FedNow and Instant Payments

In August 2019, the US Federal Reserve Bank announced that it is working on an instant payments platform to be called FedNow.  

The Federal Reserve Bank gets in the news for its work on interest rates, but that is a small part of what it does. Its primary role in the economy is as a bank to banks. As with any business, banks have to manage their liquidity, and they rely on the Fed to help them. When the Federal Reserve wants to encourage people to save money and slow down economic growth to prevent inflation, it raises the interest rates that it charges banks or pays banks on their own deposits. When it wants to encourage banks to lend money and thus stimulate the economy, it will reduce interest rates to banks.

What the Fed does

Besides lending money and taking deposits to banks, the Federal Reserve keeps gold and currency in storage vaults, manages currency distribution, and serves as a bank to commercial banks. The Fed helps banks maintain adequate reserves. The main platform used for transfers between banks is the Automated Clearing House (ACH), administered by the National Automated Clearing House Association.

Now, when you make a deposit into your bank account, you generally have to wait a few days before you can be assured that the money is in your account because of the current systems that the Federal Reserve has. If you are an established customer, your bank will generally allow you to withdraw the money before the check clears, but if it doesn’t, you will be on the hook for the difference. This is the basis for many frauds. 

Bank transfers

Right now, banks have the ability to transfer money instantly between their own customers, The extra time and delay comes when transferring between banks. An almost instant payment can be done through a bank wire transfer, but those involve a dedicated network and extra costs. Payroll is not processed instantaneously, but most banks and credit unions make the money available on payday as a service to their business customers – and many payroll processing firms transfer the funds two days before payday to ensure that there is no snafu. The ACH does not offer instant transfers, although it can transfer money within a day in some situations.

Bento Pay, Zelle, Venmo and related services are not instant payments, either. There is some delay between when the money is taken from the sender’s account and when it is deposited in the receiver’s account based on the time it takes to go through the ACH network. We simply can’t make the payments go through faster. 

The Federal Reserve’s FedNow program is still under development, but the goal is to offer instant settlement and transfers between bank accounts. It would not replace current payment transfer systems so much as speed them up. Then, we could offer our customers instant payments.

Although our payment speed is limited by the speed of ACH, Bento Pay users receive big advantages that are not affected by network issues. Our users can see all of their spending in one place for real-time budget information and sync it with their accounting systems. This leads to greater efficiency and better forecasting on all spending, no matter what form it takes.