Fed launches long-awaited instant payments service, modernizing system

Fed launches long-awaited instant payments service, modernizing system

The U.S. Federal Reserve has announced the launch of the “FedNow” service, which aims to modernize the country’s payment system. This service will eventually allow everyday Americans to send and receive funds in seconds, 24/7. It has been in development since 2019 and seeks to eliminate the several-day lag in cash transfers, bringing the U.S. in line with other countries that already have similar services.

FedNow is launching with 41 banks and 15 service providers, including both community banks and large lenders like JPMorgan Chase, Bank of New York Mellon, and US Bancorp. However, the Fed plans to onboard more banks and credit unions this year. Currently, 35 banks and credit unions, as well as the Treasury Department’s Bureau of Fiscal Service, are utilizing the service.

The FedNow service will compete with private sector real-time payments systems, such as The Clearing House’s RTP network. Initially, big banks opposed the service, considering it redundant. However, many have since agreed to participate because FedNow will allow them to expand the services they offer clients. According to Anu Somani, head of global payables and embedded payments at U.S. Bank, FedNow is a great way to expand reach.

Unlike peer-to-peer payment services like Venmo or PayPal, FedNow payments will settle directly in central bank accounts, without intermediaries. The Fed also operates a real-time payments system called FedWire, but it is reserved for large-scale corporate payments and only operational during business hours. Analysts believe that the new FedNow system will benefit consumers and small businesses the most.

Smaller banks, which often rely on larger lenders to connect to FedWire, encouraged the development of FedNow. They argued that it would give them access to real-time payments without having to pay larger competitors for the service. Lance Noggle, senior vice president of operations and senior regulatory counsel at the Independent Community Bankers of America, expressed confidence that the Fed’s involvement would ensure fair pricing for their members.

FedNow will not charge consumers, although it remains unclear whether participating banks will pass on any costs associated with the service. Some market participants have raised concerns about the potential for a bank run facilitated by FedNow, citing the failure of Silicon Valley Bank earlier this year. However, Fed officials have downplayed these concerns, stating that banks have tools available to manage outflows.

Initially, FedNow will have a maximum payment limit of $500,000, but banks can choose to lower that cap if necessary. Overall, the launch of FedNow represents a significant step towards modernizing the U.S. payment system and providing faster, more efficient services to consumers and businesses.

Reporting by Hannah Lang in Washington; Editing by Michelle Price and Andrea Ricci

About News Team

Hi, I'm Alex Perez, an experienced writer with a focus on lifestyle and culture news. From food and fashion to travel and entertainment, I love exploring the latest trends and sharing my insights with readers. I also have a strong interest in world news and business, and enjoy covering breaking stories and events.

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