What is FedNow: An Overview of the Federal Reserve's New Instant Payment System

 Plancorp Team By: Plancorp Team

With the rise of instant payment services like Venmo, PayPal, CashApp, and Zelle, the Federal Reserve has responded with a new offering.  

In July 2023, the Federal Reserve introduced its new instant-payment system called FedNow. In short, the FedNow service allows participating financial institutions to provide customers the technology to send and receive real-time payments.  

With the introduction of this new Federal Reserve system, many questions and concerns have arisen about how this system works, what it is and isn’t, how it could impact the economy and value of the US dollar, and more.   

In this article, we’ll break down the FedNow service, answer frequently asked questions, and debunk myths to ease your mind about this new technology.  

What is FedNow?  

FedNow operates much like popular payment systems you may be more familiar with—Venmo, CashApp, PayPal and Zelle to name a few.  

However, unlike these popular private-sector apps, FedNow is available directly to your bank or financial institution. It has an instant payment infrastructure—meaning the usual time it takes for a transaction to clear is cut down to zero.  

FedNow has built-in functionality for customers to make and receive payments instantly, cutting out the typical processing time which, depending on the financial institution, could be a number of business days.   

Faster payments (especially those happening between institutions) are possible through FedNow without having to wait multiple business days for the transaction to process and clear. 

How FedNow Works: The Process of Real-Time Payments 

If your bank or financial institution opts in to the FedNow service, you will have access to the system, typically through a mobile app, and can begin sending and receiving payments instantly, 24 hours a day. Here’s what the process will look like: 

  1. The party making the payment will submit the transactions on the FedNow system, likely via direct access on their bank’s mobile app or website.  
  2. In real time, the payer’s bank will verify the funds and sends an ISO 20022 compliant payment message.  
  3. At that point, the FedNow service instantly validates the payment message and sends it to the payee’s bank.  
  4. The payee’s bank then confirms its intent to accept payment, and the FedNow service debits and credits both accounts respectively.  

The FedNow service has a number of applicable use cases, including account to account transfers as well as bill payments.  

One of the biggest benefits of FedNow is how quickly the payments process, which in the case of bill payments, could help the payer avoid late fees. 

Financial Institutions Using FedNow for Real-Time Payments   

At its onset, only 35 institutions were participating in the FedNow service. By the start of 2024, that number has grown to 400. Participating institutions include a range of credit unions and banks across 90% of states. 

To see a list of participating banks and financial institutions and see if you have access to FedNow, review the comprehensive list here. If you don’t see your bank or financial institution on the list, don’t worry. The list will surely grow in the coming months and years. 

FedNow vs. Other Digital Payment Systems   

With the popularity of private-sector payments apps like Venmo, CashApp, PayPal, and Zelle, you may be wondering why you’d consider using the Federal Reserve’s new system.  

Here are a few benefits when compared to the apps you may be more familiar and comfortable with:  

Real-Time Payment Processing 

One of the biggest benefits of the FedNow service over its competitors is the instant payment infrastructure. As explained above, all of the payment steps happen in real time, giving the payee access to the funds immediately. 

With other apps, it can take a number of days both for the payer’s transaction to process and for the payee to receive the funds in their bank account. If time is of the essence, the FedNow services has the edge. 

More Payment Use Cases

Users of apps like Venmo, CashApp, PayPal, and Zelle are likely using these services to send money to peers. Perhaps they’re picking up their half of the tab from a dinner out, or they’re paying a babysitter or housekeeper for their services.  

Peer-to-peer payments are also available through the FedNow service, but in addition, users can make the following payment types:  

  • Consumer to business: bill payment, purchases of goods and services 
  • Business to business: paying invoices, sending payroll, paying suppliers and vendors 
  • Consumer to financial institutions: making payments toward outstanding debts like credit cards and mortgages 

Potentially Better Payment Security 

With the rise of private-sector payment systems like those we’ve mentioned above is also the rise of payment fraud. Hackers have discovered new tricks for getting users to authorize fraudulent payments through instant payment systems, which leaves the victim without their hard-earned money.  

Regulations are being developed at the federal level to combat this type of cyber crime, and the Federal Reserve plans to be a part of the solution.  

They are taking steps to make their instant payment infrastructure more secure than what you may find through private-sector payment service providers. This could mean your data and your money will be better protected as a FedNow user.  

To see how the Federal Reserve is protecting against instant payment fraud, check out this helpful resource. 

Myths About FedNow  

With any big change happening with the federal reserve bank, anxiety and false information begins to float around. You may be wondering if any of these myths or threats you’ve heard online or in the news are true about the FedNow service or the Federal Reserve as a whole:  

  • Does the FedNow service mean the end of cash?  
  • Is FedNow a new digital currency?  
  • Will the FedNow service cause a bank failure? 
  • Is the Federal Reserve going to manipulate the monetary system and potentially weaken the American dollar through FedNow? 

Peter Lazaroff, Chief Investment Officer of Plancorp and host of The Long Term Investor podcast, addresses these myths in a recent episode. Without spoiling the episode, we’ll share that these are bustable myths and there’s no need to panic.

To learn more, listen now wherever you subscribe to podcasts and check out other great episodes on all things investing for the long-term.  

Plancorp started with a unique philosophy: Always put your clients’ interests ahead of your own, and you’ll build a successful business. That was in 1983, but the sentiment still drives every decision we make. After 40 years of helping individuals, families and business owners plan for financial independence, our commitment to serving as financial life advocates is stronger than ever. More »