Federal Reserve launches instant payment system

The U.S. Federal Reserve announced the launch of its new FedNow system, which allows financial institutions to instantly transfer money to customers any day, anytime.

"The Federal Reserve built the FedNow service to help make everyday payments over the coming years faster and more convenient," said Federal Reserve Chair Jerome Powell, in a statement. "Over time, as more banks choose to use this new tool, the benefits to individuals and businesses will include enabling a person to immediately receive a paycheck, or a company to instantly access funds when an invoice is paid."

The FedNow system, according to the central bank's FAQ, is not a direct-to-consumer or direct-to-business service. Instead it is accessed directly by banks and credit unions who, in turn, can offer their customers instant access to funds versus having to wait a few days for, say, a check to clear. Another document on the matter noted that when the Fed says "instant" it means "instant" and not "faster." The Fed has used the term "instant payment" to refer to a payment in which an end user receives funds in near real time and at any time, with immediate interbank settlement of the payment also having occurred.

This means, theoretically, that people can have immediate access to their paychecks and be able to spend that money on the same day, versus waiting several days for it to process; they could also pay bills at the last minute on the due date, cutting down on late fees; and businesses can have immediate access to funds when invoices are paid, helping them manage working capital.

However it will be up to individual financial institutions to use the service. To start, 35 early-adopting banks and credit unions, listed by the Fed, as well as the U.S. Department of the Treasury's Bureau of the Fiscal Service, are ready with instant payments capabilities via FedNow. In addition, 16 service providers are ready to support payment processing for banks and credit unions.

Andrew Harrer/Bloomberg

As an interbank payment system, the service operates alongside other longstanding Federal Reserve payment services such as Fedwire and FedACH. The Federal Reserve is committed to working with the more than 9,000 banks and credit unions across the country to support the widespread availability of this service for their customers over time.

FedNow will be released in phases, with additional features and service enhancements introduced over time. At launch, it will be designed to maintain uninterrupted processing of credit transfers with security features to support payment integrity and data security. The service will have a 24-hour business day each day of the week, including weekends and holidays. End-of-day balances will be reported on Federal Reserve accounting records for each participating depository institution on each FedNow business day. Access to intraday credit will be provided to participants during its business day under the same terms and conditions as for other Federal Reserve services.

The system will also come with a liquidity management tool for participating financial institutions.

As of now, FedNow can only be used for domestic transactions.