1. What is the difference between "faster" and "instant" payments?
Although the term "faster payments" broadly describes what the FedNow Service delivers (e.g., payments that can be sent and received within seconds at any time of the day, on any day of the year, such that receiver can use the funds almost instantly), it can also apply to other improvements to payment speed (e.g., same-day ACH). In the 2020 Federal Register notice, the Federal Reserve Board (Board) transitioned to using the term "instant payments." Specifically, the Board has used the term "instant payment" to refer to a payment in which an end user receives funds immediately, and at any time, with near real time interbank settlement of the payment also having occurred.
2. What benefits do instant payments offer?
Beyond speed and convenience, instant payments can yield real economic benefits for individuals and businesses by allowing them to make time-sensitive payments whenever needed and providing them with more flexibility to manage their money. This flexibility is especially important for individuals and households on tight budgets, for whom receiving a payment in real time could help avoid the need to use expensive check cashing services, engage in high-cost borrowing, or incur overdraft or late fees that may throw off their carefully managed finances. Similarly, immediate access to funds and the ability to instantly make bill payments could benefit small businesses who may otherwise need to seek costly short-term financing. Widely available instant payments will be the foundation for the next generation of payment services.
3. What is required to conduct a payment between depository institution accounts? What is clearing? Settlement?
Payments typically require "clearing" and "settlement" between depository institutions. "Clearing" refers to the exchange of information about a payment and can involve additional activities such as fraud screening. "Settlement" refers to the debiting and crediting of accounts to transfer funds for a payment. Settlement services act as the foundation for most payment systems, as they provide a way for the sender’s depository institution to settle a payment by moving funds to the receiver’s depository institution. Payment services offered by the Federal Reserve, such as funds transfer, check, and automated clearinghouse (e.g., direct deposit) services, have historically provided clearing and settlement between depository institutions.
4. What have central banks in other countries done to support instant payments?
Central banks in various countries have, over the past decade or so, implemented changes to their settlement services in support of instant payments, reflecting the foundational role that central banks play worldwide in the settlement of financial obligations between financial institutions. For example, the European Central Bank, Banco de México, and the Reserve Bank of Australia have looked to support the development of instant payments in their jurisdictions by providing services that enable payment-by-payment, real-time settlement of retail payments at any time, on any day. In fact, among the many countries that have either developed or are in the process of developing instant payment capabilities, many have done so with the direct operational involvement of their central banks.
Federal Reserve Actions to Support Instant Payments
5. In addition to the FedNow Service, what other actions has the Federal Reserve taken to support the development of instant payments in the United States?
Beginning with a public consultation paper in 2013, the Federal Reserve engaged in several collaborative initiatives with industry stakeholders on strategies for improving the speed, safety, and efficiency of the nation’s payment system. In 2015, the Federal Reserve convened the Faster Payments Task Force (FPTF), a 320-member group comprised of a broad range of industry participants, to identify and assess alternative approaches for implementing safe and ubiquitous instant payment capabilities in the United States. In its final report, the FPTF identified the need for ongoing industry collaboration to address infrastructure gaps; to develop models for governance, rules and standards; and to consider actions and investments that will contribute to a healthy and sustainable payments ecosystem.
Consistent with the FPTF’s recommendations, the Federal Reserve facilitated the industry’s faster payments Governance Framework Formation Team which, in late-2018, concluded its work and launched the U.S. Faster Payments Council, an industry-led membership organization that develops collaborative approaches to accelerate U.S. adoption of faster payments.
Further, the Federal Reserve supported the development of private-sector services for instant payments by enabling the use of joint accounts to facilitate settlement in instant payment services. Specifically, the Board approved in 2017 final guidelines for evaluating requests for joint accounts at the Reserve Banks intended to facilitate settlement between and among depository institutions participating in private-sector payment systems for instant payments. The impetus for allowing broader use of joint accounts was to facilitate private-sector services for instant payments. As an example, the existing private-sector instant payment service settles payments in real time on its private ledger, supported by a joint account at a Federal Reserve Bank that is prefunded by participants in the service.
In addition, the Reserve Banks have built liquidity management transfer capability within the FedNow Service. This capability is available to FedNow Service participants as well as participants in private-sector services for instant payments that use joint accounts. Participants in such private-sector services may choose to access liquidity management capability for the limited purpose of liquidity transfers without needing to be a full participant in the FedNow Service. (For more information on liquidity management capability, please see FAQ 21).
