What is Fednow?

In July 2023, the Federal Reserve announced its newest payments service – FedNow.

Through FedNow, US-based customers and businesses banking with participating financial institutions are able to send and receive real-time payments.

As of February 2024, around 470 of the country’s approximately 9,000 banks and credit unions have opted in so far – so it’s still early days in FedNow’s evolution.

With FedNow, if the banks of both you and the person or business you want to transact with have signed up, you’ll be able to exchange funds in mere seconds; 24/7, 365 days per year.

This does, of course, open up plenty of benefits and opportunities. In the article below, we’ll explore what FedNow’s pros – and cons – look like, and how it differs from other forms of account-to-account (A2A) payment: such as ACH, PayPal, Venmo, and transactions made on real-time payments (RTP) rails.

‍Launched on July 20 2023, FedNow is a real-time payments service backed by the Federal Reserve.

The service allows customers at participating banks the ability to send and receive instant payments – with the funds appearing in the recipient’s account within seconds. FedNow joins the Federal Reserve’s existing suite of payment services, including FedACH and Fedwire.

FedNow payments are immediate and instant, and will appear without delay in the recipient’s bank account. This opens up some exciting use cases for businesses and individuals, such as:

Enabling SMEs grappling with insufficient working capital – who require prompt payment for goods and services to survive and grow – to be paid faster.
Empowering employees – particularly those in the gig economy – to receive much-needed wages on-demand and instantaneously.
Investors being able to close an investment round quickly and cleanly, without facing the long, laborious waits of ACH or wire transfers to settle funds.

FedNow also promises potential across a range of transaction types: including account-to-account, person-to-person, business-to-business, consumer-to-business, government-to-consumer – in fact, almost any combination of these as senders or recipients.

And the best part? FedNow isn’t restricted to weekdays, holidays, or by the bank’s opening hours, either – it’s available 24/7, 365 days a year.

The Federal Reserve charges the sender’s financial institution a flat fee of 4.5 cents on every transaction made through FedNow, as well as a $25 monthly fee for each routing transit number (RTN) that participates in the FedNow service. Initiating a request for payment (RFP) through FedNow will also cost the requesting financial institution a one-cent fee.

Right now, it’s still unclear as to what proportion of these fees participating banks will pass on to their customers, the FedNow end users. We’ll keep this article updated as we learn more to bring you the latest FedNow facts and figures.

How does FedNow work?

The first thing to understand about how FedNow works is that it’s not something you, as a business looking to make and receive real-time payments, signs up for.

Instead, it’s a service the Federal Reserve offers to banks and financial institutions in the US. Once they’ve signed up, they’ll make FedNow available to their customers.

So, when a customer wants to initiate a real-time payment through FedNow, they’ll do so via an interface set up by their bank: typically an online portal or mobile banking app. At this stage, the transaction works like any other account-to-account payment, with the customer selecting the recipient, specifying an amount, and the two banks – the payer’s and payee’s – working together to approve the transaction.

From here, though, FedNow steps in to play a starring role in facilitating the transaction: debiting the funds from the payer, and crediting them to the payee. In this way, FedNow – unlike “closed loop” payment systems, such as PayPal or Venmo, which require both the payer and payee to have an account with the provider – is an “open loop” system. All the payer and payee need are bank accounts with FedNow-participating financial institutions.

Which leads us to the second crucial thing to know about how FedNow works – that transfers between banks in the US typically involve two important stages:

Clearing, the process of reconciling and confirming the details of the transaction; and
Settlement, the actual transfer of funds from the payer to payee to complete the deal.

How FedNow works, then, is by not only handling both of these two key parts of the payment processing lifecycle, but making them instant – carrying out both clearing and settlement in mere seconds to make the funds instantly available for the recipient to access and use.

That’s right – whereas other popular forms of account-to-account (A2A) payment (such as Automated Clearing House, or ACH, transactions) defer settlement, meaning funds can take days to arrive, FedNow payments go through in real time. There’s no ‘batching’ of transactions (where banks and payment service providers process payments in bulk, rather than individually; batching is cost-effective, but slow), which speeds the whole process up.

