US Federal Reserve Set to Modernize Payment System

The US Federal Reserve is preparing to launch "FedNow," a long-awaited service aimed at modernizing the country's payment system. With "FedNow," everyday Americans will be able to send and receive funds within few seconds, anytime of the day or night. This move seeks to eliminate the several-day lag commonly associated with cash transfers, bringing the US in line with countries like the UK, India, Brazil, and the European Union, where similar services have been in operation for the last several years.

"FedNow" is set to launch with 41 banks and 15 service providers certified to use the service, including major players like JPMorgan Chase, Bank of New York Mellon, and US Bancorp. However, the Fed plans to onboard more banks and credit unions throughout the year. This new service will compete with real-time payments systems from the private sector, including The Clearing House's RTP network. Initially, big banks opposed "FedNow," deeming it redundant, but many have now embraced it as a way to expand services for their clients.

Unlike peer-to-peer payment services like Venmo or PayPal, which act as intermediaries between banks, "FedNow" payments will settle directly in central bank accounts. The Fed also operates a real-time payments system called FedWire, reserved for large-scale, mostly corporate payments and limited to business hours. In contrast, "FedNow" will benefit consumers and small businesses the most, offering real-time access around the clock.

Smaller banks, often connecting to FedWire via larger lenders, advocated for the development of "FedNow," as it would grant them access to real-time payments without paying larger competitors for the service. The new system will not charge consumers, but the pass-on of any associated costs by participating banks remains uncertain. Some market participants have raised concerns about potential bank runs facilitated by "FedNow," but Fed officials assure that banks have tools to mitigate large outflows. Initially, "FedNow" will have a maximum payment limit of $500,000, with banks able to adjust it as needed.