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Forward-looking: The Federal Reserve – the central banking system in the US that acts as the ultimate regulator in financial crises, price stabilization, and management of long-term interest rates – has released its own “real-time” payment system. A platform designed to securely process money transfers for both individuals and businesses.
The Fed just announced that its long-awaited system for instant payments has finally gone live. FedNow, which has been in the works since 2019, will provide individuals and small-to-medium businesses with a tool to transfer money any time of the day, on any day of the year. A capability that was previously available only through private payment systems such as Venmo or PayPal.
However, compared to those private companies which act as intermediaries between bank institutions, payments sent through FedNow will be settled directly in central bank accounts. The Fed was already operating a real-time (or quasi-real-time) system known as FedWire, but this was reserved for large-scale payments between corporations – and it was only available during normal business hours.
Compared to FedWire, FedNow is designed to provide “uninterrupted 24x7x365” payment processing capabilities while maintaining payment integrity and data security, the Fed states. For the time being, 35 banks and credit unions, as well as the US Department of the Treasury’s Bureau of the Fiscal Service, are ready to accept instant payments through the new service. Furthermore, 16 service providers are ready to support payment processing for the aforementioned banks and credit unions.
According to Reuters, FedNow has a maximum payment limit of $500,000, while individual banks can choose to lower the cap if they want. Big bank institutions were initially opposing the new federal service, arguing that it was redundant compared to private intermediaries. The tide has now turned, as large financial operators such as JPMorgan Chase, Bank of New York Mellon, and US Bancorp have finally agreed to join in the service.
The Federal Reserve highlights how instant payments through FedNow will provide “substantial benefits for consumers and businesses,” with rapid access to funds, just-in-time payments to help manage cash flows, and more. But some have expressed concern about the potential abuse of the system like in a “super-charged” bank run after a major financial failure.
Fed officials suggested that these concerns are inconsequential, as banks already have the tools to mitigate a potential major cash outflow. According to the US central bank, the first public (and final) release of FedNow includes optional features such as fraud prevention tools, the ability to join as a receive-only participant, request for payment capability, and more. With time, extra features will be introduced.
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