The U.S. Federal Reserve has launched a long-awaited service that will modernize the country’s payment system by allowing everyday Americans to send and receive funds in seconds, 24 hours a day, seven days a week. The “FedNow” service, which has been in the works since 2019, will seek to eliminate the several-day lag it commonly takes for cash transfers to settle. This could speed up bill payments, consumer-to-merchant transactions, and business-to-business payments, bringing the United States in line with countries including the United Kingdom, where instant payments are already available.
Fed officials say they have gathered feedback from many participants in the financial services industry and others in the public and private sectors to understand their needs for fast, universal access to payments. The service will be offered to financial institutions, from banks and credit unions to payment processors and technology companies. The Fed says the system has been designed flexibly to accommodate different needs. The Fed will gradually expand the service to enable consumers and businesses to use it to send money to each other or to pay their bills.
In addition to its core capability of instantly sending and receiving funds, FedNow will provide various optional features, including fraud prevention tools and payments inquiry support, the central bank said. It will also offer a flexible, “receive-only” participation option for banks that want to test the service.
Unlike peer-to-peer payments networks like Venmo and PayPal, which act as intermediaries between banks and customers, FedNow will connect the nation’s 10,000 banking and credit union branches directly to their central bank accounts. Initially, the service will focus on interbank payments and settlements. Those are payments between one bank and another or between a bank and the Federal Reserve. Over time, FedNow will expand to support consumer-to-consumer, merchant-to-consumer, and bank-to-bank payments.
Payments professionals who have worked closely on the project don’t expect the Fed to herald its debut with much fanfare, saving that kind of celebration after the new system has had a chance to fix some of its bugs. But they expect the Fed to tout the new service to encourage the financial industry to adopt it.
The Fed said it would promote the availability of the service through several outreach initiatives, including an Ecosystem Accelerator Group and a Service Provider Showcase. It also plans to work with banks and credit unions of all sizes, from community institutions to large national banks, to bring them on board over the next few years. The Fed also wants to engage with technology companies in the space, particularly those that can make payment processing more efficient. This includes mobile apps that offer a faster, more seamless way to send and receive money. Payments firms Adyen, Fiserv, and Dutch payments processor Temenos were among the companies certified to participate in the pilot program.