Why should you care?

The Central Bank Digital Currency program and the possible alternative called FedNow debuts in March 2023, but is intended to be launched in phases so they can make improvements as it is released. There are rumors going around and people are scared of the program because they think the government is trying to track their payments. Let’s start with dispelling the myths.

What FedNow is NOT?

It’s NOT the Fed trying to create its own Cryptocurrency.
It’s NOT blockchain.
It’s NOT the Fed trying to learn and track your spending habits.

FedNOW logo

What is FedNow?

The simple way to explain it is that the Fed is updating how a wire is cleared so that it can be done in seconds instead of hours or days. The Fed would act as a clearing agent to guarantee payment between 2 different financial institutions. According to the Federal Reserve website, they define FedNow by stating, “The FedNow Service is a new instant payment service that the Federal Reserve Banks are developing to enable financial institutions of every size, and in every community across the U.S., to provide safe and efficient instant payment services in real-time, around the clock, every day of the year.” Funds will be accessible immediately in a convenient and safe manner to provide time-efficient and time-sensitive payments.

Currently 3 types of payment options:

  1. Write a check – not the most optimal as checks can bounce and take awhile to clear.
  2. Wire transfer – this clears through the Fed and takes a few hours as the Fed verifies and moves the money to the receiver’s account.
  3. Electronic Funds Transfer – has a 5-day clearing process.

What is the difference between ACH (Automated Clearing House) and FED NOW?

ACH is an electronic payment system that allows individuals and businesses to send or receive payments through their banks. Some examples of ACH include direct deposit, automatic bill payment, and electronic check payment. The advantages of ACH are that it is convenient and has low fees.

How does FedNow compare and what are the benefits?

FedNow is a proposed service from the Federal Reserve that would allow individuals and businesses to make real-time payments through their banks. How Fed NOW would work is that users initiate a payment through their bank’s online or mobile banking platform, which is sent to the recipient’s bank in real-time, and the recipient’s bank credits the payment to the recipient’s account. The advantage of FedNow is that it is a potentially faster and more convenient method than existing payment systems such as checks, ACH, and wire transfers.

Both ACH and Fed NOW are electronic payment systems that allow funds to be transferred between bank accounts. The ACH is currently available and widely used, while FedNow is still in the proposal stage and has not yet been approved or implemented. ACH is generally faster than traditional payment methods such as checks, but Fed NOW would potentially be even faster.

The figure below illustrates a completed payment over the FedNow Service in its simplest form. To read the 8-step process check out the FedNow article titled, “About the FedNow Service,” on the Federal Reserve Website.

FedNOW Service

*Source – Federal Reserve www.FRBservices.org

For more information on how the FedNow Service will work, check out this youtube video. If you want to know a little more about hiring a financial advisor and the questions you should ask, please check out our right-fit guide to finding your right-fit advisor.

The information provided is based on our understanding and is for information purposes only. Please contact us for any questions relating to the content above, or to discuss your specific situation. ACH is an electronic payment system that allows individuals and businesses to send or receive payments through their banks.
By Published On: January 19th, 2023

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About the Author: Tara Bruce

Tara Bruce
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