Understanding FedNow: The Future of Real-Time Payments

May 19, 2023
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As a financial services digital transformation agency, we’re excited about the launch of FedNow, the Federal Reserve’s real-time payments solution. FedNow will enable banks to provide instant payment capabilities to their customers 24/7/365, making it faster, more secure, and more convenient for businesses and consumers. Learn how FedNow is poised to revolutionize the US payment system and transform payment experiences in our latest blog post.

What is FedNow?

FedNow is an upcoming, real-time payment infrastructure developed by the Federal Reserve. It will allow banks and other financial institutions to clear and settle payments instantly, rather than wait for the traditional ACH (Automated Clearing House) process. As a digital system, it will always be “online,” meaning customers can send and receive payments any time of the day or night.

Digital commerce and the Gig Economy have led to a growing demand for faster and more efficient payment options. Consumers and businesses alike are looking for ways to pay instantly, without waiting several business days for funds to clear. FedNow is expected to launch in July, 2023, and it will be available to all banks and financial institutions in the United States.

young man making a payment while having a coffee

How does FedNow work?

FedNow will provide banks and other financial institutions with a real-time gross settlement (RTGS) system. This means payments will be settled on a one-to-one basis, in real-time, rather than batched and settled in groups, as is the case with ACH transactions.

Banks will connect to the FedNow system through a dedicated interface, which will allow them to send and receive payments instantaneously. The system will use ISO 20022 messaging format which was designed to be highly interoperable and support a wide range of payment types and currencies. FedNow will also incorporate a range of security features to ensure payments are processed securely and to mitigate fraud and other risks. The system, for example, will use advanced encryption and tokenization technologies to protect sensitive payment data and Personally Identifiable Information (PII).

women making a secure payment using a mobile

Why is FedNow important?

Faster payments with increased visibility: FedNow’s primary benefit is speed. Traditional payment systems can take days or even weeks to process transactions, whereas FedNow will enable real-time payments, meaning funds will be transferred instantly. This will be especially beneficial for businesses that rely on cash flow, as they will be able to receive payments faster and have better visibility into their finances.

Ease of access: Another benefit of FedNow is its availability. Unlike some other payment systems, FedNow will be available to all US banks, making it accessible to a wide range of businesses and consumers. This will level the playing field and ensure all businesses have access to the same payment system. This is regardless of their size or location.

Promoting financial inclusion: FedNow will help promote financial inclusion by providing customers with access to faster, more efficient payment options. This is particularly relevant for individuals and businesses who have historically been underserved by traditional banking institutions, such as those in rural or low-income areas.

Promoting innovation and competition: FedNow will promote innovation and competition in the payments industry. By providing an innovative, real-time payment infrastructure, the Federal Reserve encourages banks and other financial institutions to develop new and innovative payment products and services. This will help drive down costs and improve customer experience.

Enhance payment security: Another crucial aspect of FedNow is its potential to enhance payment security. The instant payment infrastructure is designed to use advanced security measures, including encryption and fraud detection tools to protect users from unauthorized transactions and other threats. By providing a secure platform for instant payments, FedNow can reduce the risk of financial fraud and promote increased confidence in the payment system.

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FedNow is an exciting development in the payments industry and one that has the potential to transform the way we send and receive payments. This launch is an essential step toward modernizing the United States’ payment infrastructure. By providing a faster, more secure, and more efficient platform for instant payments, FedNow has the potential to transform money movement and management across the country. Its impact on financial inclusion, innovation, and economic growth underscores the importance of this development in shaping the financial system’s future.

To find out more about our Financial Services industry-specific solutions, don’t hesitate to contact our expert team today!