When it comes to getting paid — and paid back — most people and businesses want their money as quickly as possible.
While payment processing at financial institutions has become faster over the years — and some large players already are part of a "real-time payment" network — many people still may have to wait at least one business day to have access to 100% of deposits they receive or for payments they make to clear.
On Thursday the Federal Reserve launched the first phase of an instant payment infrastructure called FedNow Service that promises to make the option of safe, real-time payments much more widely available, whether someone banks at a large or small US financial institution.
"The Federal Reserve built the FedNow Service to help make everyday payments over the coming years faster and more convenient," said Fed Chair Jerome Powell. "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."
Based on what's known so far, here's what FedNow may mean for you, and how it will differ from other payment options you may use like Venmo or Zelle.
How it will work
FedNow's infrastructure — several years in the making — will facilitate the instant transfers of money between accounts at different institutions that choose to join the network.
There will be no waiting period for clearance and settlement of payments. The transaction will be finalized in real time. And the person or business being paid will have access to their money within seconds.
Also new: FedNow will operate around the clock. All transfers may be made at any time of day or night, any day of the year. In other words, banking hours and bank holidays won't restrict when payments can be made and recorded.
Unlike autopay features that automatically pull money out of your account to pay bills on a given date, FedNow is "push only," meaning you must authorize a payment before it's made.
How it may help you
The instant transfer of money 24/7 means that individuals and business owners will have much greater flexibility in managing their cash flow, because they will not face delays in essential deposits and payments due to a clearing process between financial institutions.
As an FAQ on the FedNow Service puts it, "This flexibility is especially important for individuals and households on tight budgets, for whom receiving a payment in real time could help avoid the need to use expensive check-cashing services, engage in high-cost borrowing, or incur overdraft or late fees that may throw off their carefully managed finances."
Instant payments can also be critical in a crisis. An insurance company, for instance, could make an immediate payment to help a policyholder whose home or car was damaged by a devastating storm.
It also can help speed access to payment of government benefits.
And depending on how a bank chooses to design an instant payment service using the FedNow infrastructure, it also may allow for customers to send payments to friends and family to cover things like their share of dinner out last night.
FedNow instant payments won't benefit you, however, if:
You don't have a bank or credit union accountYour financial institution is not part of the FedNow network. You pay a bill or make a purchase by credit card either online, in person or by phone. Those payments are processed differently.
When will everything be up and running?
There are thousands of US financial institutions that may choose to take part in the FedNow network ... eventually.
For now, though, 35 banks and credit unions have completed certification to use FedNow as early adopters, plus the Department of the Treasury's Bureau of the Fiscal Service and 16 back-end service providers.
Early adopters include some of the largest US banks, like JPMorgan Chase and Wells Fargo; as well as smaller, more locally focused banks and credit unions, such as Bridge Community Bank.
If your bank or credit union is among them, it may take some time before they start offering instant payments and deposits for customers using FedNow. And some initially may only offer to receive FedNow payments for their customers, but not send them.
And in this first phase of use, the FedNow Service will only be available to process domestic payments between US depository institutions.
How FedNow differs from other payment options
FedNow is intended to be used in an addition to, not as a substitute for, other payment systems that the Fed facilitates — such as the Automated Clearing House for electronic payments, paper checks and other funds transfers.
It also will operate alongside the many private-sector digital payment apps that have been created like Venmo — a third-party company that serves as a middleman for making quick payments between parties through their digital wallets and bank accounts; and Zelle, owned by some of the biggest US banks, which speeds electronic payments between the US-based accounts of registered users through more than 1,700 banking apps.
The design and operation of each payment app is different from that of FedNow, and their capacity to reach as broad a swath of banking and credit union customers who might benefit from having a safe option to receive instant payments isn't as great as that of the Federal Reserve.
As the Fed put it in a FedNow FAQ, given its existing nationwide payment infrastructure, "[P]rivate-sector services are likely to face significant challenges in extending equitable access to the [thousands of] diverse depository institutions across the country."
