NIC - Banks closely watch FedNow with payments system set for launch

2023-07-20 07:42:05 ET

Modernizing an antiquated U.S. banking system, the Federal Reserve is about to launch a new instant-payments system that'll be available 24/7/365. "FedNow" will be initially supported by 57 organizations like Bank of New York Mellon ( NYSE: BK ), JPMorgan Chase ( NYSE: JPM ), Wells Fargo ( WFC ) and U.S. Bancorp ( NYSE: USB ), but there are plans to onboard more lenders and credit unions in the near future. FedNow, which has been in the works since 2019, will also bring the U.S. in line with other countries that have had a similar service in place for years, such as Brazil, the EU, India and the U.K.

Explainer: Currently, it can take anywhere from a day to many days for cash payments to settle - in order to verify a transaction, account amounts, and clearing of the funds. Under FedNow, all these steps would happen instantaneously, complementing similar private-sector real-time payments systems like The Clearing House's RTP network. The central bank previously rolled out a "FedWire" service, but that is mainly reserved for big corporate payments and is only operational during business hours. FedNow will help everyone from consumers to small businesses settle directly via central bank accounts, unlike closed peer-to-peer networks like Zelle ( JPM ) or Venmo ( NASDAQ: PYPL ).

"PayPal is about to face serious competition at an infrastructure level it can't compete with, wrote SA analyst PropNotes in FedNow Makes PayPal A Value Trap . Meanwhile, John Mason forecast the U.S. banking system will become smaller with fewer small and mid-sized banks due to technological advancements and new systems like FedNow. "Investment will be centered upon who is managing the transition the best," he declared in The New Era For Commercial Banking

Concerns about overreach? FedNow does not give the central bank outright access to consumer bank accounts or the ability to control transactions. In theory, it could make it easier to do that, but the U.S. government already has the ability to turn on and off accounts or freeze assets. FedNow is also not intended to eliminate any form of payment, including cash, and there would probably be easier ways to go about that, such as the issuance of central bank digital currencies .

More on FedNow

• Fed's Waller says blockchain shows promise, but tokenization risks remain
• FedNow to launch late July with early adopters JPMorgan, Wells Fargo, others

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