FedNow, an instant payments platform, is currently in development by Federal Reserve Banks with an expected launch in mid-2023. FedNow is a faster alternative to the Automated Clearing House network (ACH) and more cost-effective than Zelle and Real-Time Payments. Once it becomes available, financial institutions of any size may opt in. Federal Reserve Banks will charge financial institutions to use FedNow but will most likely make it free for consumers with an option for banks and credit unions to charge their personal and business customers to send and receive funds while using the network.
The ACH Network, developed in the 1970s, is the conventional means of sending funds electronically in the U.S. An ACH is an electronic fund transfer made between banks and credit unions across the Automated Clearing House network. ACH is used for funds transfers such as bill payments, e-commerce, b2b transactions and other applications such as Direct Deposit. Many who use Direct Deposit have noticed the delay and irregularity in receiving a paycheck, often taking 3-4 business days to receive.
Instant payments are electronic transactions that are complete within minutes, even seconds. When using an instant payment network, funds are sent between bank accounts and are available to the recipient immediately. For example, many banks and credit unions offer Zelle, an instant payments platform, to allow their customers to send and receive funds instantly, free of charge. FedNow will operate similarly to this approach.
A key differential between Zelle or Real-Time Payments and FedNow is cost. Zelle charges financial institutions between $0.50 and $0.75 per transaction. The Federal Reserve plans to charge $25 per month and a $0.045 fee per transaction, paid by the sending institution. FedNow's publicly owned structure allows them to charge roughly 6-9% of Zelle's transaction cost.
Current payment platforms, such as Zelle, are able to withold service to select banks or credit unions based on any reason they choose. For example, asset size, geographic location or a number of other reasons could leave thousands of Americans without access to instant payments. The risk becomes mitigated with FedNow. If it becomes functional and widely adopted it will serve as a secure and cost-effective way to transfer funds for every depositor.
Zelle fraud is rising. For example, in January Bank of America customers began to notice issues with payments processed through Zelle and money began disappearing from their accounts. Zelle's fraud is rising so much that banks are being pressured to reimburse customers for stolen funds. In July of 2022, the Wall Street Journal reported that the Consumer Financial Protection Bureau is beginning to push banks to reimburse customers for lost funds. Since the announcement in July, banks such as Chase, Wells Fargo, Bank of America and others have begun developing procedures for reimbursement while community banks and credit unions have also started to leave Zelle because of the high cost of reimbursing lost funds.
Likely, FedNow will be more secure than Zelle or will be more willing to reimburse. The upside for community financial institutions is that this reimbursement will likely come from the Federal Reserve, rather than the bank or credit union. This will save smaller financial institutions millions in aggregate.
With instant payments, we often think about the convenience of sending money to friends and family. That said, there are a variety of use cases for instant payments, all of which FedNow will support.
Peer-to-Peer (P2P): Transactions between individuals for non-business purposes, such as splitting a check or sending your share of rent to a roommate.Consumer to Business (C2B): Everyday transactions such as groceries and gas, instant online purchases at e-commerce sites, paying a bill to a hospital or electrical company
Business to Business (B2B): Transactions between businesses, such as suppliers and contractors, it also allows billers to send e-invoices to clients, receiving payment instantly
Business to Consumer (B2C): Employees can receive payroll instantly at any time. Payroll no longer needs to be scheduled ahead of time, Retailers can provide refunds and rebates to customers instantly
Consumer/Business to Government (C2G/B2G): Individuals and businesses can pay taxes to their local, state, and federal government instantly, reducing inefficiencies in the tax process
Government to Consumer/Business (G2C/G2B): State and Federal tax officials can provide tax refunds immediately, Includes payments such as social security and other entitlements[1]
FedNow provides a more secure and affordable way for banks of all sizes to transfer funds. Financial institutions will receive advantages that other businesses do such as expedited payroll, bill pay and the opportunity to provide FedNow to depositors. It is expected to have a lower implementation cost and more affordable access to technology.
Smaller financial institutions that early adopt FedNow will likely have a leg-up over competitors as larger banks will likely take longer to adopt and implement the program.
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