Revolutionizing the U.S. Banking System: Federal Reserve Launches 24/7 Instant-Payment System
July 21, 2023
Revamping the US Banking System with FedNow
The Federal Reserve is poised to revolutionize the outdated US banking system by introducing a novel instant-payments system, designed to operate 24/7, 365 days a year. The service, named “FedNow”, will initially be supported by 57 entities including Bank of New York Mellon (BK), JPMorgan Chase (JPM), Wells Fargo (WFC) and U.S. Bancorp (USB). The goal is to incorporate more lenders and credit unions in the foreseeable future. Efforts have been ongoing since 2019 to make FedNow a reality, with the ambition to align the U.S. with countries such as Brazil, the EU, India and the U.K., which have already put a similar service into action for several years.
The Benefits of FedNow
Currently, cash payments settlement can take from a day up to several days due to procedures that involve transaction verification, account balances, and fund clearances. With FedNow, these processes will happen in real-time, augmenting private-sector real-time payments systems like The Clearing House’s RTP network. Previously, the central bank introduced the “Fedwire” service, primarily serving large corporate payments and only operating during business hours. In contrast, FedNow seeks to assist consumers and small businesses in settling directly via central bank accounts, a feature absent in closed peer-to-peer networks such as Zelle (JPM) or Venmo (PYPL).
FedNow versus PayPal
In the report “FedNow Makes PayPal A Value Trap”, SA analyst PropNotes remarked, “PayPal is about to face serious competition at an infrastructure level it can’t compete with.” Meanwhile, John Mason anticipates the US banking system will downsize with fewer small and mid-sized banks due to technological progress and new systems like FedNow. “Investment will be centered upon who is managing the transition the best,” he mentioned in The New Era For Commercial Banking.
Privacy Concerns with FedNow
Worries about overreach? It’s essential to specify that FedNow does not give the central bank direct access to consumer bank accounts or control over transactions. While in theory, it could simplify this procedure, it’s worth mentioning that the US government already has the power to activate, deactivate, or freeze accounts. Moreover, FedNow does not aim to eliminate any form of payment, including cash. For such a goal, simpler methods exist like the introduction of central bank digital currencies.