On Thursday, the Federal Reserve stepped up its game by initiating the much-anticipated FedNow, an instant payments system designed to elevate the United States to the same level as nations like Britain and Brazil, where real-time payments are already the norm.
FedNow has been crafted with the intention to encourage American consumers and businesses to move away from the traditional methods of cash and checks, which continue to hold sway over the nation's transactions, and transition to a quicker mode of payment enabled by the system.
Jerome Powell, Chair of the Federal Reserve, issued a statement articulating the objectives behind the creation of FedNow, "Our goal is to leverage this platform to expedite everyday payments, ensuring faster and more convenient transactions over the years ahead."
As adoption increases, the advantages of the new service will start to be felt. For example, immediate access to paychecks for individuals and instant fund availability for companies when invoices are cleared, Powell added.
Despite more than 4,000 banks operating in the US, only 35 have opted to integrate FedNow before its launch. However, these early adopters do include industry giants such as JP Morgan and Wells Fargo, according to the Fed.
The US central bank remains optimistic that the convenience of facilitating transactions up to $500,000 in near-real time will attract more financial institutions. This comes as businesses and consumers recognize the potential advantages of an instantaneous transfer service.
Highlighting the disparity between the speed of modern technology and the existing funds transfer system in the US, EY Parthenon’s chief economist, Gregory Daco, commented to AFP, “The duration required for funds transfers in the US is currently disproportionate."
With real-time transfers now accessible to customers of the first 35 participating banks, Daco predicts a subsequent decrease in the use of checks for payments, including utility bills and rent.
The prevalent instant payment apps such as Venmo and Zelle may seem to provide real-time transfer service. However, they don't execute instantaneous transfers between various accounts. Instead, these apps are often dependent on outdated, inefficient systems like Automated Clearing House (ACH) for monetary transactions between accounts.
