FedNow — Money transfers have become one of the most convenient ways to send allowances, loans, or earnings. Because of technical advancements, several methods of money transmission are now available, including:
- Online payment platforms
- Specialized remittance services
Money transfers may vary from local to worldwide, allowing for the completion of a wide range of financial operations. It enables you to send money fast and simply without the need of physical currency. However, not everyone is aware of the existence of money transfer services.
While Venmo and Zelle provide instant replies, the banking industry has lagged. Most money transfers employ outdated technologies and might take hours or even days to accomplish. The Federal Reserve, on the other hand, is attempting to alter the situation.
A new system
The Federal Reserve will introduce FedNow later this month, a new system that will allow banks to instantly transfer domestic payments to each other at any time, even Saturday midnight and holidays.
Although no release date has been specified, the Fed indicated in June that FedNow will be available to the public in late July after getting clearance to use its services from 55 banks, credit unions, and other providers. As a consequence, firms may complete bills immediately, allowing employees and workers to receive their pay as soon as feasible.
While everything appears to be going well, there might be some snags. Customers, for example, could withdraw their whole bank account in a matter of seconds, resulting in a bank run in which the government does not have time to interfere.
FedNow will begin with a per-transaction threshold of $500,000, which may avert catastrophic bank runs. However, it is likely that it will be too low to provoke comparable runs on smaller banks.
FedNow is simply a network that allows banks to transfer funds between themselves and account holders from other banks in real time. The Federal Reserve has attempted to build a comparable network at least twice previously, both times failing. However, the time appears to have come because a number of real-time payment networks built on identical designs have shown to be effective.
The impact of the service will be defined by the rate at which FedNow is adopted and the sorts of payment flows that generate the most volume. It will mostly be used for business-to-business payments, according to Kevin Jacques, a Cota Capital partner. Meanwhile, customers and individuals can use FedNow instead of sending a wire transfer to make monthly mortgage payments or other large payments.
“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 may spark bank runs, which might be far more destructive than a Silicon Valley bank failure. Customers attempted to withdraw $42 billion from other banks in one day using SVB. Wire transfers are now handled overnight, informing authorities of the amount that leaves the bank at the end of the day. They did, however, have the chance to intervene before the bank’s failure.
“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 number of bank deposits that leave in a given time period is recorded and constrained by velocity constraints.
Uncertainty for the Fed
While FedNow looks to be a solution, the Federal Reserve must address other challenges, such as the country’s unemployment rate.
The official unemployment data released last Friday revealed a mixed picture, with payrolls falling short of expectations. As a result, labor market activity slowed in June. That month, employment growth fell short of analysts’ predictions of 225,000 jobs, trailing May’s stronger-than-expected 306,000. Furthermore, it is the weakest monthly increase since December 2020.
According to Rucha Vankudre, Lightcast’s lead economist for labor market analytics:
“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 found its way in, and while employment growth slowed in June, wage growth remained stable. The monthly salary rise was 0.4%, the same as in May, and 4.4% more 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.
According to Fed Chairman Jerome Powell, more pay increases in a tight labor market may lead to higher inflation. Meanwhile, markets plummeted on Friday, wiping off prior gains and ending the day and week in the red.