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American consumers and businesses have shown an appetite for faster payments and now that a new payment infrastructure is available to facilitate real-time transactions, money is about to move much faster on a larger scale.
The FedNow Service, the newly launched payment rail from the Federal Reserve, enables U.S. financial institutions of any size to provide secure, instant payment options for their account holders. Through financial institutions participating in the FedNow Service, businesses and individuals can now send and receive instant payments in real time, any time of the day, every day of the year.
Like any newly launched technology, there are advantages and disadvantages with the new payment system.
There are five primary advantages of the FedNow Service comparedto more traditional payment methods and these benefits are significant.
#1: Transactions through the FedNow Service are not limited to business hours or bank hours.
Account holders can send money anywhere in the US at any time of day on any day of the year and the payment will settle almost instantly.
#2: Account holders have greater control over their money.
The FedNow Service allows individuals and businesses to have more control over their cash flows. For instance, a consumer can wait until the day a bill is pay it and can rest assured the payment will be settled in time. For businesses, this is a major advantage, as suppliers can be paid faster, giving businesses the advantage of paying when it best suits their cash flow, not days before an invoice is due.
#3: Funds are insured.
When consumers and businesses transact using the FedNow Service, they can be confident their money is safe and secure, as funds are protected by the FDIC or NCUA.
#4: Unlike other systems, users have instant funds availability.
Payments processed over the FedNow Service will settle between financial institutions in real time and end users will have immediate access to money sent to them.
#5: The FedNow Service can support payments via QR code scanning and virtual payment addresses.
For example, a cashier can tally a customer’s purchases and ask the customer to scan a QR code, which is similar to a barcode with the merchant’s payment identifier and other details. Once scanned, the customer can complete the transaction using a card in their digital wallet or their mobile banking app.
As beneficial as those above advantages are, the FedNow Service is not without its challenges. The main disadvantages of the service as it standstoday include:
#1: The FedNow Service is only available domestically.
The system was designed specifically for the movement of U.S. dollars and therefore, does not work for transacting with other currencies.
#2: The FedNow Service is not interoperable with The Clearinghouse’s Real-Time Payments (RTP) network.
#3: While all U.S. banks and credit unions can connect to the FedNow Service, not every institution has done so.
This means the service may not be immediately available at every bank or credit union in the nation – at least not until those financial institutions sign up to join the network.
#4: Funds are irrevocable.
While transactions are not reversible, this is also a function that allows us to have immediate funds availability. However, there is a request for return option that offers options to get funds returned. The request for return of funds isn’t a guarantee, but is a mechanism that allows users to attempt to get funds back.
#5: Like all other electronic payment systems, the FedNow Service could be vulnerable to technical issues or outages.
The only payment method that is not vulnerable to technical issues is physical cash.
The FedNow Service is a major step forward in the world of payments. Advantages range from greater control and being able to send payments at any time of the day to improved transparency. While the FedNow Service is not perfect, it is not a static system and it will be constantly evolving with new features to improve how consumers and businesses transact.
Many financial institutions are likely to take a “wait and see” approach as they have with online banking and other technologies, but waiting too long could let competitors gain “first mover” advantage.