FedNow: A Once-in-a-Generation Payments Innovation for the Fed

Providing payment services to financial institutions is one of the Federal Reserve’s main functions. To help meet that responsibility, the Fed has been at the forefront of improving the speed and efficiency of the U.S. payment system throughout its 109-year history. The Fed began offering nationwide check processing and Fedwire® services in the years soon after its creation and FedACH® services in the 1970s.

The Fed’s latest innovation is its new instant payments system called the FedNow® Service. Banks and credit unions that participate in the service can send and receive payments instantly for their customers, 24 hours a day, seven days a week. Such real-time payments would allow workers to have immediate access to their paychecks, consumers to pay bills electronically at the last minute, small businesses to manage their cash flow more efficiently, and so on.For more information, see the FedNow frequently asked questions on the Federal Reserve Board’s website.

How FedNow Came About

FedNow is the outcome of a multiyear effort to determine whether there was a societal need for the creation of a faster payments service and whether it was appropriate for the Fed to play this role. People throughout the Federal Reserve System collaborated with industry stakeholders to explore those issues and to come up with strategies for improving the U.S. payment system.For more details on what the Fed has done to support instant payments, see the FedNow additional questions and answers on the Federal Reserve Board’s website. Also see the St. Louis Fed’s 2014 annual report, which was published in 2015, “Speed, Security, Efficiency: Improving the U.S. Payment System.” At the St. Louis Fed, then-First Vice President David Sapenaro and I held outreach events to listen to stakeholders’ ideas and concerns. In addition, I was on a team of people from around the Federal Reserve System who evaluated whether the Fed should offer a faster payments service prior to the decision to go ahead and build it. The Fed’s goal in launching FedNow is to provide a real-time payments system accessible by all banks, large and small, with the same level of service for all.

FedNow launched in July, with 35 banks and credit unions being early adopters of the service. Another early adopter was the U.S. Department of the Treasury’s Bureau of the Fiscal Service. Enabling Treasury’s participation in FedNow was a team effort across the Federal Reserve System. At the St. Louis Fed, our Treasury Relations and Support Office helped identify the appropriate parties and coordinated communications to prepare Treasury for the System’s move to seven-day accounting, which had to occur to support a 24/7 payment rail.

Other Considerations with FedNow

With FedNow in operation, broader questions about the Fed’s role in the payment system are emerging. Some have asked what will happen with other payment services that the Fed offers, such as FedACH and check processing. FedACH allows for batches of payments between depository institutions through the automated clearinghouse network. Thus, FedACH—whose transfers totaled nearly $92 trillion in 2021—fills a distinctive niche and isn’t changing in the near term. Whether FedNow will further hasten the demise of checks, which have continued to decline in volume, has implications for the Fed’s check processing operations.

Another question that has come up is how FedNow differs from a central bank digital currency (CBDC), which is a digital form of central bank money that could be made widely available to the general public. Several countries have established CBDCs; however, this concept is currently under study within the U.S. Federal Reserve. FedNow is clearly not a digital currency. Rather, it is a real-time payments service that allows financial institutions to transfer money instantly for their customers. Furthermore, no decision has been made on issuing a U.S. CBDC, and Fed Chair Jerome Powell has emphasized that the Fed would need Congressional approval to do so.See the CBDC frequently asked questions on the Federal Reserve Board’s website, which includes a quote from Chair Powell during his March 2023 testimony before the House Financial Services Committee.

The Continued Evolution of Payments

With FedNow up and running successfully, the Federal Reserve will continue adding more banks and credit unions to the service and offering enhanced capabilities as the payment rail matures. But what might be next for the banking system as a whole? FedNow is offering banks the capability to clear and post transactions instantaneously at a time when many of their customers are demanding faster transactions, whether they be payments or retail deliveries. A once-in-a-generation innovation, FedNow will fundamentally transform banking.

Notes

1. For more information, see the FedNow frequently asked questions on the Federal Reserve Board’s website.
2. For more details on what the Fed has done to support instant payments, see the FedNow additional questions and answers on the Federal Reserve Board’s website. Also see the St. Louis Fed’s 2014 annual report, which was published in 2015, “Speed, Security, Efficiency: Improving the U.S. Payment System.”
3. See the CBDC frequently asked questions on the Federal Reserve Board’s website, which includes a quote from Chair Powell during his March 2023 testimony before the House Financial Services Committee.