Fortunately, though, FedNow doesn’t sacrifice security for speed. The Federal Reserve’s real-time payment service utilizes International Organization for Standardization (ISO) 20022 – a global electronic messaging standard facilitating secure, interoperable financial transactions across different international payment systems – to safeguard each FedNow payment sent.

That said, FedNow itself isn’t an international payment service. For now, FedNow is limited to domestic payments between banks in the US, and it doesn’t support cross-border payments – for that, try a wire transfer instead.

What’s the difference between FedNow and other payment methods?

While it’s easy to liken FedNow to the payment methods you’re already using to move money – such as ACH, wire transfer, PayPal or another platform – it’s actually a different beast entirely.

So let’s find out how FedNow stacks up against some of the most common alternatives.

FedNow vs ACH

Even if you haven’t heard the term, chances are you’ll have made plenty of ACH payments. They’re the most popular account-to-account payment method in the US: and any time you’ve sent money to a friend, received your wages, or paid a utility bill, you’ll most likely have had the ACH network to thank.

Unfortunately, however, speed isn’t one of ACH’s strong suits. So let’s break down how it compares to its much swifter alternative, FedNow, across three aspects of an account-to-account payment: processing, settlement, and reversibility.

Processing

Financial institutions process ACH transactions through a method known as ‘batch’ processing.

In this method, banks compile transactions in ‘batches’, before sending them off in bulk to the clearing house to be processed. Given the sheer volume of ACH payments taking place every day – around 10 million in the US alone, and that’s a conservative estimate – this makes sense.

The only issue? Batching is slow. As we touched on above, ACH payments can take days to go through. (Even Same Day ACH, introduced in 2016, can still require several hours to process.)

By contrast, FedNow – along with RTP, another real-time payments service – utilizes ‘transaction processing’. As the name suggests, these services process payments as they come through, meaning they’re not subject to any dreary delays while batching takes place.

Settlement

With ACH, transactions are settled through a method called ‘deferred settlement’.

This means settlement typically occurs at scheduled times; at designated intervals. (Picture waiting for a bus to pass your particular stop.) By contrast, real-time payments – like those FedNow offers – settle payments in real-time, almost concurrently with the clearing process.

If ACH is like catching a bus, then, FedNow is taking a private car. The former is suitable for carrying lots of people at the same time – and is much cheaper. The latter costs more, but is available and ready to go whenever you need it to. Which makes it much, much faster!

Reversibility

The final, all-important detail about the difference between FedNow and ACH? Finality itself.

Because ACH payments move so slowly, they can be reversed. With FedNow’s real-time approach, however, there’s no such luxury – the payee will receive the money instantly, so there’s no awkward wait or period of uncertainty while the funds are in the ether.

What this does is provide the payee with security that the payer has sufficient funds in their account to complete the purchase – as FedNow can only credit the recipient’s account once it has debited that amount from the sender. This is a particularly handy safeguard for businesses accepting payments through FedNow, as you can sidestep the financial and reputational costs of chargebacks on grounds such as insufficient funds.

One final note on the ACH vs FedNow split: these two aren’t in competition.

By offering real-time payments through FedNow, the Federal Reserve aims to offer consumers a more rapid alternative to ACH – not replace it entirely. And, in the long-term, the Federal Reserve has plans to ensure the interoperability of these two services.

‍Learn more: What is ACH debit?

FedNow vs real-time payments

This one’s a little tricky. Because, while FedNow does offer real-time payments, there’s still a couple of distinctions to be made between FedNow and real-time payments (RTP).

The first? That the networks they run on are operated by different entities.

The RTP network is owned by The Clearing House, a privately owned New York-based payments authority. FedNow, as we know, is a creation of the Federal Reserve.

