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It can take days to transfer money or make payments from your bank account, even as apps like Venmo, Cash App and Zelle make such transactions nearly instant. That’s because the federal government has no digital payments system for the entire banking system to utilize in real time. But that’s about to change.
The Federal Reserve plans to launch its own real-time payments system, called the FedNow Service (FedNow), this summer. Though FedNow is years behind tech-based private-sector competitors, it will be a game changer for transactions in the U.S. It will be the first—and only—digital instant-payments system that is both created and backed by the government. As a result, many banks will see it as a larger, safer system able to transfer money faster for consumers and businesses.
FedNow “will enable all the banks—any bank in the United States, not just the big ones—to offer instantly available funds in real-time payments to their customers,” said Fed Chair Jerome Powell before the House Financial Services Committee on March 8. “That’s a great thing.”
What Is FedNow?
FedNow is the first government-created system for financial institutions to send and receive funds almost instantly. Ideally, FedNow would ensure you’d no longer have to wait a few business days, or bide your time over holidays or weekends, to receive your money.
This means you can make payments—your mortgage, for example—ideally within seconds. You could opt to send funds on the due date rather than having to plan several days out for an online payment to clear, or up to a week for a check to be processed.
For business owners, too, this means faster and smoother operations. They will be able to send and receive invoice payments, for instance, in real time online.
How FedNow Works
FedNow acts as the clearing service for financial institutions’ transactions so they can provide immediate end-to-end payments to customers. The key difference between this service and the Fed’s current system is that FedNow will be online 24/7, processing transactions in real time.
The FedNow service is open to more than 10,000 financial institutions that operate within the Fed’s network. Private money-transfer apps like Venmo and Cash App are not part of that system. That’s one reason it takes a few days for you to transfer money from these apps to your bank account: The bank has to “clear” the funds.
Financial institutions participating in FedNow can opt into several different services within the system, including sending funds back and forth across financial institutions or choosing to only receive funds. They can also opt into settlement service transfers and high-dollar-limit credit transactions called liquidity management transfers.
When Will FedNow Launch?
The Fed initially set a debut date of 2024 but ramped up the deadline to launch sometime this year between May and July after realizing the central banking system is years behind the private, faster payments systems already in use by many large banks. The Fed also knows there’s heavy consumer demand for instant digital transactions.
“I think we can get this into the hands of the public very quickly, and I think we’ll have real-time payments in this country very, very soon,” Powell said.
FedNow has been in the works for nearly a decade. The Fed started contemplating an instant payments network in 2013 and formed the Faster Payments Task Force (FPTF) in 2015 to map out a plan. After years of meetings, the release of several studies and a period of fielding public comments, the Fed announced FedNow in August 2019 and has been conducting pilot runs with financial institutions since then.
“The benefits of instant payments are increasingly important to consumers and businesses, and the ability to provide this service will be critical for financial institutions to remain competitive,” said Ken Montgomery, first vice president at the Federal Reserve Bank of Boston and the FedNow Service’s program executive, in a release announcing the new launch timeframe. “Financial institutions will be able to use the FedNow Service as a springboard to provide innovative solutions to their customers.”
How Important is FedNow?
Saying FedNow would be a game changer is almost downplaying the potential impact. Because the Fed has had the largest banking universe housed within its current, slower payments setup, its thousands of participating financial institutions have waited years for a real-time system supported by the government.
Currently, there is the Real-Time Payments (RTP®) network, a private service launched in 2017 that is used by many of the larger financial institutions to transfer funds. Among the newer phone-based money transfer apps, Zelle is the only one that operates within the RTP network. That’s why you might see Zelle’s service offered directly through your bank or credit union.
More than 100 financial institutions already use the RTP network, and they can opt to use the FedNow system as well. Some critics say FedNow will end up competing with private-sector companies offering such services, while others have argued it will serve as an expansion or added service.
Either way, FedNow will open the door to thousands more financial institutions that will be able to offer instant transactions for consumers and businesses. The implications are likely to be global.
