What is FedNow? Federal Reserve Payment System Explained

Platforms like Venmo and PayPal have transformed the world of instant payments from one person to another. While these services are designed for peer-to-peer (P2P) payments, the Federal Reserve wanted to create a similar instant payment system for banks.

That’s where FedNow comes into play. 

With FedNow, participating banks and credit unions in the United States can transfer funds between each other instantly—24/7/365. 

FedNow is still brand new, and all banks haven’t yet opted in. So the service’s availability depends on which financial institutions use it. 

This in-depth guide breaks down everything you need to know about FedNow, including what it is, how it works, when it’s going live, and who can use it. We’ll also break down the importance of FedNow, take a look at FedNow’s benefits, and explain how FedNow differs from other transfer options.

What is FedNow?

FedNow is an instant payment system that’s run by the Federal Reserve. It allows the instant transfer of funds between participating financial institutions in the United States 24/7/365. 

Prior to FedNow, funds transferred between banks through the Automated Clearing House (ACH) network would take several days to process. That’s because ACH transfers are processed in batches, which typically take one to three business days to complete. So if you want to transfer money from your Bank of America savings account to your Wells Fargo checking account on a Saturday, then the funds may not actually be available until Tuesday or Wednesday. 

But with FedNow, payments between two financial institutions can happen immediately. You could pay your mortgage on a weekend, holiday, or after banking hours without having to worry about any delays. 

The use of FedNow is limited to domestic payments between US financial institutions. 

FedNow Fees: How Much Does FedNow Cost?

As a government-operated system, FedNow is supposed to break even (rather than turn a profit). This can help encourage more widespread adoption of the service since the rates could be lower than alternatives. 

FedNow fees include:

• $25 per month participation fee ($0 in 2024)
• $0.045 per credit transfer 
• $0.45 per credit return 
• $0.01 per request for payment 
• $1 per item liquidity management transfer fee

FedNow transfers are capped at $500,000. The default transfer limit is set at $100,000 for participating financial institutions, but each institution has the ability to raise or lower its own limits—as long as it doesn’t surpass $500,000. 

Update on FedNow Fees: On November 17, 2023, the Fed announced new pricing that goes into effect on January 2, 2024 for payment services provided by Federal Reserve banks. The new rates will result in an average increase of 1.8% of these services, but FedNow fees will not be impacted by these changes. The rates listed above will remain the same throughout 2024.

How FedNow Works

FedNow works on an open-loop payment infrastructure, where payments and transfers get made through a shared network. This means that the senders and receivers don’t need to have accounts with the same financial institution or both be using the same third-party payments app to move money. 

FedNow offers 24/7 availability, instant settlement of the transaction, and immediate payment confirmation for both recipients and senders. 

Money sent through FedNow only works between accounts between two participating banks. So if the sender’s bank has enrolled in FedNow, but the recipient’s bank has not, then the funds won’t be sent through FedNow. 

Individual consumers and businesses don’t need to register or sign up to use FedNow. As long as your bank has enrolled in FedNow, then you’ll benefit from the instant payments. 

When Did FedNow Go Live?

FedNow was launched by the Federal Reserve on July 20, 2023. 

Over 120 banks and payment providers were part of the initial pilot program that started back in 2021. 

Key Differences Between FedNow and Traditional ACH Bank Rails

FedNow is a payment rail, which means it allows money to be moved from one account to another. But it differs from traditional bank rails in three distinct ways—the way it’s processed, the settlement time, and its finality. 

Batch vs. Transaction Processing

Traditional bank rails use batch processing to move funds. This means multiple transfers are sent in bulk to a clearing house, which causes delays in processing.

FedNow uses transaction processing—which means payments get processed in real-time on a transactional basis. Everything from initiation to authorization, transmission, acceptance, and receipt gets processed instantly for each payment.  

Settlement Time

ACH payment rails are settled at pre-scheduled intervals and only on business days.

FedNow settlements occur in real time on a transactional basis. Also known as a gross settlement, the funds get cleared and settled transaction by transaction. 

Finality

FedNow payments are final, and the money is guaranteed. Payers can only initiate payments if their account holds sufficient funds. 

ACH transfers can be returned or reversed. 

Who Uses FedNow

FedNow is available to all banks, credit unions, and financial institutions—not just the big ones. But there is currently no requirement for anyone to join. 

Consumers and non-bank payment providers won’t have direct access to FedNow, but they can utilize the service through participating financial institutions. 

Here are some various ways that FedNow can be utilized by different users:

• Account-to-Account (A2A) — Also known as Me-to-Me banking, this involves the transfer of funds from one account to another held by the same account holder. Moving money from your Chase to Capital One account is an example.
• Person-to-Person (P2P) — The transfer of funds from one individual to another, similar to Venmo, Cash App, or Zelle. 
• Business-to-Business (B2B) — Payment from one business to another business, typically in exchange for goods or services. 
• Consumer-to-Business (C2B) — Payment from a consumer to a merchant, such as a utility bill payment.
• Consumer-to-Government (C2G) — Transfer of funds from an individual to a government agency, like a DMV license renewal or quarterly tax payment.
• Business-to-Government (B2G) — Payment from a business to a government body for things like state and federal taxes.
• Government-to-Consumer (G2C) — Payment issued from a government agency to an individual person, like a state or federal tax refund or a social security payment. 
• Business-to-Consumer (B2C) — Transfer of funds between a business and an individual. Things like paying an employee’s salary, issuing a refund to a customer, or receiving a claims check from an insurance company would all count as a B2C payment.

As you can see, there are lots of potential use cases for FedNow. If a consumer, business, or government agency banks with participating financial institutions, then the transfer of funds in all of these categories can be made instantly. 

The Importance of FedNow and Why It Matters

While FedNow is not the first real-time payment solution available in the US, it will help extend the availability of instant payments to more financial institutions across the country. 

The Federal Reserve already provides over 10,000 banks and credit unions with access to payment services (either directly or through a third party). Conversely, the privately owned RTP network (another real-time payments platform run by The Clearing House) only services about 350 institutions—despite it being available to nearly every bank and credit union. 

The Department of Treasury Bureau of Fiscal Service is already participating in FedNow. This government department is responsible for issuing tax refunds and social security benefits. So this is just one example of how a government agency can use FedNow to send instant payments to individuals without delays. 

FedNow will also help support smaller community banks. 

Benefits of FedNow

Some of the top advantages of FedNow include:

• 24/7/365 availability
• Instant transfers 
• Access to funds within seconds of payment being sent
• Lower rates than RTP
• Support for smaller, community, and regional banks
• Fewer errors for business payments
• Increased customer convenience
• Ability for consumers to make payments on nights, weekends, and holidays
• Protection from overdrafts (since money can’t be sent if an account has insufficient funds)

The benefits of FedNow will continue to grow and become more significant as additional financial institutions adopt it. 

Final Thoughts on FedNow

Many businesses and individuals will start to see the benefits of FedNow soon—without having to sign up, enroll, or do anything differently. 

Payroll deposits might clear faster, and you may see that funds are available faster when you’re moving money between banks. 

Since FedNow is so new, we won’t truly know the impact for some time. It’s also likely that the Fed might make some adjustments based on usage, such as raising or lowering the transfer limits.