The second difference? The transaction limit each payment method imposes. For real-time payments sent via The Clearing House’s RTP network, the limit is $1 million. For FedNow, it’s $500,000. (That said, the Federal Reserve sets the default transfer limit for banks at $100,000 to start with; banks can choose to lower this, or raise it to that $500,000 maximum.)

FedNow vs PayPal

Unlike PayPal and other peer-to-peer payments services, FedNow isn’t offered directly by a company, but through the customer’s bank (provided it has opted in).

Also dissimilar to services like PayPal and Venmo – which facilitate payments by acting as intermediaries between banks – FedNow payments settle directly in central bank accounts.

FedNow also differs from private peer-to-peer payments services in the way the customer pays. There’s no FedNow app or website – the customer will utilize their existing bank’s online infrastructure to login, pay, and gain full visibility over their payments.

Why is FedNow important?

FedNow is important because it increases access to real-time payments for everyday people and businesses in the US.

Real-time payments are, of course, already available as services through Venmo or PayPal. (And, as we’ve seen, through The Clearing House’s RTP network.)

But peer-to-peer apps typically charge their users through the nose for the privilege – and PayPal and Venmo’s transaction fees are already high. By contrast, FedNow costs the sender just $0.045 per transaction; and any request for payment incurs a fee of only $0.01.

As for FedNow in practice, what could it mean for the US’s consumers and businesses?

It could be paying your electricity or water bills instantly. Settling a debt with a friend or business immediately, and avoiding late-payment confusion or resentment. And receiving your wages in real time – not half a week after you’ve seen your payslip.

Real-time payments also make it easier for people to manage their money – especially those who are prone to slipping into overdraft, or ending up on the wrong side of late payment fees.

As for businesses, FedNow enables them to get immediate access to funds when an invoice is paid, rather than having to wait days. This helps businesses – especially small ones – manage their cash flow, and maintain the steady access to working capital so crucial to SMBs’ survival.

Who can use FedNow?

FedNow is available to customers – including individuals and businesses – who bank with the financial institutions and credit unions involved. (FedNow is available to all banks in the US – they just need to opt in.)

‍Important to note is that both the sender and the recipient’s bank must have opted in to FedNow for the transaction to take place.

In the short-term, this comes with barriers (only around 5% of the country’s financial institutions are signed up so far). But in the long-term, as more banks come on board, it shouldn’t present any issues.

Unlike PayPal, Venmo, and other popular payment methods, customers can’t access FedNow directly – only through a financial institution.

Where is FedNow available?

To gain access to FedNow as a payment service, you’ll need to be with a participating bank – i.e. one that’s opted in.

‍As of 23 February 2023, there are around 470 participating FedNow financial institutions.

FedNow is also available with 30 settlement agents and liquidity providers, and 25 certified service providers. For the full lists, head to the Federal Reserve’s website.

Is FedNow mandatory?

No, FedNow isn’t mandatory to the financial institutions – such as banks and credit unions – it’s available to; although the Federal Reserve is encouraging all to participate.

As of February 2024, around 470 of the more than 9,000 financial institutions in the US – 5.2% – have signed up in the eight months FedNow has been around.

As for those participating banks’ customers – FedNow’s end users – FedNow is only ‘mandatory’ if both the payer’s and the payee’s banks are signed up. In this case, neither party needs to do anything in particular to activate the service, as it will simply kick in automatically. Which, in a sense, does make it ‘mandatory’ for the end users; but if it means being able to send and receive money instantly, who wouldn’t want it to be so?

Will FedNow replace cash?

No, FedNow won’t replace cash – and that certainly isn’t the intent.

Echoing this is a firm statement on the Federal Reserve’s website, which states FedNow is not “a step toward eliminating any form of payment, including cash.”

Even in 2023, where there are seemingly limitless ways to pay, cash is still an important payment method. Cash is particularly crucial when it comes to financial inclusivity, and ensuring marginalized demographics – such as the elderly or young people, or those with limited access to credit or a bank account – are able to send and receive money.

Is FedNow a central bank digital currency?

