An instant payment service created by the Federal Reserve. It enables financial institutions, no matter what size or where they are located within the US, the ability to utilize safe and efficient payments in real time.
Businesses and individuals who use the service will be able to send and receive instant payments while also having access to the funds immediately.
The service will provide interbank clearing and settlement that enables money to be transferred from the account of a sender to the account of a receiver in near real-time and at any time, any day of the year.
The service went live July 20, 2023.
Overview
FedNow is an account based system that is accessed by the public through commercial banks. These are the customers of the FedNow service. A master account with the central bank is required to access the system.
To settle, banks and credit unions need to utilize central bank money. This narrows it down to banknotes or reserves. Financial institutions do not settle in cash anymore. That means reserves are what is transferred to the balance sheets of the banks.
All transactions are processed and settled in real time. The system updates the holdings of each entity involved in the transaction.
The financial institutions credit and debit the dollars in accounts while the FedNow system does the same with reserves.
Both systems are employing ledger based money. This is the basis of monetary systems in the digital age.
Attack On Financial Intermediaries
FedNow is projected to disrupt the payment industry. The ones who could really feel it are credit card issuers.
The present financial systems has many levels of friction and financial intermediaries. These only serve to increase the cost by acting as rent seekers.
This is true for the banking system also. For example, the Fed charges these institutions a fraction of a cent for ACH payments but the banks mark it more than 100 times, which take 1-3 days to complete.
Interchange fees, the swipe fees paid by merchants when customers pay by credit card, reached $100 billion in 2022. To incentivize users, these companies offer billions in rewards.
The problem is there difference between the fees and rewards is pure profit for the intermediaries. There is no reason for this inefficiency along with cost to be in the system.
Businesses are going to seek to save these fees if given another option. At some point these technology could be built in point of sale systems.
How It Works
How the system works is rather simple:
- In step 1, a sender (i.e., an individual or business) initiates a payment by sending a payment message to its financial institution through an end-user interface outside the FedNow Service. The sender’s financial institution is responsible for screening the payment according to its internal processes and requirements.
- In step 2, the sender’s financial institution submits a payment message to the FedNow Service.
- In step 3, the FedNow Service validates the payment message, for example, by verifying that the message meets message format specifications.
- In step 4, the FedNow Service sends the contents of the payment message to the receiver’s financial institution to seek confirmation that the receiver’s financial institution intends to accept the payment message. At this point, the receiver’s financial institution will have the opportunity to confirm or deny that it maintains the specified account.
- In step 5, the receiver’s financial institution sends a positive response to the FedNow Service, confirming that it intends to accept the payment message. Steps 4 and 5 are intended to reduce the number of misdirected payments and resulting exception cases that can occur in high-volume systems.
- In step 6, the FedNow Service debits and credits the designated master accounts of the sender’s and receiver’s financial institutions (or their correspondent financial institutions), respectively.
- In step 7, the FedNow Service sends a payment message forward to the receiver’s financial institution with an advice of credit and in parallel sends an acknowledgement to the sender’s financial institution, notifying it that settlement is complete.
- In step 8, the receiver’s financial institution credits the receiver’s account. As a term of the FedNow Service, the Federal Reserve Banks anticipate requiring the receiver’s financial institution to make funds available to the receiver almost immediately after step 7. This crediting to the receiver’s account as well as the debiting of the sender’s account by their respective financial institutions happens outside the FedNow Service.
Central Bank Digital Currency
Many have opined that this is the precursor to a Central Bank Digital Currency (CBDC). The section above shows how this is account based, not through digital wallets.
Digital wallets have the ability to transact directly. The Fed is not dealing with individuals or businesses. It is a system that is only available to the financial institutions that have a master account and opt into the service. Non-bank entities are not eligible to have an account from the Fed.
The system is using a token for settlements. Central Banks Reserves are not legal tender, not dollars. The only recognized legal tender, under fractional reserve banking, are banknotes and commercial bank money. It is the latter that most people utilize.
All interaction with the public is through the commercial banks, not the Federal Reserve. There is also no access to the accounts by the Fed since they are under the banks control.
Financial Institutions
The following banks and credit unions are participating upon rollout of the system.
Participating Banks:
- 1st Source Bank
- Adyen
- Avidia Bank
- BNY Mellon
- Bridge Community Bank
- Bryant Bank
- Community Bank of the Bay
- Consumers Cooperative Credit Union
- Corporate America Credit Union
- Eastern Corporate Federal Credit Union
- First Internet Bank of Indiana
- Global Innovations Bank
- HawaiiUSA Federal Credit Union
- INB
- JPMorgan Chase
- Mediapolis Savings Bank
- North American Banking Company
- Peoples Bank
- Pima Federal Credit Union
- Salem Five Bank Salem
- Star One Credit Union
- United Bankers' Bank
- U.S. Bank
- U.S. Department of the Treasury's Bureau of the Fiscal Service
- Veridian Credit Union
- Wells Fargo Bank, N.A.
Settlement And Liquidity Providers
The following are providing settlement and liquidity to the system.
- Alloya Corporate Federal Credit Union
- Atlantic Community Bankers Bank
- BNY Mellon
- Bankers' Bank of the West
- Catalyst Corporate Federal Credit Union
- Community Bankers' Bank
- Millennium Corporate Credit Union
- PCBB Quad City Bank & Trust
- The Bankers Bank
- Vizo Financial Corporate Credit Union
Certified Service Providers
- ACI Worldwide Corp.
- Alacriti
- Aptys Solutions
- BNY Mellon
- CSI
- ECS Fin Inc.
- Finastra
- Finzly
- FIS
- Fiserv Solutions, LLC (Fiserv NOW, Fiserv Payments Exchange)
- FPS Gold
- Jack Henry
- Juniper Payments, a PSCU Company
- Open Payment Network
- Pidgin, Inc.
- Temenos
- Vertifi Software, LLC