FedNow — Money transfers have evolved into one of the most convenient methods of transferring allowances, loans, or revenue. Thanks to technological advances, there are various ways for money transfers available, including:
- Banks
- Online payment platforms
- Specialized remittance services
Money transfers can range from local to global, allowing a variety of financial transactions to be completed. It allows you to transmit money quickly and easily without the need for actual currency. However, not everyone is familiar with money transfer services.
While Venmo and Zelle deliver rapid responses, the financial industry has lagged behind. Most transfers use obsolete technologies to handle money, which might take hours or even days to complete. In contrast, the Federal Reserve is seeking to change the situation.
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A new system
Later this month, the Federal Reserve will launch FedNow, a new system that would allow banks to instantaneously send domestic payments to one another at any time, even Saturday midnight and holidays.
Although no release date has been set, the Fed stated in June that FedNow will be accessible to the public in late July, after receiving authorization from 55 banks, credit unions, and other providers to utilize its services. As a result, businesses may instantly fulfill invoices, allowing employees and workers to get paid as soon as possible.
While everything appears to be going smoothly, there may be some hiccups. Customers, for example, may withdraw their whole bank deposit in a single second, which causes a bank run in which the government has no time to intervene.
FedNow will begin with a $500,000 per-transaction cap, which may prevent catastrophic bank runs. It is possible, though, that it will be too low to cause similar runs on smaller banks.
Details
FedNow is essentially a network that allows banks to move money in real time between themselves and account holders from other banks. The Fed has attempted to construct a similar network at least twice before, both times failing. However, it appears that the moment has arrived because a number of real-time payment networks based on analogous architectures have shown to be effective.
The service’s impact will be determined by how quickly FedNow is adopted and the types of payment flows that create the most volume. According to Kevin Jacques, a Cota Capital partner, it will mostly be used for business-to-business payments. Meanwhile, customers and individuals can utilize FedNow to make monthly mortgage payments or other significant payments instead of sending a wire transfer.
“We have a number of regional banks that are limited partner investors in our fund, and we make it a point to talk to the executives at those banks, and they seem to be taking a wait-and-see approach,” Jacques added.
“One thing they have to think through is, should they connect and integrate into FedNow or should they integrate into The Clearing House (a banking association and payment company owned by the largest and oldest commercial banks). It’s going to cost them money to make that integration, so they don’t want to do both.”
Potential downsides
FedNow may cause bank runs, which might be considerably more disastrous than a Silicon Valley bank disaster. Customers sought to withdraw $42 billion from other banks using SVB in one day. Wire transfers are processed overnight now, alerting authorities of the amount leaving the bank at the end of the day. They did, however, have the opportunity to interfere before the bank went bankrupt.
“If we switch to a system where that transaction happens instantly, regulators are going to have a lot less time to see what’s going on and to act and intervene,” Jacques explained.
“There will be times where regulators will need to intervene in the future, so our argument is for velocity controls. A lot of thinking should go into the transaction size limits.”
The number of bank deposits that leave in a particular time period is tracked and limited by velocity restrictions.
Uncertainty for the Fed
While FedNow appears to be a solution, the Federal Reserve must address other issues, such as the unemployment rate in the United States.
Last Friday’s official jobless figures showed a mixed picture, with payrolls falling short of forecasts. As a result, the labor market slowed in June. That month, employment growth slipped behind May’s stronger-than-expected 306,000, falling short of experts’ expectations of 225,000 jobs. In addition, it is the smallest monthly gain since December 2020.
Rucha Vankudre, Lightcast’s principal economist for labor market analytics, says:
“The job growth is slowing, but I don’t actually think that’s necessarily a bad thing. In some ways, this is great. We’re continuing to see the soft landing that we’re hoping for.”
However, uncertainty has crept in, and while employment growth slowed in June, salary growth has stayed consistent. Salary increase was 0.4% month on month, the same as in May and 4.4% higher than in 2022.
“Wage growth ticked up and remains well above levels the Fed would be comfortable with in their efforts to bring inflation back to 2%,” said Joseph Davis of VanGuard.
Additional wage increases in a tight job market, according to Fed Chairman Jerome Powell, may lead to greater inflation. Meanwhile, markets fell on Friday, wiping out previous gains and closing the day and week on a negative note.
