Cullen’s Corner Topic of the Day, What is FedNow and What Does it Mean for You?

FedNow is a new real-time payments service launched by the Federal Reserve. The service is expected to be available in July 2023, and it will enable customers at participating banks and credit unions to send and receive the money within seconds, 24/7, and every day. Unlike standard online transfers processed in batches, such as those through the Automated Clearing House Network, FedNow will enable you to complete payments or transfers on weekends, holidays, and after banks’ business hours.

Fed Chair Jerome Powell explained that FedNow will allow all banks in the United States, not just the big ones, to offer instantly available funds and real-time payments to their customers. The service will be available to all banks and credit unions, but there’s no requirement for them to join. Consumers, businesses, and non-bank payment providers won’t be able to use FedNow directly, but they can access it through a participating financial institution. Neobanks, which are not banks, would need to partner with a participant bank.

FedNow will make clearing and settlement occur within seconds, according to the Fed. Payments between banks usually require clearing and settlement. Clearing means that banks exchange information about payment, and settlement involves moving money to the recipient’s account.

The Fed will charge fees to participating institutions, but it’s unclear if banks will pass on FedNow costs to their customers. The Fed will cap transfer amounts at $500,000 and set the default transfer limit at $100,000 for a financial institution, which can raise or lower its limits. FedNow will be initially limited to domestic payments between US financial institutions.

Two uses for FedNow at its launch include bill payments and account-to-account transfers. Being able to send money instantly could be helpful, especially if you’re on a tight budget and susceptible to late payment fees. You could pay right when a bill is due and receive immediate confirmation that a payment is accepted. And there’s no risk of overdrawing your bank account or paying overdraft fees since your bank has to verify sufficient funds before initiating an instant payment. Instant account-to-account transfers would allow you to manage your accounts across banks easily.

FedNow is not the first real-time payments service in the US, but it will likely expand the reach of instant payments to more institutions nationwide. The privately owned entity The Clearing House has operated the RTP network for real-time payments since 2017, but only about 300 financial institutions participate. In contrast, the Fed already provides access to its payment services to more than 10,000 banks and credit unions, either directly or through an intermediary.

Peter Tapling, payments industry consultant, and managing director of PTap Advisory, LLC, believes that FedNow adoption among financial institutions will take time. However, the US Department of Treasury’s Bureau of Fiscal Service is on the list of participants in FedNow’s pilot program. The department is responsible for issuing payments, such as tax refunds and Social Security benefits, to the public on behalf of the federal government, among other financial operations. The US Treasury’s use of FedNow may create urgency for more banks to join the service once it’s available.