In a significant move towards modernizing the financial system, the U.S. Federal Reserve has officially launched its much-anticipated instant payment service, FedNow. This new service will allow consumers and businesses to send and receive money in seconds, bringing the world's largest economy in line with other countries that have already adopted instant payment systems.
The FedNow service, which will be available 24 hours a day, every day of the year, will enable immediate access to funds. It will serve as the basis of infrastructure for instant payments by linking banks. Transactions will occur between bank accounts, allowing funds to be transferred from a sender's bank account to a receiver's bank account instantly. The initial transaction limit will be set at $100,000, with the limit per customer credit transaction being $500,000.
"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. The service is expected to offer just-in-time access to paychecks and invoices, a dramatic shift from the current status quo where payments sent through the U.S. banking system can take hours or even days.
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. It also differs from traditional payment rails of check, Automated Clearing House (ACH), and wire services. ACH transfers are electronic bank-to-bank money transfers processed through the Automated Clearing House network, which are not instantaneous.
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. However, 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 that 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. This could 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.
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.
The launch of 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.
