FedNow — Money transfers have evolved into one of the most convenient methods of transferring allowances, loans, or wages. Several means of money transfer are now accessible as a result of technological improvements, including:
- Online payment platforms
- Specialized remittance services
Money transfers can range from local to global, enabling the execution of a wide range of financial transactions. It allows you to transmit money quickly and easily without the need for actual currency. However, not everyone is aware that money transfer services exist.
While Venmo and Zelle offer immediate responses, the banking industry has lagged. Most money transfers use antiquated technology and might take hours or even days to complete. In contrast, the Federal Reserve is seeking to change the situation.
A new system
Later this month, the Federal Reserve will launch FedNow, a new system that would allow banks to instantaneously send domestic payments to each other at any time, regardless of whether it was Saturday midnight and holidays.
Although no official release date has been set, the Fed stated in June that FedNow will be accessible to the public in late July after receiving approval to utilize its services from 55 banks, credit unions, and other providers. As a result, businesses may fulfill bills as fast as possible, allowing employees and workers to get their money as soon as possible.
While everything looks to be going smoothly, there may be some hiccups. Customers, for example, may withdraw their whole bank account in seconds, resulting in a bank run in which the government would be unable to intervene.
FedNow will begin with a $500,000 per-transaction cap, which may prevent catastrophic bank runs. It is probable, though, that it will be too low to cause analogous runs on smaller banks.
FedNow is basically a network that enables banks to transfer cash in real time between themselves and account holders from other banks. The Federal Reserve has tried and failed at least twice before to construct a comparable network. However, it appears that the moment has come because a number of real-time payment networks based on comparable principles have shown to be effective.
The service’s effect will be defined by the rate at which it is adopted and the types of payment flows that create the highest volume. According to Kevin Jacques, a Cota Capital partner, it will mostly be employed for business-to-business payments. Meanwhile, customers and individuals can utilize FedNow to make monthly mortgage payments or other significant payments instead of sending a wire transfer.
“We have a number of regional banks that are limited partner investors in our fund, and we make it a point to talk to the executives at those banks, and they seem to be taking a wait-and-see approach,” Jacques added.
“One thing they have to think through is, should they connect and integrate into FedNow or should they integrate into The Clearing House (a banking association and payment company owned by the largest and oldest commercial banks). It’s going to cost them money to make that integration, so they don’t want to do both.”
FedNow might cause bank runs, which could be considerably more damaging than a Silicon Valley bank disaster. Customers used SVB to withdraw $42 billion from other banks in one day. Wire transfers are now processed overnight, alerting authorities to the sum of money that leaves the bank at the end of the day. They did, however, have the opportunity to interfere before the bank’s demise.
“If we switch to a system where that transaction happens instantly, regulators are going to have a lot less time to see what’s going on and to act and intervene,” Jacques explained.
“There will be times where regulators will need to intervene in the future, so our argument is for velocity controls. A lot of thinking should go into the transaction size limits.”
The amount of bank deposits that leave in a given time period is kept track of and is controlled by velocity limitations.
Uncertainty for the Fed
While FedNow appears to be a solution, the Federal Reserve needs to tackle other issues, such as the unemployment rate in the United States.
Last Friday’s official jobless report offered a mixed picture, with payrolls falling short of forecasts. As a result, labor market activity in June slowed. Employment growth that month fell short of experts’ expectations of 225,000 jobs, lagging May’s stronger-than-expected 306,000. It is also the smallest monthly rise since December 2020.
Rucha Vankudre, Lightcast’s principal economist for labor market analytics, says:
“The job growth is slowing, but I don’t actually think that’s necessarily a bad thing. In some ways, this is great. We’re continuing to see the soft landing that we’re hoping for.”
Uncertainty has crept in, and while employment growth slowed in June, pay growth held steady. Monthly wage growth was 0.4%, the same as in May, and 4.4% higher than in 2022.
“Wage growth ticked up and remains well above levels the Fed would be comfortable with in their efforts to bring inflation back to 2%,” said Joseph Davis of VanGuard.
More salary rises in a tight job market, according to Fed Chairman Jerome Powell, may lead to greater inflation. Meanwhile, markets fell on Friday, wiping off previous gains and finishing the day and week in the negative.