Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

FedNow: The Most Revolutionary Thing You’ve Never Heard Of

By Boris SchlossbergMarket OverviewApr 29, 2021 07:52AM ET
www.investing.com/analysis/fednow-the-most-revolutionary-thing-youve-never-heard-of-200576275
FedNow: The Most Revolutionary Thing You’ve Never Heard Of
By Boris Schlossberg   |  Apr 29, 2021 07:52AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
  • What is FedNow?
  • How will it work?
  • Why is it so badly needed?
  • Can the US financial system  finally enter the 21st century?

In yesterday’s FOMC presser Fed Chair Powell, in responding to a question about central bank digital currencies, made an offhand remark about a new program that could change the financial services industry as we know it.

Chair Powell noted:

” I am really concerned about getting it right. It is a tricky set of questions that we have to navigate in a world where we already have, remember, a highly evolved payment system. We have FedNow and other immediately available funds. Pretty soon everybody will be able to do what people do in other parts of the world, which is just use their phone to make immediately available payments all the time. It’ll be normal. And what would be the role of a central bank digital currency in that kind of an environment? Far more important to get it right than it is to do it fast or feel that we need to rush to reach conclusions because other countries are moving ahead. 

I mean, the currency that’s being used in China is not one that would work here. It’s one that really allows the government to see every payment for which it is used, in real time. It’s much more to do with things that are happening within their own financial system than it is, I think to do with the sort of global competition.”

What is FedNow?

So what exactly is FedNow?. The FedNow Service is a new instant payment service that the Federal Reserve Banks are developing to enable financial institutions of every size, and in every community across the U.S., to provide safe and efficient instant payment services in real time, around the clock, every day of the year. The service is expected to rollout in stages starting 2023 enabling all sorts of new use cases for both businesses and consumers.

The basic schematic of the payment flow will look like this

FedService - Reserve Banks
FedService - Reserve Banks

The system is designed to be secure, robust and as error-proof as possible and could effectively eliminate the need for digital currency by creating an evolutionary rather revolutionary change.

How will it work?

The Fed envisions a variety of use cases including Account to Account ability – where the user can instantly transfer his or her own funds between two different institutions. An investor for example can transfer funds from their bank to their brokerage account in a matter of seconds. The second most obvious use case would be to instantly settle bills with vendors such as utilities and credit card companies. Finally the third most common use case that the Fed envisions is E-voicing allowing billers to send requests for payment that could be settled instantly. 

Why is it so badly needed?

There are of course a plethora of instant settlement choices that already exist in the marketplace with PayPal(NASDAQ:PYPL) and its subsidiary Venmo dominating the space while Zelle – a consortium of banks offers a similar service for banking customers. Although the private market choices work well they require enrollment and adoption that is far from universal in scope. The current system runs into massive bottlenecks when either the vendor or the customer does not have one of the services which forces a return back to physical settlement of transactions that is both highly inefficient and far more costly. 

Furthermore, because systems such as Zelle are private they are subject to bizantine rules of each member bank with some banks putting widely varying limit caps on daily settlement transactions and some banks offering the service to consumers but not to businesses which effectively defeats the whole purpose of universal digital payments.

Can the US financial system  finally enter the 21st century?

If FedNow solves these issues by first creating a universal standard for instant payment settlement and then enacting regulations that would force every financial institution to comply with those standards the implications for commerce could be massive. The current Balkanized state of e-payments in the US has put the country at a major disadvantage to the rest of the world where instant digital payment settlements are the norm. A physical check is the 21st century equivalent of the horse and buggy and it is not only an embarrassment but a true economic risk for the US economy to function in this manner for any longer than necessary. The FedNow project is designed to address this critical weakness in the US financial system. Let’s hope it succeeds. 

FedNow: The Most Revolutionary Thing You’ve Never Heard Of
 

Related Articles

FedNow: The Most Revolutionary Thing You’ve Never Heard Of

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email