No – FedNow isn’t a central bank digital currency, nor is it related to one. It’s simply a way for banks and credit unions to enable their customers to make real-time payments.

On the topic of issuing a central bank digital currency, the Federal Reserve is staying tight-lipped. On its website, a statement reads:

‍"The Federal Reserve has made no decision on issuing a central bank digital currency (CBDC) and would only proceed with the issuance of a CBDC with an authorizing law. Testifying before the House Financial Services Committee in March 2023, Chair Powell said a CBDC is "something we would certainly need Congressional approval for.""

So, no word on a central bank digital currency yet. But FedNow certainly isn’t one.

FedNow: Benefits and drawbacks

Still on the fence about whether FedNow is right for you? We’re breaking down the service’s biggest draw cards – and drawbacks – below.

‍FedNow benefits:‍

No waiting to pay, or get paid! Transactions go through immediately, and the money is available in the recipient’s account instantly.
Low per-transaction fees (just $0.045 for the sender).
There’s no specific, dedicated app you’ll need to download, set up an account with, and start paying through – you can do all this from your existing bank’s app or website.

FedNow drawbacks:‍

Both the payer and the payee need to be with participating FedNow banks to be able to make a real-time payment through the service.
As of February 2024, just 470 financial institutions in the US have opted in. The service is still in its infancy, though – so there are promising signs!
It’s still new and untested, so the jury’s still out as to how much of a splash FedNow will make.

Is there a FedNow app?

Because FedNow is a service offered to banks – not directly to consumers – there’s no FedNow app, website, or other portal for customers to login to and send money through.

Instead, customers will access FedNow’s real-time payments service through the app or website of their bank. How this will look exactly depends on the specific bank, but it’s likely to be simple to locate and use through the bank’s online services.

The future of FedNow

It is, quite literally, the million-dollar question – what does the future have in store for FedNow? Let’s summarize our crystal ball’s top insights to explore what’s next for FedNow.

FedNow could become essential for B2B payments

For businesses looking to make and receive instant payments, FedNow is already changing the game – and the scale of this evolution will only continue to grow in 2024 and beyond.

One of the reasons FedNow is becoming such a handy resource for B2B payments is that it utilizes the ISO 20022 messaging standard. This allows FedNow to provide businesses like yours with more contextual data about each transaction – information hitherto unknown to business owners, but which can play a vital role in how you analyze and reconcile payments.

FedNow is paving the way for a more open, seamless payments space

FedNow’s significance isn’t limited to its positive impact on business owners – but on the future of the wider payments space at large.

FedNow lays the foundations of an open loop payment system facilitating real-time transactions, its potential for integration and interoperability with other systems – such as ones enabling cross-border payments – is high.

That open architecture will also stimulate innovation among banks and financial institutions in creating APIs to work alongside FedNow. This could, in time, see a whole, exciting new raft of payment applications and services enter the market, while encouraging the use of payment-adjacent technologies such as machine learning, blockchain applications, and AI.

However, that doesn’t mean FedNow won’t face its fair share of challenges as it expands and develops. The technologies enabling businesses to settle funds instantly and across borders – through blockchain-based stablecoins such as USDC, for example – already exist. To keep up, FedNow will need to accelerate its evolution – and its uptake by US financial institutions. (Uptake which, as of February 2024, is yet to truly gather pace.)

Switch on the right payment methods with Checkout.com

Here at Checkout.com, we don’t offer FedNow right now. However, we do offer plenty of other payment methods your business can harness to take payments from your customers faster, more seamlessly – and in the payment method they’re most suited to.

From Apple Pay and Alipay to TrueMoney and Trustly, we’ll help you accept a range of international and local payment methods. Empowering you to switch on the right payment methods – and use them to drive business growth, increase your revenue, and bolster your brand’s burgeoning reputation.

Want to learn more about FedNow, and the future of real-time payments in the US? Explore our detailed deep-dive into the data, or reach out to our team for a chat about what Checkout.com can do to breathe new life into your business’s payment processing strategy.

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