FedNow Cannot Unilaterally Freeze Customer Funds
An analysis of the FedNow instant payment system clarifies a common misconception about its capabilities. The Federal Reserve’s infrastructure is designed as a payment messaging system, not a custodial platform, and cannot be used to unilaterally freeze or seize customer accounts; such powers remain with depository institutions and are subject to legal due process.
- The legal authority to freeze a customer's account rests with the financial institution and is governed by regulations like the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) rules, or in response to a court-ordered garnishment or restraining notice from a creditor. - While the Federal Reserve provides participating institutions with fraud management tools, such as the ability to set transaction value limits and report suspicious accounts, the financial institutions themselves are the primary line of defense and are responsible for implementing their own fraud detection systems. - FedNow is one of two real-time payment systems in the U.S.; the other is the RTP network, which was launched in 2017 by The Clearing House, a private company owned by large banks. A key operational difference is their settlement model: FedNow settles transactions through banks' master accounts at the Fed, whereas RTP requires participating institutions to pre-fund a joint account. - As of Q1 2025, over 1,300 financial institutions were live on the FedNow service, with community banks and credit unions making up more than 95% of participants. However, a significant challenge for the network is that many of these institutions are only set up to receive payments, not to send them. - Transaction volume on the FedNow network grew 1,200% year-over-year between Q1 2024 and Q1 2025, reaching over 1.3 million transactions in the first quarter of 2025. Despite this growth, its volume is considerably lower than the RTP network, which handles over a million transactions daily. - The two networks have different transaction limits, influencing their primary use cases. As of June 2025, FedNow's per-transaction limit is $1 million, while the RTP network's limit increased to $10 million in February 2025. - Both the FedNow and RTP networks are built on the ISO 20022 messaging standard, which allows for richer data to be transmitted with payments, a key feature for corporate use cases and improved reconciliation.
