Federal Reserve's FedNow Goes Live With Fast PaymentsThe Program Is Expected to Modernize the Country's Payment Systems
FedNow, the Federal Reserve's first instant payment service, officially launched on Thursday. FedNow so far has 35 banks and credit unions and 16 service providers certified to use the service, including community banks and large lenders such as JPMorgan Chase and Bank of New York Mellon.
"The Federal Reserve built the FedNow Service to help make everyday payments over the coming years faster and more convenient," said Jerome Powell, chair of the Federal Reserve. "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."
FedNow is the first government-created system for financial institutions to send and receive funds almost instantly. Consumers will no longer have to wait a few business days to receive or make payments.
FedNow is a new payment rail and can support any type of payment. It is a service that is only available to financial institutions - no business or consumers can connect directly to FedNow. Businesses and consumers will experience FedNow through financial institutions or products offered by fintechs connected to FedNow through a financial institution. "Many of the financial institutions I've spoken to will go live on day one, but they won’t have any products offered to their customers on day one. Most of the FIs will join as receive-only financial institutions," said Peter Tapling, board member for the U.S. Faster Payments Council.
FedNow is a payment infrastructure that allows banks to move money instantly, but it will not be accessed through consumer-facing apps such as Zelle, which allow instant peer-to-peer payments.
RTP vs. FedNow
Technically, the U.S. already has Real Time Payments, or the RTP, owned by The Clearing House. The Clearing House is a banking association and payments company owned by the largest commercial banks. But so far the volume of money RTP is moving is miniscule - 0.13% of the ACH transfers.
Small banks, in particular, have been reluctant to sign on to the big-bank-controlled RTP system. Industry experts predict that more banks and credit unions will now sign up for FedNow.
Most smaller banks are still waiting to see how the FedNow service unfolds before participating. Most aren’t technologically ready and still must upgrade infrastructure. Some are talking with technology companies and other service providers about what they need to do to prepare internally, but they're not there yet.
Boost to Existing Payment System
FedNow is expected to overhaul the U.S. payment system, and the Federal Reserve says the service is intended to generate competition.
Now that banks have the capabilities to essentially build their own versions of Zelle, within their own banking app, the overall payment system is expected to undergo long-delayed modernization.