On Thursday, the Federal Reserve unveiled new details about FedNow Service—a new real-time payments platform that would enable financial institutions in the U.S. to clear and settle transactions in virtually instantaneous fashion.
The Fed announced its plans for FedNowService almost one year ago to the day, and has since been receiving public comments on the platform, what it should look like, and how it should operate. The goal is to develop a widely accessible, “24x7x365” instant payments infrastructure that would “modernize the U.S. payment system and bring the benefits of instant payments broadly to communities across the country,” according to the Fed.
While the Fed has provided payment and settlement services to the financial system since its founding more than a century ago, FedNow Service would represent an expansive, tech-enabled leap forward—one allowing individuals and businesses to transfer funds in a matter of seconds at any time, on any day (including weekends and holidays).
The U.S. lags behind much of the world in this regard; dozens of developed and developing nations around the world—including the likes of the U.K., India, Poland, Mexico, and Nigeria—already operate their own real-time payments infrastructures. Though The Clearing House—a collective comprising most of America’s largest banks and financial institutions—did launch its own real-time payments platform, known as RTP, in 2017, that system remains far from universally adopted.
The Fed has relationships with more than 10,000 different financial institutions across the country, giving it the ability to develop a real-time payments system that virtually all American banks can access to facilitate the near-instant flow of funds. Individuals and businesses would be able to send up to $25,000 through the FedNow Service, though the Fed said Thursday that it would reevaluate that figure after numerous commenters suggested a larger transaction limit.
The benefits of a state-of-the-art, real-time payment infrastructure would appear to be wide-ranging. In addition to allowing businesses of all types to access funds and manage their cash flow in a more flexible manner, it would also allow individuals to send and receive money more quickly, potentially helping those facing financial constraints to avoid penalties like overdraft and late fees.
While many banks and non-bank payment services (like PayPal and Square) already offer instant payments and transfers through The Clearing House’s RTP network, such services often come with additional fees. By creating a wider-reaching platform, the Fed believes FedNow Service would stimulate “healthy competition” in the real-time payments space, and result in “efficiencies related to pricing, service quality, and innovation.”