FedNow vs. ACH: How they differ

This past summer, the Federal Reserve introduced a new payments system that makes it possible for people to send and receive money into their bank accounts instantly. The system, known as FedNow, operates 24 hours a day, seven days a week. That means you can get funds deposited in your checking account at any hour of the day or night, even on weekends. But chances are you won’t be able to use the system yet because it’s only available at select financial institutions. So for many Americans, the traditional, and slower, Automated Clearing House (ACH) system remains the only option.

But as FedNow gains adoption among banks and credit unions, it’s worth taking time to note how the two payment options differ, and when you might find yourself using FedNow.

What is FedNow?

FedNow is an instant payments service that makes it possible for banks and credit unions to send and receive financial transactions within a matter of seconds, not days, on behalf of the customer, 24/7. It’s the first settlement service that supports instant payments and the first new payments infrastructure system from the Federal Reserve Bank since the introduction of the ACH system in the 1970s, notes Todd Koehn, vice president/Faster Payment Solutions at Bankers’ Bank headquartered in Madison, Wisconsin.

But if you think the FedNow instant payment system is a new financial phenomenon throughout the world, think again. Central banks in such countries as Brazil, China and India, already have instant payment systems (Pix, for example, is a dominant system in South America), so the U.S. is hardly an innovator in this space.

When it comes to daily transfer limits, FedNow has a maximum limit of $500,000 a day, compared with ACH which has a higher daily transfer limit of $1 million. It’s possible that a bank will charge a fee for sending money with FedNow.

“I do not see financial institutions charging to receive funds via FedNow, but I can see them charging to send payments,” Koehn says.

The Federal Reserve will be charging banks to use this service.

What is ACH?

For half a century, countless many Americans have been able to receive their paycheck straight into their checking accounts via direct deposit thanks to the ACH system. Since its introduction in the mid-70s, ACH has eliminated the need for many Americans who earn a steady paycheck to take time to travel to a bank branch, with paycheck in hand, and wait in line to deposit it, usually at the end of the work week.

Today, ACH is the dominant payments system in the U.S. According to the National Automated Clearing House Association (NACHA), 88 percent of W-2 employees receive their paychecks via direct deposit. Last year, the ACH network processed 14.5 billion consumer bill payments, with the vast majority of bill payments made directly to billing companies, NACHA says. What’s more, some banks enable you to initiate ACH transfers through the bank’s mobile app or website, NACHA adds.

“ACH payments are batch-processed,” Koehn says. “Batches typically (contain) lots of payments bundled together to make up the ACH file. FedNow will be processed in real time as individual payments.”

FedNow vs. ACH

FedNow

• Consumers with access to FedNow are able to send and receive money instantly.

• Maximum transaction limit is $500,000 a day.

• FedNow is a pilot program at 564 financial institutions.

ACH

• ACH transactions typically take a couple of days to process and post to your account only on days when banks are open.

• Maximum transaction limit is $1 million a day.

• About 88 percent of W-2 employees receive their paychecks via direct deposit using the ACH system.

Bank holidays and weekends when banks are closed can make availability of funds challenging. But one major benefit of FedNow is that every day is a banking day when it comes to sending and receiving money.

“FedNow is always ‘on,’ which is unique compared to other Federal Reserve bank payment services which would be ‘off’ on a bank holiday,” says Koehn, who is also on the board of directors of the U.S. Faster Payments Council. “Bank holidays will not impact the ability of businesses or consumers to send or receive payments via FedNow. A payment will be debited (sent) and credited (received) in a few seconds at the business or consumer level. And most importantly to financial institutions that have joined, they will have the settlement funds in real time.”

Unlike FedNow, bank holidays and weekends will still impact the time required for sending or receiving money via ACH, a wire transfer and in depositing checks – with funds available.

When it comes to wire transfers, FedNow is only available for domestic payments at this time, Koehn says. Which begs the question, what can you do with FedNow?

Julie Redfern, chief banking officer at Lake Ridge Bank, says the two biggest use cases for FedNow in the instant payment space are earned wage access and digital wallets. The former means paying employees after their workday ends and the latter refers to payment apps such as PayPal and Venmo. “They’re starting to get a payment out there – a salary in the hands of their employers in a faster way than we’ve traditionally seen before,” Redfern says.

Sending funds via FedNow isn’t available at all participating banks

Both First Internet Bank of Indiana, an online-only bank based in Indiana, and Lake Ridge Bank, a bank that has 20 locations in Wisconsin, are two banks where customers only have FedNow enabled for receiving funds.

“The ability to monitor that activity and make sure that we don’t have fraudulent transactions is top of mind,” says Anne Sharkey, senior vice president, chief risk officer at First Internet Bank of Indiana. “And when the money’s moving very quickly, you have to have the right protocols and systems in place to be able to monitor that activity, which is why I think a lot of banks are approaching this cautiously from a send standpoint because they want to make sure they have everything in place before they enable that functionality,” Sharkey adds.

Bottom line

FedNow enables payments to be made instantly any day of the year, unlike ACH payments, which takes days to process the transfer of funds. But only a few banks currently have FedNow at this time – and some banks only have receive-only capabilities – as it has been in operation for less than a year. Instant payments available through FedNow could help people avoid overdrafts, such as early direct deposit can, because people will have their funds available sooner to pay bills and other expenses. FedNow might be better for sending money to individuals, but ACH is still a great way to send bulk payments.