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.
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.
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:
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.
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.
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:
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.
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:
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.
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:
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.