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What Is the FedNow Program and How Does It Work?

What Is the FedNow Program and How Does It Work?

Published on: 18 Aug 2023 7 min read

FedNow, the Federal Reserve’s newly launched real-time payments service, enables faster bank payments for financial institutions of any size 24/7, 365 days a year. The FedNow service will help the wider adoption of instant payments across the US, which is lagging behind other economies like India, Brazil, the UK and the EU, especially among small and medium-sized banks.

What Is the FedNow Program and How Does It Work?

The service began operating on July 20, with over 50 early adopter organizations taking part. Let’s break down what the FedNow program is and how it will affect the US payments system.

What is the FedNow program?

FedNow is the new government-created platform allowing instant money transfers across banks and credit unions 24/7. This includes weekends and bank holidays, unlike other online transfer services, such as the Automated Clearing House (ACH) network, which processes transfers in batches and takes a few days to complete.

The idea behind FedNow is to make instant payments more accessible to the general public through its adoption by banks of all sizes, specifically by regional banks with fewer clients and resources. It is available to all US banks and credit unions, but they are not required to join. If a financial institution opts in, this means its customers could, for example, make payments on their mortgage without planning days ahead for the amount to clear. Also, businesses could send and receive invoice payments within seconds.

In many ways, the new service is similar to the RTP network. Still, the main difference is that FedNow will include all federal reserve banks through the FedLine® network, providing real-time access to payments and information services to thousands of financial institutions.

How will FedNow work?

FedNow will have instant transfer speed and make clearing and settlement happen in seconds. In addition, it will provide immediate payment confirmation to senders and recipients. Transactions will occur via a closed loop system which means that FedNow acts as a shared network and participants don’t need accounts with any apps or financial institutions to have their payments routed and settled.

Participating institutions will have to pay a service fee, but at this point there is no confirmation that banks will pass on costs to end customers. Banks in the FedNow network will get to choose different services. For example, a financial institution can opt into sending and receiving funds back and forth across organizations or choose to only be a receiver.

The FedNow program will be a gamechanger across the US banking system that up until now required hours or days for payments to clear and get from one entity to another. Now, individuals and small businesses will be able to make transactions through bank accounts of participating banks. The network will benefit small banks specifically as it will allow them to provide equitable access to a larger number of people.

How will FedNow work?

Who is eligible to use FedNow?

If their bank has opted in, both businesses and consumers will be able to access FedNow. More than 10,000 financial institutions across the US that are part of the Fed’s network will be eligible, as well as institutions that can hold accounts at Reserve Banks. For instance, if a consumer wants to send money to a friend, both individuals have to bank with the same financial institutions that are part of the FedNow system.

FedNow will help for the wider adoption of instant payment services and support the most common payment types, such as Person to person (P2P), Consumer to Business (C2B), Consumer to Government (C2G), Business to Consumer (B2C), Business to Business (B2B), etc.

What are the benefits of FedNow?

One of the biggest benefits of FedNow is that it will support regional banks across the US and their customers. It will promote financial inclusion by enabling small businesses and local financial institutions to participate in real-time payment services. This also means improved efficiency of business operations due to bigger flexibility and cash flow control.

In addition, FedNow is integrated with the Federal Reserve’s wider network. In its essence, it is a flexible and more neutral platform offering a variety of instant payments. For the general public, one of the main benefits will be quicker access to salary payments and elimination of delayed payroll.

As of now,  interbank payment systems across the country are not equipped to support instant retail payments. Their goal is to allow individuals and businesses to transfer funds at any time, so that these funds are available to the recipient immediately.

In a broader sense, the FedNow system is expected to be a game-changing factor in the payments industry in the US and help shape the future of the payments system in the years to come. It will facilitate innovation by providing a platform for fintech players and other trail-blazing companies to build on.

What are the benefits of FedNow?


Differences between FedNow and instant payment apps

At first glance FedNow may look similar to private sector payment apps such as Venmo, Cash App, Paypal and Zelle that send funds instantly. However, they do so outside of bank accounts. FedNow’s goal is not to eliminate them, nor undermine their importance. Rather, it will work alongside the current system to advance the adoption of instant payments across the country, especially among smaller players in the financial industry.

Another key difference is that the FedNow program is available only to financial institutions and not directly to customers meaning individuals will not be signing up for it. Also, it doesn’t have an app or a website where users can send and receive funds. Instead, banks and credit unions will provide the service through new features on their mobile apps and websites.

According to the Federal Reserve’s website, customers will not even see the name FedNow on their provider’s platforms as the service is a high-speed highway that helps instant payments move between institutions and these institutions’ products simply connect to the highway.

Differences between FedNow and instant payment apps


The FedNow program is expected to revolutionize the US payments system. It will support instant clearing and settlement of transactions for banks and credit unions across the country. Even though individuals will not have direct access to FedNow, they will be able to take advantage of the instant payment services offered by their financial institutions.

Let’s say an employee is getting their paycheck through FedNow. Instead of waiting for it to clear for days, it will be instantly available. Another example would be someone forgetting to pay their rent until the last minute. FedNow will make it possible to send the money even late at night without waiting for the payment to go through for one or several business days.

Because of the speed and convenience of instant payments, they are becoming an increasingly preferred method of transferring funds. FedNow’s primary goal is to support the growth of this segment in the payments industry. It will not replace instant payment apps like Venmo, PayPal, Cash App and Zelle, but rather work alongside them to provide high-quality payment services that meet consumers’ changing demands.

Any new system being introduced into the payments sphere is bound to disrupt the status quo and this comes with certain challenges. Every financial institution that will opt in and use FedNow will have to make certain adjustments, upgrades and integrations across their technological landscape to accommodate the new service.

Scalefocus is here to help you navigate the challenges the adoption of FedNow is going to bring along. Take a look at how we are reinventing financial services through technology and contact us so you could get the full benefits of FedNow.

About the Author:

Velina has been writing in one way or another most of her life. In 2020, she took a leap of faith and left advertising to explore the unlimited potential of the technology world. She is interested in topics such as FinTech, Digital and Neobanking, Payments, and Embedded Finance among others. Outside of technical writing, she enjoys vegan food, films, and creative storytelling.

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