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What is FedNow?

FedNow will be the first new payment rail in the United States since the introduction of the Automated Clearing House (ACH) in the early 1970s. This new payment service, designed by the Federal Reserve, will enable real-time payments (RTP) for financial institutions of any size, in any community—365 days of the year. FedNow is targeting launch mid-year 2023.

While services like PayPal and Venmo are already revolutionizing the world of instant, person-to-person payments, FedNow’s mission is to increase accessibility, efficiency, and widespread adoption from regional banks, too. The FedNow service will incorporate clearing functionality into the process of settling each payment, meaning that financial institutions will be able to instantly exchange the necessary information to debit and credit customer accounts. As a result, banks will also be able to notify customers of completed or failed payments faster.

Similar to RTP, the FedNow service enables instant fund transfers between two bank accounts, even on bank holidays, weekends, or outside of business hours. What sets FedNow apart from RTP and other instant payment services is that FedNow will service all federal reserve banks through the FedLine® network, which provides payment and information services to over 10,000 financial institutions.

Currently, hundreds of different banks and payment processors are taking part in FedNow's pilot program. The hope is that widespread adoption of the FedNow service, specifically by smaller regional banks, will make instant payments more accessible to the general public in the years to come.

Who Can Use FedNow?

FedNow is an instant payment service for both individuals and businesses. Once launched, the initial transaction limit will be $25,000. This means that FedNow be more useful for small businesses and retail payment needs until it is widely adopted and the transaction limit grows.

How Does FedNow Work?

Similar to RTP, FedNow payments will operate year-round for businesses and individuals. Since funds will transfer and settle instantly, all payments are final and cannot be reversed.

With this new infrastructure, people and small businesses can make real-time transactions through reserve banks accounts of participating banks. The key here is that transactions are only possible between FedNow participating banks. The hope is that FedNow will be adopted by more local banks—providing equitable access to more people.

The question remains how many financial institutions will adopt FedNow right away, and how long the rollout phase may take.

How Much Does FedNow cost?

In early 2022, the Federal Reserve released pricing and fee details for their real-time settlement network. Because FedNow is government-operated, it’s mandated to break even and not turn a profit. A possible advantage of this is that FedNow may offer more competitive pricing than other payment systems, which encourages widespread adoption at a faster rate. 

The anticipated fees include:

  • A $25 monthly participation fee for each routing transit number (RTN) that receives credit transfers.
  • A $0.045 per credit transfer fee that is paid by the sender, including returns.
  • A $0.01 fee for a request for payment (RfP) message that requestors must pay. This includes both new payment messages and returns.

A default credit transfer limit of $100,000. Financial institutions (FIs) can lower or raise their credit transfer limit to $500,000. The Federal Reserve will evaluate the credit transfer limit on an ongoing basis and adjust as appropriate.

What are the benefits of the FedNow service?

One of the biggest benefits of FedNow is that it offers support to more financial institutions, including smaller, community banks. While RTP is equally efficient, it is not ubiquitous; it is currently supported by select banks in the U.S. Many banks and non-bank payment services like Venmo and Paypal already offer instant payments or transfers through the RTP networks, but often at an additional fee. FedNow is designed to open up instant payment services to more banks. 

FedNow noted that they are, “uniquely positioned to build an instant payment infrastructure, given [their] long history of operating payment systems to promote a safe, efficient, and broadly accessible payment infrastructure.”

As FedNow adoption grows, more people can benefit from instant payments. Businesses can operate more efficiently with instant settlements, knowing exactly how much they have in their budget at any given time. This is also ideal for individuals who can access their paycheck faster. When sending money is cheaper and settling is faster, both businesses and individuals benefit.

The first release of FedNow will also include some optional features, including fraud prevention tools, the ability to join initially as a receive-only participant, requests for payment capability, and tools to support participants in their handling of payment inquiries. 

The Federal Reserve is hoping to launch this service “as soon as practicably possible,” with a target release date in 2023. They are currently developing the necessary infrastructure, integrating with existing Federal Reserve systems, and collaborating with industry stakeholders on design to ensure faster payment and settlement services are available sooner.

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FedNow is a payment service, designed by the Federal Reserve, that will enable real-time payments (RTP) for financial institutions of any size, in any community—365 days of the year.

  1. 1What is FedNow?