How FedNow Service Will Change Payment Processing
The Federal Reserve will soon launch the FedNow Service. This new service will facilitate instant payment services by financial institutions every day of the year.
The FedNow Service is a new program of payment infrastructure that the U.S. Federal Reserve has created. Essentially, the FedNow Service is intended to provide instant payment processing around the clock, 365 days a year. What is the FedNow and what are its expected benefits?
The Federal Reserve is presenting the FedNow Service as a positive development in the financial services industry. Its available information on the service touts the speed at which payments will be processed, making business and personal transactions run more smoothly. However, some Americans are suspicious of the move to FedNow.
How does FedNow work?
The core of the FedNow Service is providing faster, more flexible financial transactions for both businesses and individuals. According to the Federal Reserve, FedNow "allows financial institutions of every size across the U.S. to provide safe and efficient instant payment services." The Fed's FedLine Network will provide access to funds nearly instantly.
Financial institutions such as banks and credit unions may choose to participate in the FedNow service. Businesses and individuals using those institutions will have the capability of sending and receiving instant payments in real time. This service will be available at all times, rather than typical banking hours on weekdays only.
Who developed the FedNow Service?
The FedNow Service was developed by the Federal Reserve, or the central banking system of the United States. It focuses on three main tasks: setting interest rates, managing the overall money supply, and regulating financial markets. The FedNow service seems to align with those goals, particularly that of managing the money supply.
What are the benefits of the FedNow Service?
You may be wondering what the point is of developing the FedNow Service. What benefits will consumers find? The key benefit, according to Federal Reserve officials, is that payments will be instant rather than requiring days before payments "clear" a bank or financial institution.
In March, the Federal Reserve announced its intention to begin launching FedNow in July of 2023. Ken Montgomery, first vice president of the Federal Reserve Bank of Boston, and a FedNow program executive, said, "We couldn't be more excited about the forthcoming FedNow launch, which will enable every participating financial institution, the smallest to the largest and from all corners of the country, to offer a modern instant payment solution."
Tom Barkin, president of the Federal Reserve Bank of Richmond, said the FedNow launch was part of a journey to "help financial institutions serve customer needs for instant payments to better support nearly every aspect of our economy."
When will FedNow launch?
The Federal Reserve began this week the process of certification of participants (banks and financial institutions) who wish to be part of FedNow. These first adopters must complete a "customer testing and certification program" in order to prepare the sending of live transactions through the FedNow Service.
Currently, validation activities are expected to run during June of 2023 to prepare for an official July 2023 launch of FedNow. Financial institutions of all sizes have already stated their plans to participate right away in July. Montgomery, of the Boston Federal Reserve Bank, said that more participants will be essential to making instant payments available across the country.
What is the difference between FedNow and Fedwire?
The Fedwire Funds Service is also a part of the Federal Reserve; however, the Fed has postponed implementation of Fedwire to focus on FedNow. According to Pymnts.com, the Fed is delaying the Fedwire Funds Service message format until 2025 (originally planned to launch in November 2023).
The Fedwire Funds Service is a "real-time gross settlement system" that the Federal Reserve System owns and operates. It also enables quick and secure transfer of funds. It is a competitor of CHIPS, another settlement service.
What's the difference between FedNow and CashApp?
If you're thinking FedNow is similar to CashApp, you're not entirely wrong. CashApp is an app that enables instant payments. Some people are critical of FedNow, saying it's just the government's version of CashApp.
Is FedNow built on blockchain?
No, FedNow is not built on a blockchain, Cointelegraph explains. It will be able to support transactions between merchants, consumers, and banks. Federal Reserve Vice Chair Lael Brainard said that a central bank digital currency, or CBDC, would take longer to implement than FedNow due to regulatory issues.
Why are people worried about FedNow?
Some are loudly critical of FedNow. Robert F. Kennedy Jr. tweeted that this will enable the government to "surveil all our private financial affairs" and even control our transactions. However, others responded that he was fear-mongering and promoting conspiracy theories.