- The Federal Reserve's instant payment network, FedNow is now live in the US.
- 35 credit unions and banks are already on board; the Fed expects to work with over 9,000 institutions over time.
The Federal Reserve switched on its instant payment system, FedNow in the past week. It is an instant payment infrastructure that allows financial institutions to access funds instantly regardless of the time of day or night.
As of now, 35 financial institutions are on board. The credit unions and banks are also joined by the Treasury’s Bureau of the Fiscal Service as well as 16 payment processing service providers.
According to the Fed Chair, Jerome Powell, “The Federal Reserve built the FedNow Service to help make everyday payments over the coming years faster and more convenient. 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”.
While the FedNow Service may take some time to gain momentum, the US central bank expects to work with over 9,000 financial institutions countrywide over time. It is also important to note that the network is set to operate alongside existing infrastructures like FedACH and Fedwire as opposed to replacing them.
FedNow’s payment process
FedNow’s payment flow is comparable to other instant payments flow. The process involves:
Payer
Payer’s bank
Payee’s bank
Payee
FedNow Service
As part of the process, the payer sends a payment instruction to their bank via an end-user interface. The bank responds by authorizing the transaction for as long as the bank account in question has sufficient funds.
The next step in this process is for the payer’s bank to send the payment message to FedNow Service, which will then validate the text and send the instructions to the payee’s bank. The payee’s bank is then required to respond to FedNow Service by either rejecting or accepting the payments instruction. If accepted, the FedNow Service will automatically deduct funds from the payer’s bank account to that of the payee.