6. What steps did the Federal Reserve take in determining whether and how to build the FedNow Service?
As part of the recommendations published in its final report in 2017, the Faster Payments Task Force requested that the Federal Reserve (i) develop a 24x7x365 settlement service to support instant payments and (ii) explore and assess the need for other Federal Reserve operational role(s) in faster payments. The U.S. Treasury subsequently recommended that "the Federal Reserve move quickly to facilitate a faster retail payments system, such as through the development of a real-time settlement service, that would also allow for more efficient and ubiquitous access to innovative payment capabilities." In response to these requests and recommendations, the Board published in 2018 a request for comment on two potential Federal Reserve payment and settlement services to support the development of instant payments in the United States. The vast majority of comments received supported the Federal Reserve building a real-time gross settlement (RTGS) service for faster payments.
As a result of this extensive consultation with a wide variety of stakeholders, the Board announced via public notice in August 2019, that the Reserve Banks would develop the FedNow Service, a new interbank 24x7x365 RTGS service with integrated clearing functionality to support instant payments in the United States. In that notice, the Board requested comment on the features and functionality of the service; and on August 6, 2020, the Board published a final notice detailing the features and functionality of the FedNow Service at launch as well as potential features for future releases.
7. Does operating the FedNow Service go beyond the roles that the Federal Reserve has traditionally played in the payment system?
Operating the FedNow Service alongside private-sector real-time gross settlement services for instant payments aligns with most payment systems in the United States. Since its inception, as intended by Congress, the Federal Reserve has played a key operational role in the nation’s payment system by providing payment and settlement services between depository institutions. As the nation’s central bank, the Federal Reserve has a unique ability to provide settlement between depository institutions without introducing credit and liquidity risks. This operational role also allows the Federal Reserve to promote the accessibility, safety, and efficiency of the U.S. payment system. The payment and settlement services offered by the Reserve Banks, such as services for funds transfers, checks, and automated clearinghouse payments, have traditionally operated alongside and in support of similar private-sector services
8. Why doesn’t the Federal Reserve use its supervisory or regulatory authority to influence the adoption of instant payments in the United States?
The Federal Reserve Board does not have plenary regulatory or supervisory authority over the U.S. payment system. Rather, the Board has limited authority to influence private-sector payment systems in specific circumstances. Instead, the Federal Reserve has historically exercised significant influence in the U.S. payment system through the Reserve Banks’ provision of payment and settlement services to depository institutions. This operational role has helped to promote payment systems in the United States that are ubiquitous, safe, and efficient.
9. How does the Federal Reserve make decisions about developing new payment services, such as the FedNow Service, or enhancing its existing services?
The Federal Reserve Board has established a set of criteria for evaluating new or enhanced Federal Reserve payment services in its policy The Federal Reserve in the Payment System. As the Federal Reserve considers the introduction of new services or major service enhancements, the policy requires all of the following criteria to be met:
The service should be one that other providers alone cannot be expected to provide with reasonable effectiveness, scope, and equity. For example, it may be necessary for the Federal Reserve to provide a payment service to ensure that an adequate level of service is provided nationwide or to avoid undue delay in the development and implementation of the service.
The Federal Reserve must expect that its providing the service will yield a clear public benefit, including, for example, promoting the integrity of the payments system, improving the effectiveness of financial markets, reducing the risk associated with payments and securities-transfer services, or improving the efficiency of the payments system.
The Federal Reserve must expect to achieve full recovery of costs over the long run.
Key Policy Considerations of the FedNow Service
10. Why did the Federal Reserve believe it was important to develop the FedNow Service?
In assessing its criteria for new payment services, the Federal Reserve Board considers input from the public, historical experience, and its own analysis to assess whether such services can be expected to generate public benefits that private-sector services alone may be unable to achieve. Based on its assessment, the Board concluded that private-sector real-time gross settlement services for instant payments alone were unlikely to provide an infrastructure for instant payments with reasonable effectiveness, scope, and equity. In particular, private-sector services would face significant challenges in extending equitable access to the more than 9,000 diverse depository institutions across the country. By contrast, the Federal Reserve is well positioned to overcome the challenge of extending nationwide access to an infrastructure for instant payments, thanks in large part to its existing nationwide payment infrastructure and established customer service relationships with more than 9,000 depository institutions (or their agents). Moreover, the Board concluded that development of the FedNow Service would likely yield clear and substantial benefits to the safety and efficiency of instant payments in the United States, as suggested by the majority of comments in response to the Board’s 2018 request for comment.
