The Federal Reserve announced that the Federal Reserve banks will create a new “round-the-clock real-time payment and settlement service” called the FedNow service to provide faster payments within the U.S. It is expected to launch by 2023 or 2024. It will begin by offering support for transfers of up to $25,000.
The Federal Reserve holds the belief that faster payment services, which allow for the instantaneous transfer of funds day and night, weekend and weekdays, could potentially bring many benefits. One of which is providing opportunities for both businesses and individuals to have more flexibility to manage their money and fulfill time-sensitive payments.
Specifically, real-time payments for cash-strapped individuals will mean not having to rely on expensive check-cashing services to pay for their living expenses. They will also not depend on taking out high-interest loans, thereby have less on late fees and overdrafts.
Small businesses win because they will be able to avoid short-term loans with high-interest rates.
For more than a century, the Federal Reserve has offered payment and settlement services to promote a safe, efficient, and accessible U.S. payment system. It has been a provider of both payment and settlement services to more than 10,000 financial institutions throughout the country. This broad connection will allow the FedNow service support a national infrastructure necessary for other financial institutions to develop their own faster payment service to benefit all citizens.
The market for faster payments is still in its early stages of development here in the United States. Currently some banks and fintech companies do offer faster payment services, however, their functionality is limited. Because there is a lack of a universal infrastructure to carry out faster payments, these services depend heavily on “closed-loop” approaches. This means that users that are signed up to one service cannot exchange payments with users signed up to other services.
Other services depend on users’ bank accounts, but will face challenges in reaching enough banks so that two users can exchange payments. They also use traditional retail payment methods to move funds between accounts. Unfortunately, this methodology only results in a “build-up” of financial obligations between banks.
The private sector has developed its own solution to address these issues, most notably those from The Clearing House Payments Co., but the challenge to provide faster payments that are also safe, ubiquitous, and efficient remains.
How Will The FedNow Service Work?
The FedNow Service will process and settle individual payments within seconds, 24 hours a day, 7 days a week, and 365 days a year. The service will “settle” the obligations between banks through the adjustments made to the balances of the banks’ master accounts at the Reserve banks. These funds will be eligible to earn interest and count towards the banks’ reserve requirements.
The FedNow service will require participating banks to ensure that the funds associated with individual payments be made available immediately after receiving notification of settlement from the service.
Working alongside the private sector, FedNow hopes to offer a safe and efficient nationwide infrastructure to support faster payments in the United States, thereby making it available on a broader scale for both businesses and individuals.