Revolutionizing Payments: FedNow Unleashes Instant 24/7 Transactions

Say goodbye to waiting: How FedNow’s game-changing service transforms the future of payments.

Photo by David Dvořáček on Unsplash

Cryptocurrency has always tried to fix two fundamental economic problems: waiting times for payments and middlemen.

Now, one of those problems is fixed: waiting for transactions. FedNow, the Federal Reserve’s new service, payments between banks and credit unions are instant, 24 hours a day, seven days a week, 365 days a year.

Automated Clearing House (ACH)

Since the mid-1970s, we have used the Automated Clearing House (ACH) system to make payments and transactions.

The ACH network helps businesses, consumers, and the government move money from one bank account to another. These are called transactions, examples are payrolls, tax refunds, payments, and more.

How it works

1. An originator makes a payment using the ACH network
2. The originator’s bank, or Originating Depository Financial Institution (ODFI), takes this transaction and batches it along with other ACH transactions
3. The ODFI sends this batch to an ACH operator (Federal Reserve or clearinghouse)
4. The ACH operator will process and sort the batch, finally making it ready for the recipient’s bank, called the receiving depository financial institution
5. The recipient’s bank receives the transaction

The Problem with ACH

With the ACH network, the biggest disadvantage is that it takes days for transactions to settle. And, combined with weekends and holidays, transactions can take a long time. This system became outdated as other countries moved to instant payment networks.

Image from Insider Intelligence

As of 2021, the U.S. ranks 8th in real-time payments, behind India (48.6%), China (18.5%), Thailand (9.7%), Brazil (8.7%), South Korea (7.4%), Nigeria (3.7%), and the UK (3.4%).

There are alternatives to ACH which offers instant transactions, but each comes with its problems:

• Wire Transfers — Often costly
• Zelle — Limitations and spending limits
• Money Transmitters (Venmo, Square, Paypal) — Restrictions, sending money to a bank account takes a couple of days

Introducing FedNow

FedNow is a new system that will allow banks to send and receive money instantly at any time, in a matter of seconds. FedNow is not a service directed at consumers, but instead at banks that consumers will use. This means that FedNow will not replace or compete with Venmo, Cash App, PayPal, Zelle, etc.

How it works

Credit: FedNow

1. The sender initiates a payment using their financial institution (which uses the FedNow service)
2. The sender’s financial institution submits an ISO 20022-compliant payment message (the global standard for payment messages) to the FedNow service
3. FedNow validates the payment message
4. FedNow confirms the payment message with the recipient’s financial institution
5. The recipient’s financial institution replies to FedNow, intending to accept the payment message
6. FedNow debits and credits the sender and recipient’s financial institution
7. FedNow sends advice of credit (a message that the bank promises that the recipient will receive money from the sender) to the recipient’s financial institution and notifies the sender’s financial institution that the settlement is complete
8. Finally in real-time, the sender’s and receiver’s financial institution credit and debit their bank account

FedNow vs Automated Clearing House

Conclusion

Photo by Towfiqu barbhuiya on Unsplash

Even though it may be years late, FedNow has finally emerged as a game-changing innovation in the realm of payments. Its 24/7/365 instant payment service ushered in an era of unprecedented speed and efficiency. FedNow opens the floodgates to limitless opportunities, revolutionizing the way transactions are conducted and setting the stage for a more dynamic and interconnected financial landscape.