Fed wants paychecks to reach bank accounts immediately

Officials said the Fed is expected this week to launch its long-awaited FedNow system, which aims to make bill payments, paychecks and other common consumer or business transfers quick and available around the clock.

This is a change from the current, slow system that is closed on weekends and can sometimes take days for consumers to access their funds. Those old rails handled 30 billion payments last year, worth about $73 trillion. The Fed’s system will compete with real-time payment networks built and launched by big banks in 2017, which process very small amounts of payments.

While FedNow would theoretically give consumers instant access to their money, the Fed said in June that only 57 of the thousands of banks and financial institutions have been participating since its inception. More widespread adoption of the system and further development of its capabilities could take a few years, officials have said.

“It’s not going to be a big bang,” said Craig Ramsey, head of real-time payments at payments-software company ACI Worldwide.

For millions of Americans, getting paid promptly is more important than a day or two. An entire segment of the financial-services industry fills the time gap in today’s payment system, including payday lenders and check-cashing stores. They effectively provide bridge loans at higher interest rates that prevent more expensive utility shutoff and overdraft fees.

It appears that peer-to-peer platforms such as Venmo transfer money between consumers faster, but they generally still operate on slower payment systems, meaning that actual transfers to consumers’ bank accounts take longer. May take several days. Instant payments are available on these platforms, albeit with a fee to be paid.

Fed officials said the new system — a behind-the-scenes network with which consumers won’t interact directly — could help individuals who are not on regular payrolls, such as gig workers, get faster access to their wages. It could also help the federal government distribute emergency aid payments more quickly.

Fed Chairman Jerome Powell told House lawmakers in March that “FedNow” would enable all banks – any bank in the United States, not just the big ones – to offer their customers readily available funds in the form of real-time payments. “This is a very good point.”

Currently, the electronic banking system in the US relies on automated clearing house payments to transfer funds from one financial institution to another. The ACH system, which began in the 1970s, is only available during normal business hours and typically offers overnight transactions, so Monday’s payments show up in bank accounts on Tuesday. It is also increasingly offering same day payment transfers.

A real-time payment network owned by the largest banks allows customers to receive their money almost instantly. The system now accounts for about two-thirds of checking accounts, although many smaller banks and credit unions are not part of it, and not all payments at large banks go through it. That system processed 58 million transactions for a total of $29 billion in the second quarter. This is up from 41 million transactions and $18 billion in payments a year ago.

While other countries, including Mexico and Brazil, installed systems almost immediately, and some mandated them, the Fed moved slowly. The project has been under discussion for more than eight years.

Aaron Klein, a senior fellow at the Brookings Institution, said the Fed’s delay has cost consumers hundreds of billions of dollars in overdraft fees, check-cashing fees and late fees.

And the new system could still falter, he said, because the Fed doesn’t require banks to provide consumers with faster access to their money. There is a risk that FedNow “will fail to gain traction and the Fed will increasingly perceive a reduction in demand for rapid payments,” he said.

Banks on both sides of a transaction must be part of FedNow to use it. The system will not be able to interact with the network of large banks, at least initially. The Fed has stated that such interoperability is a goal.

Another limitation: According to people familiar with the system’s launch, at least some “early adopters” of the system will only receive FedNow payments, not send.

Large banks, which had spent more than $1 billion on their own systems, mounted a lobbying effort to prevent the Fed from developing FedNow. Industry executives have said the prospect of a competing Fed system has inadvertently delayed the spread of faster payments. The Fed last month added some big banks, including Wells Fargo and JPMorgan Chase, among its early adopters.