11. How does the FedNow Service make instant payments safer in the United States?
A safe payment system is crucial to economic growth and financial stability because the effective operation of markets for virtually every good and service is dependent on the smooth functioning of the nation’s banking and payment systems. The FedNow Service promotes the safety of the U.S. payment system in multiple ways. As the prominence of instant payments in the United States grows, operating the FedNow Service allows the Federal Reserve to retain its ability to provide stability and support to the banking system and the broader economy in times of crisis. In addition, the FedNow Service enhances the safety of the U.S. payment system by promoting resiliency through redundancy, allowing depository institutions that join multiple services to establish backup connections in case one of those services has an operational outage or other problem.
12. How does the FedNow Service lead to a more efficient payment system?
An efficient payment system facilitates and encourages economic activity by making it faster, cheaper, and more convenient for individuals and businesses to pay for goods and services. The FedNow Service facilitates an efficient payment system by creating a foundation on which depository institutions across the country and the broader payment industry can build modern, innovative, and safe instant payment services. By facilitating nationwide reach for instant payments, the FedNow Service can make the development of new instant payment services more attractive, improving efficiency by increasing innovation and competition in the market for end-user instant payment services. In addition, the presence of multiple real-time gross settlement (RTGS) services for instant payments—the FedNow Service and private-sector RTGS services—can yield additional efficiency benefits by leading to lower prices and higher service quality, which would benefit the U.S. payment system and its users.
13. How does the FedNow Service help smaller depository institutions?
Providing payment services that are accessible to virtually all U.S. depository institutions benefits all payment system participants because it allows individuals and businesses to make payments to any other party for a wide range of purposes. The Federal Reserve is uniquely positioned to operate a safe and efficient nationwide settlement service for instant payments through its existing payment infrastructure and established customer service relationships with more than 9,000 depository institutions (or their agents). Since its inception, driven by its long-standing policy commitment to promote nationwide access, the Federal Reserve has extended access to depository institutions of all sizes on fair and equitable terms, including smaller depository institutions in rural and remote areas of the country. The FedNow Service facilitates access to a real-time gross settlement infrastructure for instant payments for these depository institutions and, most importantly, the communities they serve.
14. Will the Federal Reserve be able to recover costs of the FedNow Service over time?
In keeping with the requirements of the Monetary Control Act (MCA) and longstanding principles for the pricing of Federal Reserve services, the Federal Reserve Board would fully expect any new service to achieve full recovery of costs over the long run. In reaching this conclusion, the Board considered the MCA’s cost recovery requirement alongside its requirement that the Federal Reserve "give due regard to competitive factors and the provision of an adequate level of such services nationwide." For any new service, the Board would follow a similar approach to long-run cost recovery as that applied to the Federal Reserve’s FedACH® service, the last new retail payment service developed by the Federal Reserve prior to the FedNow Service.
15. How does the FedNow Service support the development of instant payment services in the United States?
The FedNow Service, alongside similar services provided by the private sector, will help establish over time a safe and efficient nationwide infrastructure supporting instant payment services in the United States. This infrastructure enables depository institutions across the country and the wider payment industry in their efforts to build modern, innovative, and safe instant payment services that are broadly available to individuals and businesses and that ultimately serve the American public.
The FedNow Service is available to depository institutions in the United States and enables individuals and businesses to send instant payments through their depository institution accounts. The service is a flexible, neutral platform that supports a broad variety of instant payments. At the most fundamental level, the service provides interbank clearing and settlement that enables funds to be transferred from the account of a sender to the account of a receiver in near real-time and at any time, any day of the year. Depository institutions and their service providers are able to build on this fundamental capability to offer value-added services to their customers.
Features and Functionality of the FedNow Service
16. How does the FedNow Service work?
The FedNow Service processes and settles individual payments within seconds, 24 hours a day, 7 days a week, 365 days a year. Like other payment and settlement services offered by the Federal Reserve, the service settles obligations between depository institutions through debit and credit entries to balances in their master accounts at the Reserve Banks. Consistent with the goal of supporting instant payments, use of the FedNow Service includes, as a term of service, a requirement that participants make the funds associated with individual payments available to their end-user customers immediately after receiving notification of settlement from the service. A detailed description of the payment flow of a FedNow Service transaction can be found here.
