The Federal Reserve announced Monday it will develop a service to eliminate the frustrating delay many Americans face between when they deposit a check and when it’s recognized in their account.
Such delays costs billions of dollars in late fees and overdraft charges for millions of people living paycheck-to-paycheck, industry experts and regulators say.
“Immediate access to funds could be especially important to households with fixed incomes or living paycheck to paycheck,” said Federal Reserve Gov. Lael Brainard during a speech before the Federal Reserve Bank of Kansas City.
The new service, FedNow, is expected to launch by 2024 and would allow banks to nearly instantaneously move money into customers’ accounts, she said. The Fed board approved the decision by a 4-to-1 vote Friday, but it wasn’t announced until Monday.
The announcement could pit the Fed against some of the country’s biggest banks, including Bank of America and JPMorgan Chase, who have already developed rival technology and fear that Silicon Valley companies could use the Fed system to push their way further into the banking world.
America’s payment system lags behind many parts of the world, and U.S. banks are concerned about being left behind, said Aaron Klein, the policy director for the Center on Regulation and Markets at the Brookings Institution. “I think some of the large banks don’t want to be the taxi medallions and be uberized,” he said, a reference to the impact of ride hailing on taxi owners. “The rest of the world went to real-time payments a long time ago.”
The Fed’s announcement comes at a time when big technology companies are finding other ways into the banking world. Wall Street has raised concerns about Facebook’s efforts to create an alternate global currency system, known as Libra. Meanwhile, Square, the mobile payment company, and Rakuten, known as the Amazon of Japan and operator of U.S. rewards program Ebates, have applied for a special banking license that would allow the companies to offer checking and savings accounts.
In 2005, Walmart waged a two-year battle for a similar bank charter but withdrew its application after small banks objected. But more than a decade later, Silicon Valley may pose a bigger threat to the stranglehold banking industry holds on key parts of the financial world.
Big tech companies could use the Federal Reserve’s new service to gain direct access to the payment system, bypassing banks that currently act as a gatekeeper, said Greg Baer, chief executive of the Bank Policy Institute, which represents the country’s biggest banks.
The tech industry would like the Federal Reserve to give non-banks more access to the payment system, said Brian Peters, executive director of Financial Innovation Now, a lobbying group that includes Apple, Amazon and Google. But that is not likely to happen without congressional approval and is not why the industry supports the Fed developing its own service, he said.
“At this point, we just want to make our payment system work faster,” Peters said.
For decades, banks flew planes across the country filled with paper checks ready to be processed. Now, depositing a check is as simple as snapping a photo with your phone.
But there is still often a delay of a couple of days before the money is deposited into an account, a frustrating feature of America’s antiquated payment system, industry experts say.
The current electronic payment system was built in the 1960s with physical checks in mind, not splitting a dinner bill with friends on a mobile phone app, they say. Retailers bundled physical checks into batches before taking them to the bank to be processed. That same type of process is now used for electronic payments.
The Fed decision to develop its own service was cheered by community banks, credit unions and big tech companies that were weary of depending on a system developed by big banks.
“Community bankers, we did it!,” Rebeca Romero Rainey, chief executive of the Independent Community Bankers of America said in a blog post Monday, adding that the decision would “avoid a megabank monopoly.”
"I’m glad to see the Fed is heeding our calls to act, and that the American people will soon have a payments system that works for them,” said Sen. Chris Van Hollen (D-Md.), who co-sponsored legislation directing the Federal Reserve to develop a real-time payments system.
The Federal Reserve is requesting comments on how its service, FedNow, should be designed. It is unclear how much it will cost to build.
The Fed will probably meet resistance from the big banks as it develops its service. The Clearing House, which is owned by 24 of the country’s largest financial institutions, already spent millions of dollars building a system that brings the typical processing time from a few days to less than five seconds, said Steve Ledford, a senior vice president at the company.
Launched in 2017, the real-time payments system is used in 16 of the 10,000 banks and credit unions across the country.
If the Fed develops a rival technology that could slow adoption across the industry, Ledford said in an interview before the announcement Monday. “The numbers are ramping up,” he said, but “one of the complicating factors has been this Fed potential to move into the market.”
The Fed’s Vice Chair of Supervision, Randal Quarles, the lone dissenting vote on the board, appeared to side with the big banks.
“I do not see a strong justification for the Federal Reserve to move into this area and crowd out innovation when viable private-sector alternatives are available,” Quarles said in a statement.