Overall, FedNow is designed to increase accessibility to instant payment technology for all businesses and individuals.

How FedNow Works

The FedNow process will follow a flow similar to other platforms such as Venmo and Paypal that have already been revolutionizing instant person-to-person payments. Instant payments follow the general structure of: 

• Authorization
• Posting
• Settlement
• Notification

Here’s a breakdown of how that will flow for the FedNow service: 

• A customer makes a payment online to a business
• The business’s system sends a payment message to the financial institution through an end-user interface
• If there are sufficient funds in the customer’s account, the financial institution authorizes the payment
• The financial institution submits a payment message to the FedNow service
• FedNow validates the message and sends it on to the company’s financial institution
• The financial institution can approve or reject the message
• If approved, FedNow deducts the funds from the customer’s account and transfers it immediately to the company’s account
• All parties are notified of the success or failure

Are Banks Required to Use Fednow?

Fednow is available to all banks and credit unions across the United States. Consumers, businesses and all non-bank providers won’t be able to directly use Fednow unless they use it through a Fednow participating financial institution. There is no requirement for financial institutions to use Fednow.

FedNow Fees

All transfers cost something, but the Federal Reserve is a not-for-profit government organization and can offer more competitive pricing for the benefit of both banks and their customers. Here’s a breakdown of the fees for using FedNow: 

• $25 monthly participation fee for financial institutions (per routing number)
• $0.045 per credit transfer paid by the sender of the first request
• $0.01 fee for each (optional) Request for Payment message (RfP) paid by the party requesting it, both for new payment notifications and returns
• $100,000 initial credit transfer limit that can be decreased or raised by financial institutions up to $500,000 

FedNow vs. RTPs

What’s the difference between FedNow and real-time payments? They aren’t the same service, and there are a few differences to be aware of.

For starters, FedNow will have a much lower transaction limit capped at $500,000, whereas RTPs are at $1 million. FedNow is designed to really benefit smaller businesses and financial institutions while RTPs can service larger institutions. Plus, cross-border capabilities vary. RTP can process foreign transactions, while FedNow is starting out as a purely domestic network.

Does FedNow Replace ACH?

In short: no. ACH is still the fundamental building block or precursor to services such as FedNow. FedNow is just quicker, faster and more efficient. FedNow isn’t going to replace ACH but instead add further redundancy to payment options. Greater redundancy can also help reduce the risk of payment bottlenecks, which can help make the payment process more effective for everyone involved with both ACH And FedNow. 

But more than 60% of consumers want a real-time view of their account balance and immediate posting of payments they initiate. Unlike ACH, services such as FedNow and RTP allow for this. So while FedNow won’t replace ACH, it does provide an alternative service to meet this need. 

The Bottom Line

FedNow is a service that is designed to help improve the payment process for financial institutions. But it’s not the only financial service available to help benefit companies. Trustly’s Open Banking solution uses real-time infrastructure for quick and seamless payments. Learn more about Open Banking to start improving your payment system now.