Banks Will Move Money Faster With Launch Of New Fed Payments System

The Fed Is Rewiring The U.S. Payments System—What That Means For You

Rachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications including The Wall Street Journal, American Banker and Bankrate. Ms. Witkowski's deep knowledge of government and policy aided a series of investigative stories that triggered congressional hearings on employee claims of discrimination at a federal agency and how indirect auto lenders were being reviewed by regulators.

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Since her first tax article appearing more than three decades ago in Money magazine, Caren Weiner has written and edited stories about money management topics ranging from investment fees and health costs to household budgets. Her finance- and investment-related stories and visualizations have been featured by NerdWallet, Bankrate, AARP, Money and GoodRx. She has also worked at lifestyle publications including InStyle, Entertainment Weekly and All You.

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Updated: Jul 20, 2023, 11:24am

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The Fed Is Rewiring The U.S. Payments System—What That Means For You

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It can take days to transfer money or make payments from your bank account, even as apps like Venmo, Cash App and Zelle make such transactions nearly instant. That’s because the federal government has no digital payments system for the entire banking system to utilize in real time—until now.

The Federal Reserve has launched its own real-time payments system, called the FedNow Service (FedNow), as of July 20. Though FedNow is years behind tech-based private-sector competitors, it will be a game changer for transactions in the U.S. It is the first—and only—digital instant-payments system that is both created and backed by the government. As a result, many banks will see it as a larger, safer system able to transfer money faster for consumers and businesses.

FedNow “will help make everyday payments over the coming years faster and more convenient,” said Federal Reserve Chair Jerome Powell in the soft-launch announcement on July 20. “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.”

What Is FedNow?

FedNow is the first government-created system for financial institutions to send and receive funds almost instantly. Ideally, FedNow would ensure you’d no longer have to wait a few business days, or bide your time over holidays or weekends, to receive your money.

This means you can make payments—your mortgage, for example—within seconds. You could opt to send funds on the due date rather than having to plan several days out for an online payment to clear, or up to a week for a check to be processed.

For business owners, too, this means faster and smoother operations. They can send and receive invoice payments, for instance, in real time online.

How FedNow Works

FedNow acts as the clearing service for financial institutions’ transactions so they can provide immediate end-to-end payments to customers. The key difference between this service and the Fed’s previous system is that FedNow will be online 24/7, processing transactions in real time.

The FedNow service is open to more than 10,000 financial institutions that operate within the Fed’s network. Private money-transfer apps like Venmo and Cash App are not part of that system. That’s one reason it takes a few days for you to transfer money from these apps to your bank account: The bank has to “clear” the funds.

Financial institutions participating in FedNow can opt into several different services within the system, including sending funds back and forth across financial institutions or choosing to only receive funds. They can also opt into settlement service transfers and high-dollar-limit credit transactions called liquidity management transfers.

When Will FedNow Launch?

The Fed did a soft launch in late July but a more formal, wide-scale launch is planned for 2024. The Fed said 35 banks and credit unions as well as 16 payment-process service providers are participating in the initial launch.

The central banking system lags the private, faster payments systems already in use by many large banks. The Fed also knows there’s heavy consumer demand for instant digital transactions.

FedNow has been in the works for nearly a decade. The Fed started contemplating an instant payments network in 2013 and formed the Faster Payments Task Force (FPTF) in 2015 to map out a plan. After years of meetings, the release of several studies and a period of fielding public comments, the Fed announced FedNow in August 2019 and has been conducting pilot runs with financial institutions since then.

How Important is FedNow?

Saying FedNow would be a game changer is almost downplaying the potential impact. Because the Fed has had the largest banking universe housed within its previously existing slower payments setup, its thousands of participating financial institutions have waited years for a real-time system supported by the government.

Currently, there is the Real-Time Payments (RTP) network, a private service launched in 2017 that is used by many of the larger financial institutions to transfer funds. Among the newer phone-based money transfer apps, Zelle is the only one that operates within the RTP network. That’s why you might see Zelle’s service offered directly through your bank or credit union.

More than 100 financial institutions already use the RTP network, and they can opt to use the FedNow system as well. Some critics say FedNow will end up competing with private-sector companies offering such services, while others have argued it will serve as an expansion or added service.

Either way, FedNow will open the door to thousands more financial institutions that will be able to offer instant transactions for consumers and businesses. The implications are likely to be global.