17. What features and functionality are included in the FedNow Service?
The FedNow Service maintains uninterrupted 24x7x365 processing of credit transfers with security features to support payment integrity and data security. The service has a 24-hour business day each day of the week, including weekends and holidays. End-of-day balances are reported on Federal Reserve accounting records for each participating depository institution on each FedNow Service business day. Access to intraday credit is provided to participants in the FedNow Service during its business day under the same terms and conditions as for other Federal Reserve services.
The FedNow Service also includes optional features: fraud prevention tools, the ability to join initially as a receive-only participant, request for payment capability, and tools to support participants in their handling of payment inquiries. The FedNow Service also provides liquidity management transfer capability to support instant payment services (see FAQ 21). Additional features and service enhancements will be introduced over time.
18. When did the FedNow Service become available?
The FedNow Service began operating on July 20, 2023.
19. Who is eligible to participate in the FedNow Service? How can merchants, consumers, or non-bank payment service providers access the service?
As with all Federal Reserve Bank services, the FedNow Service is available to depository institutions eligible to hold accounts at the Reserve Banks under applicable federal statutes and Federal Reserve rules, policies, and procedures. Participants are able to designate a service provider or agent to submit or receive payment instructions on their behalf. Participants are also able to settle payments in the account of a correspondent, if they choose to do so. Merchants, consumers, or non-bank payment service providers can access the service through depository institutions as they do today with other payment systems.
20. Are cross-border transactions available in the FedNow Service?
The FedNow Service supports only domestic payments between U.S. depository institutions.
21. How does the FedNow Service support liquidity management needs in a 24x7x365 environment?
Feedback in response to the 2019 Federal Register Notice indicated a need for the Federal Reserve to provide support for FedNow Service participants in managing their liquidity needs in a 24x7x365 environment. Given that the FedNow Service is inherently able to support funds transfers around the clock, the Board determined that providing liquidity management transfer capability as a core feature of the service would be the most effective way to address the industry’s needs for liquidity management related to instant payments. The capability is available to FedNow Service participants and their traditional liquidity providers, as well as participants in private-sector services for instant payments that use a joint account at a Reserve Bank. Participants in such private-sector services may choose to access the capability for the limited purpose of liquidity transfers without needing to be a full participant in the FedNow Service.
22. What is payment system interoperability?
The Federal Reserve defines interoperability broadly to mean that payment messages are routed or exchanged and settled such that a sender may initiate a payment, and it will seamlessly reach the receiver. With interoperability, an individual or business with a bank account would be able to send a payment to another individual or business, without having to choose, understand, or even be aware of the path taken by the payment.
In a payment system with multiple operators, interoperability could take different forms.
As noted in a paper by the U.S. Faster Payments Council, one model of interoperability is payment routing, which is used in card payments and wire transfers. This model relies on the sending depository institution routing payments through a specific service based on the path(s) available to reach the receiver; if there is more than one path, the sending depository institution may choose the service it uses based on specific criteria, such as price and features.
Another model is message exchange across services, which is designed for bilateral exchange between two service operators. In this model, depository institutions can connect to either service operator, and those operators conduct message exchange with each other and provide settlement arrangements, among other things. Automated clearinghouse (ACH) payments use this model.
23. Does the FedNow Service interoperate with other private-sector services for instant payments to facilitate nationwide reach?
The Federal Reserve Board views nationwide reach as a key objective for real-time gross settlement infrastructure for instant payments.
The FedNow Service supports payment routing interoperability with the existing private-sector service. The Federal Reserve is committed to using the widely accepted ISO 20022 standard and other industry best practices to remove unnecessary and burdensome incompatibilities that could be a barrier to payment routing.
The Federal Reserve is open to the model of interoperability based on message exchange across services in the future. However, the message exchange model poses several additional complexities (such as technical message exchange and common settlement) and would require the full commitment and active engagement of the existing private-sector service.
24. How do I get involved to help inform the evolution of the FedNow Service?
The Federal Reserve will continue to engage with industry stakeholders as the FedNow Service matures in order to understand, on an ongoing basis, the needs of depository institutions, other industry stakeholders, and the public. A primary avenue of engagement is the FedNow Community, which is a voluntary group open to the public.
25. How can I learn more information about the FedNow Service, such as operational procedures and pricing?
More details on the service can be found at FRBservices.org.