The United States has long lagged behind other countries in instant bank payments, with traditional bank transfers often taking days to complete. However, that is set to change with the launch of a new service called FedNow, created by the Federal Reserve, which will allow for instantaneous bank transfers starting in July.
The current banking system, which was invented in the 1970s and uses the Automated Clearing House, is a significant factor in the slow processing of transactions, as it batches them together and only processes them at specific intervals. This leads to delays in transferring funds between accounts and can result in late fees or penalties for overdrafts. In fact, a survey by American Banker in 2021 found that 21% of consumers had abandoned financial transactions or account openings due to slow processing times.
Banks have little incentive to change the current system as they earn income from overdraft and other fees. They also have the right to hold funds for up to 10 days to ensure the money is not the proceeds of a crime. Although some banks have developed rapid-settlement platforms like Zelle for consumers and real-time payments for business customers, these still rely on the slow batch system for some transfers and do not offer the same instantaneous payment potential as FedNow.
FedNow will offer instantaneous payments 24/7, all year round, between bank accounts. Once a payment is made, the money is instantly transferred, and customers will immediately know if the transfer is successful or not. However, there are a few drawbacks to this new service, such as the inability to put a hold on a payment or cancel it, and a lack of rewards, points or fraud protection, unlike credit cards. Though the costs are not yet clearly defined, it is expected that customers will have to pay a nominal fee.
The FedNow system will likely be adopted gradually, with banks plugging it into the back end of their existing websites or apps. While over 10,000 US banks and credit unions are eligible to join and use FedNow, it is unknown how many will sign up to use the service.
However, FedNow is not intended to eliminate other electronic payment systems like Venmo and Cash App. Instead, FedNow will complement and compete with these existing services in a competitive payments landscape, giving smaller regional lenders and credit unions a better chance to compete with more prominent banks and financial technology firms.
While some have speculated that FedNow is a precursor to phasing out physical cash or introducing a government-backed digital currency, the Federal Reserve has denied these claims, maintaining that FedNow is solely created to provide a faster way to move deposits without replacing the physical currency.
Overall, the launch of FedNow is a significant step forward in modernizing the US payment system, providing consumers with a faster and more efficient way to transfer funds in real-time.