By now, you would have heard of the Fed’s initiative FedNow finally being launched this month with 57 early adopters already certified to use it system with big names such as JPMorgan Chase and Wells Fargo looking to utilize this new real time payment system. The third one to come into existence in the past 6 years, the other two being Zelle and the aptly named Real-Time Payments (RTPs) Network, both privately owned with the former being owned by Early Warning System, LLC and the latter owned by The Clearing House. However, given the rise in demand for instantaneous settlements as propelled by a slew of factors some of the key ones being: the high levels of digital transactions which was further exacerbated by the COVID-19 Pandemic, government back reduction on cash reliance, and the recognition of positive impacts to GDP and the general public.
These two real time payment systems have been the main actors in real time payment in the US since 2017, which was a period where other countries have already adopted RTPs systems since the late 2000s, and countries like China posting an absurd transaction value of 112% of their GDP for the period of 2019 with the UK and Nigeria following far behind with 88% and 81% respectively. To put that into context, if that World Bank data point is accurate, China would have processed more than USD 14 Trillion in real-time payments in 2019 alone. That’s a lot of money instantaneously changing hands, in contrast Zelle posted on their annual report that they facilitated 2.3 billion transactions that accounted for the transfer of USD 629 billion in 2022 on the back of posting promising growth data of approximately 28% from the previous year. Given this trajectory, the FedNow’s implementation could not have come at a better time for the US. So, what is FedNow?
Simply put, FedNow is an interbank tool, so that means you nor I will not be able to use it directly but member Banks (or Credit Unions) will communicate the transaction to the FedNow system which will then grant instantaneous payments through directly crediting their involved Financial Institutions master accounts with the Fed. Not revolutionary stuff, but hell of a lot faster than the batch transactions that the Automated Clearing House (ACH) that the Treasury Department does. Given the large number of Financial Institutions in the US – approximately 10,000 in 2023 – this will provide a boost to the US’ already bustling retail sector as the instantaneous transfer of payments grows as adoption of FedNow and the other RTP systems continue to gain traction.
However, the retail sector isn’t the only one to benefit from FedNow, but the banks themselves as the 24/7/365 operation of FedNow will also (at some point) grant banks the ability to “plan ahead“ for Fed emergency funding and other sources of liquidity. Now, the fact that this is released months after SVB, First Republic, and Signature Bank’s collapse is pure coincidence, but they sure could have benefited from FedNow as Cleveland Fed President nicely said in an interview “In addition to a bank being able to borrow from the Fed during the hours the discount window is open, a bank could use liquidity management transfers to replenish its master account balance from private funding sources on the weekend when the discount window is not accessible, which would help to mitigate the effects of deposit outflows on the health of the bank”. Now, the US may have been late to the RTP transaction party (some central banks already adopted their own RTP starting in 2008) but the US will definitely make a bang as RTP adoption ramps up in the US.