The long-awaited launch of FedNow by the U.S. Federal Reserve marks a significant step toward faster and more accessible payments, allowing businesses and consumers to enjoy near-instant access to funds and money transfers between financial accounts.
08/02/2023 12:40 P.M.
2 minute read
After a decade of development and anticipation, the U.S. Federal Reserve has launched FedNow, a system that promises to revolutionize the U.S. payment landscape, according to a recent article from the Fed. With the ability to provide real-time payments, FedNow aims to bring the country in line with other tech-savvy nations like the UK, India and Brazil.
The existing high-speed money transfer system, Real Time Payments Network (RTP), rolled out by major banks, has seen limited adoption, moving only a fraction of the volume compared to the slower Automated Clearing House (ACH). The launch of FedNow is expected to change this dynamic, encouraging more banks and credit unions to adopt the instant payment system, according to the Fed.
The widespread adoption of real-time payments in the U.S. has faced a “chicken and egg” problem, according to reporter Emily Mason. “To use a new instant-payments system (like RTP), financial institutions need to build an interface for customers to interact with, which can be time-consuming and costly,” she said. “But many banks and fintechs didn’t want to make that investment until they were convinced that other banks, regardless of size, would be on an instant payment rail too and that customers would come to demand instant payments.”
While instant payments offer enhanced convenience, they also raise concerns about potential real-time fraud. To address this, FedNow has set a default transaction limit of $100,000, which can be adjusted by individual banks.
What’s Next?
In the short term, smaller institutions are expected to gravitate toward FedNow, while larger ones might continue using RTP. However, as the demand for instant payments grows, it is predicted that institutions of all sizes will adopt both systems to ensure broader reach.
Faster payroll deposits, particularly for hourly workers, could be a significant benefit, helping to reduce reliance on costly loans for those living paycheck-to-paycheck. The introduction of FedNow opens up new possibilities for fintech companies and payment solutions, potentially leading to more payment options like “pay-by-bank” that could circumvent interchange fees for merchants.
FedNow is launching with 41 banks and 15 service providers certified to use the service, including community banks and large lenders like JPMorgan Chase, Bank of New York Mellon, and US Bancorp, but the Fed plans to onboard more banks and credit unions this year.
The Fed said on Thursday in a statement that 35 banks and credit unions were currently using the service, as well as the Treasury Department’s Bureau of Fiscal Service, according to Reuters.
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