When we think about the U.S. Federal Reserve, it’s usually in terms of interest rates, money supply or some other facet of monetary policy. Beyond those responsibilities, the Fed plays a much larger role in the payments space than most people realize.
The Federal Reserve currently operates the Automated Clearinghouse (ACH) Network, the infrastructure on which we conduct most interbank payments. However, the organization recently announced plans to develop a new round-the-clock, real-time payment and settlement process called FedNow. This will enable faster payments processing and settling to serve the more than 10,000 financial institutions across the country.
FedNow will combine real-time gross settlement (RTGS) with integrated payments clearing. The service will settle interbank obligations using adjustments to the institutions’ master accounts held at regional reserve banks. Receiving banks will then be required to make those new funds available to customers immediately after receipt, up to a value limit of $25,000 at first. Contrast this with the existing ACH process, which works by maintaining multiple records and reconciling them against one another at the bank level.