On 20 July 2023, the Federal Reserve officially launched the FedNow Service, its instant payment system designed to enable 24/7/365 real-time payments across the United States. The launch came after years of development and positioned the Fed alongside The Clearing House's RTP network as the two instant payment rails in the US market.
Development Timeline
The Federal Reserve first announced its intention to build an instant payment system in August 2019, setting an initial target of 2023-2024 for launch. Despite the complexity of building a new payment rail from scratch and the disruption of the COVID-19 pandemic, the Fed delivered on the original timeline.
FedNow launched with 35 banks and credit unions as early adopters, along with the US Department of the Treasury's Bureau of the Fiscal Service as a participant. This was a deliberately measured rollout - the Fed prioritized stability over breadth at launch.
How It Works
FedNow settles payments individually and instantly in central bank money, 24 hours a day, 365 days a year. The initial transaction limit was set at USD 500,000, with individual institutions able to set lower limits. The system supports core credit transfer functionality with plans to add request-for-payment and other features over time.
Unlike RTP, which is operated by the private-sector Clearing House consortium and settles through a prefunded joint account, FedNow settles directly through Federal Reserve master accounts. This gave smaller banks and credit unions - many of which are not TCH members - direct access to instant payment settlement in central bank money.
Competitive Dynamics
The launch of FedNow created an unusual situation in the US: two competing instant payment rails serving the same market. RTP had a head start, having launched in 2017, and had built a participant base and transaction volume over six years. FedNow offered the advantage of Federal Reserve backing and direct access for the more than 10,000 depository institutions that maintain Fed master accounts.
Significance
FedNow's launch marked the end of the US being one of the last major economies without a central-bank-operated instant payment system. It signalled the Fed's commitment to modernizing US payment infrastructure and provided the foundation for bringing instant payments to the full breadth of the US banking system.
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