How a New Federal Reserve Service Might Speed Up Bank Transfers

Do you ever feel frustrated when you cash a check or transfer a digital cash balance to your bank account and it takes days to process? FedNow Service is a new payment system from the Federal Reserve aimed at allowing individuals and businesses to send and receive money instantly.

Here’s what you need to know about FedNow, which banks are participating, and how it might change the future of banking.

FedNow Service is intended to help banks and credit unions transfer funds instantly to their customers 24 hours a day, seven days a week, 365 days a year. In other words, you won’t have to calculate business days when figuring out how long it will take for a payment to clear.

Though it is similar to existing services Fedwire and FedACH, the difference with FedNow is that there is no lag time. Instant banking transactions can help with cash flow and lets people receive paychecks and other payments faster, helping them avoid the costs of check cashing.

The first phase of FedNow Service launched at the end of July 2023 with 35 early-adopting bank and credit union partners and 16 service providers that support the payment processing. Going forward, all banks and credit unions are invited to sign up for this tool.

Some of the institutions taking part in the initial phase of FedNow include Peoples Bank, JPMorgan Chase, Star One Credit Union, U.S. Bank and Wells Fargo.

Ultimately, the Federal Reserve hopes to get all 9,000 banks and credit unions in the United States signed up so the service is available to all consumers.

Most people are used to Automated Clearing House payments taking multiple days to clear. The reason why that happens is because transactions are processed in batches at specific times. With FedNow, funds will settle in real time so transactions can go through instantly.

Here’s how it works: Payment is initiated through a bank or credit union, and a payment message is sent to the FedNow Service. FedNow validates the payment message and passes it to the recipient’s bank, which confirms it will accept the payment. FedNow then sends a payment notice to notify the two banks that the debit and credit is complete.

Ultimately, it is still a “regular” money transfer – it’s just happening more quickly.

The FedNow Service is not mandatory, but all banks and credit unions are encouraged to participate. While just 35 banking institutions signed up for the launch that number is expected to grow over time.

If you do happen to bank with an institution that is signed up with the FedNow Service, you may notice that sending payments and receiving deposits happens right away as opposed to taking a couple of business days. Just note that in order to reap this benefit, both banks involved in a given transaction will have to be signed up.

As a consumer, there’s nothing special you have to do since it’s the bank or credit union that has to sign up for FedNow Service.

The closest comparison to FedNow Service is ACH, which also powers electronic funds transfers, but those transactions typically take one to two business days to clear.

When it comes to instant banking, the only comparable service right now is Zelle. However, Zelle is still limited to person-to-person instant bank transfers and can’t speed up transactions like paycheck deposits or bill payments.

Other payment services like Venmo, PayPal and Apple Cash allow instant payments, but transferring account funds to your bank takes a day or two.