A Moody’s analyst has warned that the Federal Reserve’s forthcoming FedNow initiative to enable faster payments could bring further risk for banks. The system, set to launch in July, will allow for instant bank-to-bank payments that transfer money in “near real-time” at all hours. While FedNow could help smaller banks and credit unions remain competitive with larger peers and non-banks, it could also reduce revenues for payments firms and banks that rely on debit and credit card interchange fees.
In addition, the instant payments service could cause banks to lose out on “float”, the money they earn in practice before officially registering a deposit or withdrawal. As customers will be able to transfer their funds more quickly, banks may also see a reduction in the amount of money kept as deposits. Furthermore, banks may need to invest early in infrastructure to support the technology.
FedNow’s Possible Impact on Smaller Banks
There is some concern that the introduction of the Federal Reserve’s instant-payments service, FedNow, could harm smaller banks. The faster payment speed may pose a liquidity management challenge for them, especially if there are fund flows outside of standard business hours. Tu, a senior economist at Moody’s Analytics, points to the rapidity of deposit movement as a contributing factor in some recent US bank failures. Despite concerns, nobody knows how quickly the service will take off, and many analysts remain skeptical about FedNow’s potential to drive significant changes in payment technologies.
Limited Adoption in Established Markets
The adoption of similar services has been more muted in economies with well-established payment infrastructure. In contrast, instant payments have caught on more quickly in emerging markets. Despite an imminent launch for the FedNow service in July, Bernstein’s Harshita Rawat believes the risks to cards are measured over a decade or more, not just a few years.
Strong Competitors
In addition to competing with credit cards and Automated Clearing House transfers that don’t process instantly, the FedNow service faces a more direct competitor in the Real-Time Payment Network owned by big banks. Earlier this year, Tu warned that Apple Inc.’s savings account, which has a high yield and is popular among consumers, was also a risk for banks.
Conclusion
Overall, while the introduction of FedNow is significant, it remains to be seen whether the service will achieve its objectives. Its impact on the payment industry may take many years to materialize, and there is still a great deal of uncertainty surrounding its adoption.
