What is FedNow? Everything You Need To Know in 2024 (2024)

What Is FedNow?

FedNow is an instant payment service offered by the Federal Reserve. It allows consumers—both individuals and businesses—to send and receive payments instantly. Its goal, according to the Federal Reserve, is to “establish a safe and efficient nationwide infrastructure supporting instant payment services in the United States that ultimately serves the American public.”

FedNow was released in July 2023 to a network of just 35 participating banks and credit unions. It’s been under development since 2019 and has received $545 million in investment from the Federal Reserve. In the months since the program went live, its user base has grown from 35 participating institutions to more than 600.

How Does FedNow Work?

FedNow allows consumers to send and receive instant payments directly from their bank account. Unlike other payment services like PayPal or Venmo, FedNow doesn’t require a third-party account. Instead, all transfers happen from within your bank account.

To use FedNow, individuals and businesses can log into their bank accounts and send payments, ensuring the money will be instantly available in the receiving bank account. The payment flow for a FedNow transaction will look something like this:

1. An individual or business will initiate a payment through FedNow using their bank account. That party’s financial institution can screen the payment using its internal requirements and processes.
2. The sender’s financial institution submits a payment message through the FedNow network.
3. FedNow validates the payment message.
4. FedNow sends a payment message to the receiver’s financial institution to ensure they can and will accept the payment.
5. The receiver’s financial institution confirms receipt of the message and that it will accept the payment.
6. FedNow debits the money from the sender’s financial institution and credits it to the receiver’s financial institution.
7. FedNow sends payment confirmation to both the sender’s and receiver’s financial institutions.
8. The receiver’s financial institution makes the funds immediately available to them.

While this may seem like a lot of steps, this transaction flow takes just seconds, allowing the payment to clear each party’s bank account and making the money available to the recipient immediately.

In addition to providing payment services, the Federal Reserve also provides a number of other support features to participating financial institutions and users. Those features include:

• Liquidity management
• Fraud prevention
• Receive-only participation
• Payment request capabilities
• Support for payment inquiries

The Federal Reserve plans to continually enhance and update the service and its features, in part based on feedback from its users. Considering how new the program is, it’s likely to go through major improvements in its early years.

What Is FedNow User Group?

FedNow User Group is a collaboration network of financial institutions and service providers using the FedNow service who have been enlisted to help improve the program.

As a part of the FedNow User Group, the hundreds of financial institutions and service providers participating in FedNow will receive detailed information about new service enhancements to the program. Additionally, they can provide feedback to the Federal Reserve through working groups, roundtables and webinars to ensure FedNow best fits the needs of banking customers.

As FedNow expands its use cases, one primary goal of the FedNow User Group is to find innovative ways for users to send and receive payments more quickly and efficiently.

Pros and Cons of FedNow

FedNow is far from the first payment service on the market, but it does offer some unique characteristics and features, partially because it’s a government service rather than one offered by a company. But like other payment services, it has some clear pros and cons to consider.

Pros

• Instant payments: FedNow allows consumers of participating financial institutions to send and receive instant payments 24 hours per day, seven days per week, including holidays and weekends.
• Avoid unnecessary fees: This service allows consumers to instantly access the money they receive, helping reduce the risk of overdraft fees and late fees.
• High transaction limits: FedNow’s default customer transaction limit is $100,000, but it can be increased to $500,000 for customers with sufficient funds and risk levels.
• No third-party account: Unlike many payment services, FedNow doesn’t require you to transfer your money from your checking account into a third-party account. Instead, transfers come directly in and out of your bank account.
• Fraud mitigation: FedNow has fraud mitigation tools available to benefit both banks and individual customers. The service’s lack of a need for a third party could also help reduce instances of fraud.

Cons

• Not widely available: FedNow is only available to customers of participating banks, and as of March 2024, only about 600 of the nation’s 9,000+ financial institutions are enrolled in the service.
• No international payments: FedNow only supports payments to and from banks and credit unions within the United States, meaning you won’t be able to send or receive international payments.
• Irreversible payments: All payments on the FedNow network are final and irreversible, so if you accidentally send money to the wrong person or in the wrong amount, you cannot cancel the transaction to correct your mistake.

How FedNow Compares

One of the biggest questions consumers are likely to ask themselves when considering whether to use FedNow is how it differs from other services on the market, such as PayPal, Venmo, Cash App, Zelle and more.

FedNow Doesn’t Require a Third-Party Account

A clear differentiator between FedNow and many other payment services is FedNow doesn’t need a third-party account. Many other payment services require you to set up an account on their platform, transfer money into your account and then transfer money to other users on the platform. Once the recipient gets the transfer, they’ll still need to transfer it from their third-party account into their bank account.

FedNow, on the other hand, allows you to send and receive money directly from your bank account. This eliminates the need for a third-party account. It also eliminates the waiting period — sometimes several days — that occurs when transferring money from your third-party payment platform to your bank account. After all, a transaction isn’t entirely instant if you still have to wait several days to actually use the money.

FedNow vs. Zelle

Of the other payment services on the market, FedNow most closely resembles Zelle, which allows you to send and receive payments directly through your bank account using your email address or phone number. The two key differences are that Zelle is operated by a company while FedNow is offered by the Federal Reserve and that Zelle’s payments take minutes while FedNow’s take seconds.

It’s also worth noting that Zelle introduces some credit risk. FedNow can communicate with participating banks in a way Zelle may not be able to to ensure payments clear instantly on both sides of the transaction. Because Zelle may not be able to do this as efficiently, there is some credit risk, opening up the possibility that payments are being sent with money someone doesn’t really have available in their account.

A final difference between FedNow and other competing services is that FedNow intends to serve all parties: financial institutions, individuals, and businesses. Payment services usually serve individuals and sometimes businesses, while FedNow aims to benefit all parties.