August 9, 2019

For some time people have been wondering whether or not the federal government would modernize payment processing, and they received their answer this week. The Federal Reserve Board announced that it is going to build a payment processing system that will be able to process payments in “real-time”. The new system has been coined “FedNow” and will make it possible for payments to be processed instantaneously in the U.S. for financial institutions and, thus, their customers.


In the announcement, the Federal Reserve Board stated that all people deserve the ability to receive a payment or make a payment in real-time and in a secure manner. They also said that all banks must have the right to offer this service to their customers. Thus the FedNow Service will allow instantaneous payments whether the bank is large or small and no matter where it is located in the country, apparently putting banks on a level playing field.


Many businesses are in favor of the new plan because they feel as if they are at the mercy of the big banks who inherently have too much power. Target, Walmart, small-and medium-sized banks, as well as many technology companies are examples of the entities that feel as if the big banks have had an unfair upper hand. 


Large banks already have the means to offer their customers ways to get paid instantaneously. Such banks include JPMorgan Chase & Company, U.S. Bancorp and Citigroup. These three financial institutions are concerned that an “instant payment processing plan” wouldn’t be accepted right away. On the other hand, smaller banks are afraid that the Federal Reserve will give banks the opportunity to obtain volume discounts, again giving an unfair advantage to the larger banks. 


Another argument against a network operated by the Federal Reserve Board is the fact that it would cause everybody’s payment systems to slow down as they are relying on government systems which historically have a reputation of being slow. Lastly, credit unions and smaller banks are all worried that their personal issues are not of concern to the larger banks, so they are reluctant to become a part of the new system that is owned by big banks. 


One federal official stated that ordinary people are largely in favor of the new system. This is especially true if the person being asked is living paycheck to paycheck. These are people who are charged insufficient funds fees if they have to wait for a payment to be deposited in their bank accounts. Small businesses would also benefit because they would have their funds immediately after they make a sale. As a result, many businesses will no longer need to worry about financing.


In the end, time will tell if the Federal Reserve’s new payment processing system is good or bad for smaller banks. One thing is clear – if the FedNow system works as is proposed there will be many benefits to businesses and debit card users alike. 

Categories: Financial News, Payment Processing

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