FedNow Will Provide Instant Payments for Businesses, Consumers
By Cheryl Lehotyak, Director, Product Management
Everyone is talking about the launch of FedNow, so let’s look at what it is and what it will be able to offer you and your business.
FedNow is a new settlement service for U.S. currency launched by the Federal Reserve. The network enables domestic financial institutions to transfer funds in real-time, around the clock, 365 days a year.
However, the opportunity to make instant transactions won’t happen instantly.
To send or receive real-time payments on FedNow’s closed-loop network, financial institutions must opt into the network. And before opting in, the infrastructure to support instant payments needs to be in place. Yet many banks don’t have that necessary functionality in place, and the required upgrades will take time to develop.
For example, the country’s first—and only other—instant payment network was introduced in 2017. The Clearing House (TCH), a firm owned by 24 of the largest banks, operates Real Time Payment (RTP)—an instant payment rail for individuals and corporations. Although it has been operating for several years, it is only recently that the number of banks participating in RTP has substantially grown, and there are still only 373 banks in the network as of mid-September 2023. It took time for fintechs and third-party service providers to develop the gateways banks need to plug into the network.
The FedNow pilot program included 120 banks, fintechs and service providers, but only 35 banks were live in the system when it launched. FedNow is expected to ramp up more quickly as financial institutions leverage experience gained from RTP. Third-party providers are more seasoned, and as more banks join and participation increases, more knowledge is shared.
FedNow is also expected to grow faster because the Federal Reserve has relationships with 9,000 financial institutions. Use of RTP is limited because payments must be initiated and received through banks connected to the TCH payment rail.
What FedNow Means for You
The instant payment trend comes at a time when consumers are adopting services like Zelle and Venmo to transfer funds to other people. These solutions may feel instant, but there can be a delay of one to three days. FedNow will eliminate that delay and broaden access to a real-time payment service to financial institutions of all sizes, benefitting individuals, the public sector and businesses.
With FedNow, consumers will be able to instantly fund accounts at their own bank or at other financial institutions. Imagine being able to instantly send money to a child away at college or an elderly parent in need, directly from your bank. Or paying a bill at the last minute to avoid a late fee.
Government entities will be able to use FedNow for tax refunds, social security benefits and stimulus payments.
The business use cases are extensive, including:
- Business-to-Consumer – Payments to an individual for rebates, refunds, wages or insurance disbursements.
- Business-to-Business – Payments to suppliers for inventory, rent or services.
- Business-to-Government – Payments to the government including federal or state tax.
Over half the banks in the country are planning to make the move into an instant payment solution, and FNBO is actively exploring how the FedNow real-time payments system may benefit our clients.
While we do not have a firm timeline for implementation, we are committed to providing our clients with the best possible payment solutions. If you have questions about FedNow or our plans for real-time payments, please feel free to reach out to us.
About the Author
Cheryl, a Director in Product Management for FNBO Commercial Payments, is passionate about solutions that help companies enhance their receivables and payables processes. She is an expert in short-term cash management and all forms of payment services processing. With over 30 years of banking experience, Cheryl’s roles have included stints as a solution engineer, treasury management consultant and risk management analyst. She also spent a decade in consumer banking and has management experience in sales and operations.
The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.