FedNow Service, the Federal Reserve instant payment system, went live July 20, available to any bank and credit union interested in the tool.
“The Federal Reserve built the FedNow Service to help make everyday payments over the coming years faster and more convenient,” Federal Reserve Chair Jerome Powell said. “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.”
At the start, 35 banks and credit unions, the U.S. Department of the Treasury’s Bureau of the Fiscal Service, and 16 service providers were signed up.
When fully available, instant payments will provide rapid access to funds when it is most useful. For example, individuals can instantly receive their paychecks and use them the same day, and small businesses can more efficiently manage cash flows without processing delays.
Loretta Mester, president and CEO of the Federal Reserve Bank of Cleveland, told attendees at the Summer Institute 2023 for Macro, Money, and Financial Frictions, National Bureau of Economic Research in Cambridge, Mass that while FedNow won’t be offered directly to individuals and businesses, it will allow the customers of financial institutions offering the service to send and receive payments within seconds at any time on any day and get full access to those funds immediately with instant finality of payment.
“The service is being designed as a flexible and neutral cloud-based platform, which is unique among central bank instant payment services, and that design will make it easier to reach scalability and geographic resiliency,” Mester said. “Cloud-based does not mean it is designed using distributed ledger technology. Instead, the FedNow Service settles payments in Federal Reserve Bank master accounts, so it relies on a centralized ledger.”
The offering will operate alongside The Clearing House’s Real-Time Payments service, the instant payments service offered by the private sector, with the competition expected to help promote efficiency for the tool. Mester said the Fed is providing direct support for the development of private-sector faster payments.
“The rollout of the FedNow Service is only the beginning of the journey,” she said. “Enhancements will be made to the FedNow Service over time to support safety, resiliency, and innovation. There are several items on the agenda after the official rollout. Some of these are near- to medium-term efforts and others longer-term considerations.”
These considerations include:
- Growing the number of financial institutions using the FedNow service.
- Educating the public and financial institutions, specifically on fraud mitigation and depositor runs.
- Promoting the interoperability between instant payment systems.
- Facilitating person-to-person and cross-border payments.
“A well-functioning and secure payment system is vital to our economy,” Mester said. “As we modernize the payment system, it is important to remember that the foundation of a successful payment system is the public’s confidence in it. The public needs to be confident that the system will be available whenever the customer needs it; efficient at routing and settling payments; resilient against cyberattacks and fraudulent actors; and reliable without the public having to know the intricacies of the infrastructure behind it.
“As the payment system evolves, the Fed, the industry, and end users will need to continue to collaborate to ensure that the modern payment system lives up to its promise of being efficient, safe, resilient, and available to all,” she told her audience. “That’s the best way to maintain the confidence of the public the Fed serves.”