If you haven’t already heard, the Federal Reserve is launching its FedNow instant payment service later this month.
The new system will enable banks to send each other cash instantly, 24/7, as an alternative to the existing system that runs only during regular business hours and often takes days to move money.
FedNow could put America’s banking system on track to catch up to countries like India and Nigeria, where high-speed payments are common.
The US does already have an instant payments system, but it’s private rather than government-backed, and it hasn’t been widely adopted. It’s mostly only used by big banks, and only 1.4% of US transactions happen in real time, according to payment systems company ACI Worldwide.
FedNow-enabled services will likely soon appear at the 41 banks that have been certified to participate so far.
The benefit is twofold:
- People moving money between banks or paying bills could complete their transactions in seconds, without the need to plan payments days in advance.
- Businesses will be able to access customer payments immediately, and send workers payments more frequently with instant direct deposit (rather than the usual payroll cycle).
Faster payments could also mean faster bank runs.
Some experts worry that allowing people to drain their bank accounts instantaneously could make SVB-style bank runs more likely.
Related: The Silicon Valley Bank Collapse: How You Can Protect Yourself
Smaller banks struggling with liquidity would have even less time to react to customer panic and get collateral for emergency government loans to cover fleeing cash.
But there are safeguards built in. FedNow has a transaction limit of $500,000, and banks can set their own ceilings to ensure that customers don’t pull their deposits too quickly.
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