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Fed wants to add 8,000 financial institutions to FedNow

Written on May 8, 2024

The Federal Reserve wants to add 8,000 financial institutions to FedNow, its new instant payments network, and it has at least 1,000 in the pipeline to add, a Fed official said. 

While there are nearly 10,000 financial institutions in the country, only about 9,200 of those banks and credit unions are actively using Fed services, so the central bank’s goal for FedNow isn’t necessarily to draw them all, the Fed said. 

So far, about 700 financial institutions have connected to the network since it was launched last July, and the central bank has been eager to lure more to the system in the interest of creating as much reach for the network as possible. The new system will allow consumers and banks to settle payments in seconds, as opposed to days, and provide services at all hours and on weekends. 

There are some 1,500 smaller financial institutions largely dependent on paper checks so the Fed doesn’t expect to draw them all to FedNow, the Fed added. 

While about 60% of the institutions that have signed up for FedNow can receive payments, a smaller 40% have signed up to send payments. That likely reflects some concern about the potential for fraud, though the Fed is seeking to address those risks through circuit-breakers, as in shutoff controls; working with stakeholders; and analyzing anomalies in data. 

The rate of FedNow sign-ups has been seen as slow in some corners of the industry, particularly with respect to a few large banks still not joining in yet. That experience echoes a slow pace of adoption for FedNow’s private sector rival, the RTP network, which was launched by The Clearing House in 2017. 

Still, the start of FedNow last year seems to have instigated more interest generally in the real-time payments capabilities, with the bank-owned RTP posting a faster rate of adoption since its FedNow competitor’s launch in July. 

The Fed is unlikely to ever mandate use of the FedNow system, and it would likely need new authorities to make that happen, but it could seek to boost bank adoption, if needed, by providing pricing incentives, or other types of incentives in the future. 

The Fed envisions a variety of potential use cases from basic capabilities like catering to the movement of funds in digital wallets to supporting earned wage access tools to enabling the faster settlement of major transactions, like buying real estate or a car. 

Aside from those consumer uses, the central bank wants to assist business-to-business payments. That’s especially true for big corporations that manage cash flow to the hour and that are making investments around the world. 

Other countries have moved ahead with real-time payments at a faster rate than the U.S. In particular, Brazil has developed the Pix system and India has deployed the Unified Payments Interface. 

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