Everything you need to know about the launch of FedNow

• This month, the US Federal Reserve is launching FedNow, a new interbank clearing and settlement service that facilitates instant payments 24/7, 365 days a year. 
• FedNow will aim to transform the way that money moves in the US, enabling faster payments for business and consumers.
• In a new report, FXC Intelligence explores the impact of FedNow and finds that it may also have the potential to support faster cross-border payments in the future.

 Later this month, the US Federal Reserve will launch FedNow, a new interbank clearing and settlement service that facilitates instant payments 24/7, 365 days a year. This follows a successful pilot programme in 2021, which saw more than 120 participants across major banks, smaller regional banks and fintechs signing up to test the new system.

It’s not currently known how many financial institutions across the US will adopt FedNow at launch, however it has been designed to be accessible to all financial institutions in the country. The graphic below shows where the headquarters of banks and credit unions in the FedNow Pilot Programme are based, which gives a sense of how far FedNow has taken a foothold across the US, as well as how much further it has to go in terms of adoption.

FedNow has the potential to transform the way money moves in the US. Despite being one of the biggest payment markets globally, the actual system for moving money in the US is still slow. Most of the time, it will take up to three days for funds to appear in a recipient's account.

This is because of a legacy system, the Federal ACH system, which since the 1970s has worked by batching payments that are then paid in intervals, rather than at the moment of payment.

Daniel Webber, CEO and founder of FXC Intelligence said:

“Popular apps such as Venmo, Cash App and Zelle have filled the gap for instant P2P money transfers for years. Many industry peers have speculated that the launch of FedNow is in direct response to the success of these private challengers.

“Undoubtedly, the provision of a federal 24/7 settlement system will be beneficial to American customers and businesses, however I think we can expect to see some limitations on the take-up of the new system.

“Adopting the FedNow system will be optional at the start, and asking banks to move from their current legacy systems is a big undertaking that will take time. FedNow will launch with a maximum transfer limit of $500,000, which means banks looking to make larger payments will need to use a different system, such as the RTP.”

FXC Intelligence analyzed how FedNow will impact instant payments in the US, as well as its future potential to facilitate cross-border transactions in a new report. FedNow will launch as a purely domestic service and experts interviewed for the report agree that the system needs to gain traction across the US before it can be linked in with other payment schemes internationally.

However, FedNow will offer opportunities to improve cross-border payments because of the prominence of the US dollar and there’s already conversations happening among central banks on how to link schemes to improve cross-border interoperability.

In the meantime, FedNow could still be beneficial for private fintechs that specialise in delivering faster, more efficient cross-border payments. For these companies, being able to collect money into their accounts faster via local real-time payment rails helps speed up the delivery process for P2P customers. The system will need to be more widely adopted with an expanded transaction limit for business customers to truly benefit from the new system.

Further info:

 -   To read more about FedNow, read FXC Inteligence’s report here.

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