The 411 on FedNow Instant Payments
With CashApp, Venmo, Zelle and PayPal, you can send money to friends and family around the clock in real time. In July 2023, the Federal Reserve will introduce FedNow, that will enable a similar service through banks.
However, FedNow will NOT replace CashApp, Venmo, Zelle, PayPal or other fintech person to person (P2P) services that you currently enjoy. And FedNow is NOT an app.
The FedNow Service is being launched by Federal Reserve Banks as a service for financial institutions across the United States that will enable businesses and individuals to send and receive money instantaneously and at any time through mobile banking apps or online banking.
OneUnited Bank, as an example, is an FDIC insured, full-service bank. Our Funds Transfer service uses the Automated Clearing House (ACH). These transactions take time. As an example, if you use electronic funds transfer (EFT) to move money from Bank A to Bank B, the funds are withdrawn from Bank A today and arrive at Bank B in 1-2 days. The transfer may take time, but it’s secure.
When funds are “transferred” using fintechs such as CashApp or Venmo, the process seems quick, but the reality is that your funds have not really moved. They are still being held by CashApp, Venmo or other fintech apps until you or the person you are sending money to decide to transfer them into a bank account.
The Federal Reserve plans to introduce FedNow in July 2023. Banks will need to sign up to offer FedNow (it’s not automatic). In addition, you may prefer CashApp, Venmo or Zelle or your family member or friend may not have a bank account or prefer CashApp, Venmo or Zelle. Those services will still be available.
However, if you send money to a friend through a bank’s mobile app or online banking that uses FedNow, your friend will be able to immediately see the funds in their bank account if their bank is also using FedNow. If you own a business and use a business payment service, such as Square, you may be able to receive instant payments to your bank account from customers.
(Please note: FedNow is not a blockchain-based product and it’s not a central bank digital currency. It is not an app. It will not replace the Automated Clearing House Network (ACH); instead, it is expected to complement ACH services. At launch, the FedNow Service will support only domestic payments between U.S. depository institutions, not international payments.)
The FedNow Service will leverage the FedLine network for secure connectivity, which today connects 7,000 financial institutions and processors to the Fed’s critical payment and information infrastructure, services, and applications, such as ACH and wire transfers.
Ultimately, the FedNow Service will serve as a platform for financial institutions to develop innovative, new payment services. There may be a natural movement away from ACH and wire transfers to FedNow over time.
Faster funds can come with the threat of faster fraud. Instant payments are really leaving the bank instantly. That means if you have sent it to the wrong place, your instant payment might not get to the right receiver.
The FedNow Service will include fraud protections, while also guaranteeing that funds can be immediately transferred. The service is being designed to maintain uninterrupted 24x7x365 processing with security features to support payment integrity and data security.
As stated earlier, banks will need to sign up from FedNow (it’s not automatic). As more financial institutions adopt the FedNow Service, a positive network effect is expected to take shape that will allow for faster payments, while minimizing fraud.