The Federal Reserve recently announced its plan to develop a new payment and settlement service, known as FedNow, which would allow for real-time payment processing by banks, even at night and on weekends. Many say that this move is long overdue, as the current public-sector-operated ACH payment infrastructure is nearly a half century old.
The goal is to allow banks of all sizes and all across the United States to provide virtually instantaneous payment and settlement services to their customers. As Federal Reserve Board Governor Lael Brainard said in a press release, "Everyone deserves the same ability to make and receive payments immediately and securely, and every bank deserves the same opportunity to offer that service to its community."
Aren't there already real-time payment services?
There is a current real-time payments system in existence, which is known as the RTP Network by The Clearing House. It was developed and is co-owned by some of the world's largest commercial banks, including Bank of America (NYSE:BAC), Capital One (NYSE:COF), Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), and about 20 others.
This network does provide real-time payment and settlement capabilities 24 hours a day. The problem is that it has been slow to trickle down to smaller financial institutions, which has given the big banks an advantage. Think about it this way -- if you get paid on Friday evenings and have the choice of getting access to your money instantly through a big bank or waiting until Monday until the payment clears at a smaller bank, which do you think more people would be likely to choose?
There will be some big winners
For the reasons I just mentioned, smaller banks could certainly be winners from a Fed-developed real-time payments system. However, it's unclear just how much they'll benefit. While the Clearing House option is currently not widely used by smaller banks, the venture's goal is to integrate it into all U.S. accounts by 2020. In addition, banks could experience a drop in overdraft fee revenue, as consumers' funds would be available to use sooner.
The biggest winner from this move is American consumers who would gain quicker access to their money, regardless of the institution they bank with. Not only would this be more convenient than the current situation for millions of Americans who live paycheck to paycheck, but it could also potentially save money in the form of overdraft fees, credit card interest, and other ways by giving them access to money sooner.
There could be some big losers as well
Big banks could be potential losers from this for a couple of reasons. Most obviously, giving the same payment capabilities to all banks regardless of size helps level the playing field. And the roughly $1 billion the big banks spent to develop the Clearing House service could end up being wasted money.
Payday lenders could also be losers here, and ones that most readers won't likely shed a tear over. These companies get a fair amount of business because of the delays in payment processing, so if consumers have instant access to their paychecks when their employers send the funds, they'll have less need for payday loans.
Another big loser could be the cryptocurrency industry. To be fair, not all cryptocurrencies are primarily used as a form of money transfer, but many are. And one of the major benefits of using cryptocurrencies to send payments is speed and availability. When banks can send and receive payments instantly and outside of "bankers' hours," it naturally would make cryptocurrencies less appealing. This includes Facebook's (NASDAQ:FB) Libra cryptocurrency project, which is mainly intended to be an instant payments system.
We're still several years away
To be perfectly clear, it's important to emphasize that the Fed's new payment system is still in the very early stages of development. The new real-time payment system isn't going to affect any companies in the banking industry right away.
In its press release, the Fed said that it anticipates the FedNow service becoming available in 2023 or 2024, so in a best-case scenario, we're at least four years away from the rollout, which should let the industry anticipate and adapt to the new system well ahead of time.