The U.S. Federal Reserve, the nation’s central bank, has launched the long-awaited instant payment service – FedNow.
According to an announcement made by the Fed, the payment solution will allow users to send and receive dollars on the go, and settle transactions directly on the payer or payees’ bank accounts without the need for an intermediary. FedNow is said to be operational 24 hours without any breaks even during bank holidays.
U.S. Federal Reserve Unveils FedNow – An Instant Payment Settlement System For American Banks
The payments platform, which has been under development since 2019, is expected to improve cash flow in the U.S. economy and help bring down the cost and time taken to settle bank transactions. Even though FedNow is touted as a revolutionary system, similar initiatives have existed in the U.K., India, Brazil, and countries in the EU for years.
Last month, the Fed revealed that 57 firms were certified to utilize the FedNow instant payments system, including 41 banks and 15 financial service providers.
Currently, the service is being used by 35 banks and credit unions. Mega banks like JP Morgan & Chase, Bank of New York Mellon, and U.S. Bancorp, as well as the Federal Bureau of Fiscal Service, have joined the platform.
The Federal Reserve is looking to onboard more banks and service providers to FedNow by the end of the year.
Washington D.C-based trade association for the U.S. banking sector – the American Bankers Association (ABA) – supports the development of FedNow, which alongside the Clearing House’s RTP network are the two major instant payment settlement services operating in the country. ABA president and CEO Rob Nichols said that the group will educate its members on both systems and how they benefit consumers and businesses.
Executives of major banks also lauded FedNow, saying the platform could help expand the scope for banks when reaching out to their customer base.
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FedNow Helps Customers Settle Payments In Real-Time
Unlike existing peer-to-peer payment solutions like Venmo or PayPal, which act as an intermediary between banks, FedNow will help financial institutions settle directly in central bank accounts.
The Fed does operate another real-time settlement network called the FedWire but it is reserved for large-scale, corporate payments and is only available during business hours. Smaller banks often have to link up with their larger counterparts to get access to Fedwire`1 m, which charges them huge fees for availing of the service.
The Federal Reserve developed FedNow at the request of the smaller banks who applaud the central bank’s efforts to directly enter the payment service business.
Lance Noggle, the senior vice president of operations at the trade group Independent Community Bankers of America said the small banks would feel more comfortable with the existence of FedNow as their needs will be met and will also be treated fair and square when it comes to pricing.
The Fed has revealed that it will not charge consumers for opting FedNow. However, it is unclear if and how the participating banks will price their clients for using the service.
In the wake of the collapse of Silicon Valley Bank and Signature Bank, some participants are worried that FedNow could cause a potential bank run on them by facilitating faster outflows for customers.
The Fed officials have dismissed those claims, arguing that the system has tools set in place that will mitigate outflows. At launch, FedNow will cap payments at $500,000, with banks having the freedom to lower the limit if needed.
The Fed has promised that as the system develops, it will be integrated into the apps and websites of major banks and other financial service providers.
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Is The CBDC Coming Up Next?
The Federal Reserve is working on developing a central bank-issued digital currency (CBDC) for the U.S. economy called the digital dollar. The Fed is currently conducting studies on how to implement the digital currency. According to its timeline, the CBDC is expected to launch in a pilot phase by the end of 2024.
Senator Chris Van Hollen, who had urged the Fed to develop an instant payment settlement system for U.S. banks, says FedNow will save billions of dollars annually for consumers as it will help them connect with their money in real-time.
