The nation’s central banking system — the Federal Reserve — has released the government’s first real-time payment service. It's called FedNow.
Through FedNow, money transfers and bill payments will be much faster, almost instantaneous. The service launched Thursday, July 20, with dozens of banks and financial institutions as partners. Many — if not all — financial institutions are expected to get on board with the new instant payment system in the coming months and years.
"The Federal Reserve built the FedNow Service to help make everyday payments over the coming years faster and more convenient," said Fed Chair Jerome Powell in an announcement Thursday. "Over time, as more banks choose to use this new tool, the benefits to individuals and businesses will include enabling a person to immediately receive a paycheck, or a company to instantly access funds when an invoice is paid."
Here’s what to know about the government’s foray into real-time payments.
What is FedNow?
FedNow is a 24/7/365 instant-payment system run by the Federal Reserve. As opposed to consumer-facing apps like Venmo, PayPal or Zelle, which allow instant peer-to-peer payments, FedNow won’t be an app. It’s more akin to a payment infrastructure that allows banks to move money instantly.
More than 50 financial institutions are “early adopters” of FedNow, and will be participating in FedNow immediately. Some popular partner banks include JPMorgan Chase, Wells Fargo and Peoples Bank.
While almost anyone can download and sync PayPal to their bank account, FedNow is only available to customers of the banks that choose to implement the new system. Only a few dozen are currently signed up, but the Fed says all 10,000 or so banks that are regulated by the Fed are welcome to join — though none will be required.
For everyday people, FedNow is expected to make managing money much easier and faster.
For instance, you could pay your mortgage bill on Christmas Day without worrying about it being delayed or late because of the holiday (so long as your bank is participating in the service). And transferring money between, say, your checking and savings accounts at different banks could be done instantly.
Additionally, gig workers like Uber drivers could get paid immediately after each completed ride.
How does FedNow work?
FedNow is a service and suite of tools available to banks, credit unions and other financial service companies. It allows the customers of the institutions that choose to implement FedNow to instantly access their money to make payments in a variety of situations. Banks are currently not required to sign up, but the idea is that most or even all banks will get on board to offer instant payments to their customers.
"At the most fundamental level, the service will provide interbank clearing and settlement that enables funds to be transferred from the account of a sender to the account of a receiver in near real-time and at any time, any day of the year," according to the Fed.
The Federal Reserve will also offer an additional suite of tools to the banks to allow them to prevent fraud and better manage their cash flow. The Fed says additional features will be released over time.
"The FedNow service is designed to exist alongside private-sector options," the Fed says.
Exactly how financial institutions will implement FedNow — and what that will ultimately look like for everyday folks — remains to be seen. The Fed ultimately expects the service to be seamlessly integrated into the app of the bank they’re using.
When is the FedNow launch date?
FedNow officially launched on July 20, 2023, though only a small portion of banks are among the early adopters of the service.
It’s not clear when or how many other banks will choose to implement FedNow, but the Fed says it’s working to onboard additional institutions throughout the year and beyond, aiming to reach “all 10,000 U.S. financial institutions.”
Who will benefit from FedNow?
The entire U.S. financial system stands to gain from a universal instant-payment service like FedNow. Under such a system, consumers, businesses and the government would be able to send and receive money instantly.
More than 50 countries already have similar systems, including China, Sweden, India and the U.K., according to the Fed. Meanwhile, the payment system in the U.S. has been lagging behind.
Technically, a real-time payment system already exists here, but it’s not readily available to everyday people. The Clearing House, a private firm owned by more than a dozen major banks, operates a similar network — but it’s not available to all banks and is used for mostly commercial purposes.
On the other hand, some experts worry that a widely used instant-payment system could increase fraud. More processing time, the argument goes, means more time to allow verification and security measures to stop bad actors.
Similarly, some argue that being able to move large sums of money out of bank accounts immediately could introduce instability in the banking system. See: the recent Silicon Valley Bank failure, which was due in part because depositors got spooked and withdrew more than $40 billion in one day.
Will FedNow replace Venmo and Zelle?
Instead, FedNow’s is a much broader system that will allow for immediate payments in a variety of circumstances — payments from employers, to friends or family, between accounts and more.
However, it is expected to overhaul the U.S. payment system. And the Fed says the service is intended to generate competition for additional providers to create end-user services — such as additional payment apps.
Now that banks have the capabilities to essentially build their own versions of PayPal or Venmo within their own banking app, it’s possible that the dominant cash-sending companies will look much different in the years to come.