What is FedNow? The Federal Reserve’s Instant Payment Service Explained

FedNow is the instant payments solution from the Federal Reserve.

Launched in July 2023, FedNow allows financial institutions (FIs) of every size across the U.S. to provide safe and efficient instant payment services. As of October 2024, more than 1,000 FIs have signed up with FedNow Service.

Through their participating FIs, businesses and consumers can send, request and receive instant payments 24/7, 365 days of the year. FIs can use the service to introduce innovative instant payment products, and recipients receive immediate funds availability, enabling greater financial flexibility.

In today’s immediate gratification society, businesses and consumers expect their money to move instantly. In fact, Federal Reserve Research showed that 86% of businesses and 74% of consumers said they used faster or instant payments in 2023, and most (74% of businesses and 79% of consumers) reported looking to their FI to provide these services.

With FedNow, FIs can meet that demand. You can offer instant payments products and services that provide additional value to your customers/members. In addition, by becoming an early adopter, you can differentiate from competition, enabling businesses and consumers to send, request and receive instant payments on FedNow via innovative product offerings.

The Federal Reserve introduced a user group to facilitate regular engagement between FedNow participants and the Fed to promote innovation and inform the continued evolution of the service. The group also focuses on identifying innovative use cases to serve businesses and consumers seeking faster and more efficient ways to send and receive payments to meet a variety of needs.

A July 2024 Banking Dive article also outlined the most popular FedNow use cases:

• Account-to-account funds transfers, which take place, for example, when a customer moves money from a brokerage account to a bank account, or transfers funds between two different financial institutions.
• Earned wage access, which enables an employer to pay a gig or hourly worker the money they’ve earned at the end of their shift or at the end of the day rather than wait for another pay cycle.
• Insurance company reimbursements, which allow for instant payments through the FedNow Service to pay claims more quickly.

Overall, the article concludes that the FedNow Service enables banks and credit unions to offer new services for instant payments, such as paying bills, sending money to friends and family, offering earned wage access, transferring funds between accounts, and much more. As FedNow adoption grows, so, too, will the volume on the network and the use cases it supports.

FedNow launched independent of existing payment rails to support instant payments. It provides a complement to existing payment rails, including FedWire, ACH, and SWIFT.

Every payment rail has its unique benefits. For instance, batch ACH payments create operational efficiencies by processing files in aggregate, but they take longer to process and settle. With FedNow, individual payments process and settle instantly, creating a new option for those payments that need speed.

FedNow also leverages the rich data of the ISO 20022 structure, creating new opportunities for payments that can benefit from information with the payment. For instance, FedNow offers the potential to introduce a new service around Request for Payment (RFP) functionality, supporting both your consumer and business customers/members in making efficient bill, invoice or person-to-person payments.

The Federal Reserve issued Operating Circular 8, along with subpart C of Regulation J, to apply to funds transfers made through the FedNow Service. In addition, the FedNow Service Operating Procedures, effective October 2024, provide operational details, including expectations, requirements and guidance for FedNow participants on the use of the service. By partnering with a provider who has depth of knowledge of these regulations, you can ensure you remain in compliance.

For banks and credit unions, fraud is always a top consideration. The Federal Reserve is looking to add additional security controls to FedNow, including the following as reported in a July 2024 Banking Dive article:

• Ability for FIs to establish thresholds to reject payments that exceed a cumulative amount or frequency. This will enable a financial institution, for example, to detect someone sending a high number of low-value transactions to remain undetected. The feature allows financial institutions to customize the service based on whether the customer is a business customer or a new account holder, for instance.
• Option for participating institutions that settle payments for other participants to set net send limits for these institutions, which provides liquidity management control.

Perhaps most importantly, when exploring partners for FedNow, FIs should seek out a provider who leverages integrated real-time fraud monitoring and/or provides APIs to help you incorporate your existing fraud solution. In addition, you should look for a partner that can help manage operational risk. Select a provider partner who offers smart routing capabilities to mitigate the risk of payment failures or delays by automatically rerouting transactions when necessary.

The majority of banks and credit unions participating in the FedNow Service do so with the support of a partner provider. To advance your FedNow connectivity, take the following steps:

1. Identify a FedNow certified service provider who will ensure smooth onboarding with a ready-to-go solution. Target one that will integrate with your internal systems and your core. For a timelier experience, don’t wait on layered solutions from legacy providers; instead, identify reliable pre-wired, certified and tested connections so you can go to market faster.
2. Ensure your chosen partner offers solutions to meet today’s needs and tomorrow’s potential. For example, look for a provider that offers a payments hub. By using a unified API, payment hubs make it easy to integrate new payments. This not only simplifies orchestration but also allows FIs to customize workflows for seamless integration. Also confirm the provider offers a platform that’s constantly updated to meet new standards, regulations, industry innovation and customer expectations.
3. Collaborate with your selected provider to determine if you want to launch as receive-only or if you want to send as well. Many banks have chosen to start leveraging FedNow by receiving payments, and then add the functionality of sending payments when the time’s right.
4. Create a to-go-market plan that aligns with informed implementation timing. Work with your partner to consider any third-party integrations you may need to create for customer/member-facing products or to manage risk. In addition, build in time to support internal training to confirm staff is ready to answer any questions on FedNow.

For general information on FedNow, visit the FedNow Explorer website. To explore more about launching FedNow with Finzly,  speak with one of our payment experts.