FedNow might be a double-edged sword

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FedNow — Money transfers have evolved into one of the most convenient methods for sending allowances, loans, or salary. Because of advances in technology, there are an abundance of routes for money transfers, such as:

  • Banks
  • Online payment platforms
  • Specialized remittance services

Money transfers can range from local to international, allowing for a variety of financial transactions to be completed. It offers a convenient and efficient method of transmitting money, avoiding the need for real currency. However, not everyone has acclimated to the usage of money transfer services.

While Venmo and Zelle give fast solutions, the financial system has lagged. Most transfers use outdated technologies to handle the money, which might take hours or even days to complete. The Federal Reserve, on the other hand, is striving to change things.

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A new system

Later this month, the Federal Reserve will launch FedNow, a new system that would allow banks to instantaneously transfer domestic payments to one another at any time, from Saturday midnight through holidays.

Although the Fed has not specified a release date, it stated in June that FedNow will be available to the public in late July, after 55 banks, credit unions, and other providers were granted permission to utilize its services. As a result, businesses may instantly fulfill invoices, allowing employees and workers to get their compensation as soon as possible.

While everything appears to be going swimmingly, there are some possible hiccups. Customers, for example, might withdraw their entire balance from a bank in a split second, resulting in a bank run with no time for the government to intervene.

FedNow will begin with a $500,000 per-transaction cap, which might prevent major bank runs. However, it is possible that it will not be low enough to cause comparable runs on smaller banks.


FedNow is simply a network that allows banks to instantaneously move money between themselves and account holders from other banks. The Fed attempted to construct such a network at least twice before, both times failing. However, it appears that the moment has come because various real-time payment networks based on comparable architectures have shown to be effective.

The service’s impact will be determined by how quickly FedNow is adopted and the sorts of payment flows that produce the highest volume. According to Kevin Jacques, a Cota Capital partner, it will be mostly used for business-to-business payments. Meanwhile, customers and individuals might utilize FedNow to make monthly mortgage payments or other bigger 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.”

Potential downsides

FedNow might cause bank runs, which could be more damaging than a Silicon Valley bank failure. Account holders sought to transfer out $42 billion in other institutions in one day using SVB. Wires are now processed overnight, informing authorities of the amount leaving the bank when the bank shuts. They did, however, have the opportunity to interfere before the bank fell.

“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.”

Velocity controls measure and limit the quantity of bank deposits that leave in a certain period of time.

Uncertainty for the Fed

While FedNow appears to be a solution, the Federal Reserve must address other issues, such as the unemployment rate in the United States.

The official unemployment figures released last Friday provided a mixed picture, as payrolls were fewer than projected. This suggests that the employment market slowed in June. That month, employment increases were about 100,000 behind the stronger-than-expected 306,000 in May, and fell short of experts’ estimates of 225,000 jobs. It is also the smallest monthly rise since the December 2020 dip.

According to Rucha Vankudre, senior economist for labor market analytics Lightcast:

“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.”

However, uncertainty set in, and while employment growth slowed in June, salary growth remained consistent. The month-on-month growth in average hourly wages remained at 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.

Fed Chairman Jerome Powell has stated that further wage increases in a tight job market might contribute to inflation being elevated. Meanwhile, markets fell on Friday, wiping out previous gains and finishing the day and week on a sour note.