The FedNow Service, an instant payments infrastructure developed by the Federal Reserve, has seen impressive momentum since its launch in July 2023. There are now more than 1,000 diverse financial institutions live on the service. Use cases are growing, and the Federal Reserve continues to prioritize innovation and industry collaboration.

“Consumers and businesses are embracing faster payment methods, and the FedNow Service empowers financial institutions to offer instant payments to their customers as part of their suite of offerings,” says Mark Gould, chief payments executive for Federal Reserve Financial Services. “Importantly, this can help financial institutions enhance their customer experience and improve customer retention.”

Instant payments can offer increased transparency and convenience for businesses and consumers. The value proposition also extends to the financial institution itself, says Gould. Many find instant payments can support reduced costs associated with processing higher-touch transaction types, like checks. Financial institutions can also gain operational efficiencies and reduce manual interventions – for example, through converting check or small-dollar wires to instant payments.

Use Case Opportunities

As more financial institutions adopt the FedNow Service, use cases continue to grow. Digital wallet funding and defunding is a popular example, as consumers can benefit from instant access to these funds when they need them, whether they are moving money to a digital wallet or depositing funds into their bank account. In fact, a recent Federal Reserve survey found that digital wallet usage increased by more than 30% among consumers and businesses year over year.

Earned wage access is another fast-growing use case, where employees can be paid directly after a shift instead of waiting for the traditional two-week pay period. This helps workers have more control over their money after they earn it. 

Bill pay is also gaining traction as a way for businesses to optimize operations and consumers to make time-sensitive payments. The request for payment (RFP) feature enables financial institutions to build instant bill pay services and allows a person or organization to request an instant payment from another person or organization. “RFP is likely to continue gaining momentum as businesses increasingly rely on it to manage cash flow,” Gould added.

Addressing Risk Management

Against this robust backdrop, some financial institutions remain cautious, citing concerns around potential fraud risks. As digital banking expands, so too does the need for enhanced risk management. To supplement the risk mitigation capabilities offered by financial institutions, the Federal Reserve is continually evolving service features to help financial institutions address this important issue.

In addition to existing risk mitigation capabilities offered by the service, one upcoming feature will enable financial institutions to set thresholds for rejecting payments that exceed specified cumulative amounts or frequencies. This will help financial institutions detect unusual patterns, such as a large volume of low-value transactions, and allow institutions to set customized limits for different customer types.

When it comes to enabling “send” functionality, financial institutions also have flexibility to select lower-risk use cases. For example, some participants start with transactions they initiate themselves, such as loan disbursements, or paying associates or vendors. As financial institutions build confidence with these use cases, they can expand their offerings over time to meet their unique business needs.

Looking Ahead

Moving forward, the FedNow Service will continue to evolve its future roadmap alongside the industry. Based on recent industry feedback, the service introduced a “net send” limit for correspondent banks, enabling participating banks to set limits for their direct respondents to support liquidity management control.

According to Gould, the evolving use cases and flexible nature of the FedNow Service offers endless possibilities for financial institutions, regardless of where they are in their instant payments journey. The transparency and convenience of instant payments also helps provide better customer service, allowing financial institutions to retain or gain customers seeking these capabilities and uncover additional revenue-generating opportunities.

“Our long-term goal is ubiquity,” Gould concluded. “We want instant payment capabilities to be ubiquitously available to all businesses and consumers through their financial institutions, ensuring that the benefits of instant payments are realized across the country.”