Banking Is Going 24/7. Mind the Risks.
Money is getting faster. Regulators need to adapt.
Thanks partly to the pandemic, America’s long-term shift toward electronic money has accelerated. Yet its banking system hasn’t kept up. Although money-moving apps and websites are available night and day, most transfers are still processed on networks that operate during business hours only. So while a payment can be made within seconds, the recipient will need to wait hours or days for the funds if it’s after closing time or on a weekend.
That will soon change. Later this month, the Federal Reserve plans to roll out its FedNow Service to make instant domestic payments available to all bank customers — at any time of day and any day of the year. This long-awaited upgrade is welcome, finally helping the US catch up with the rest of the world. Businesses will be able to receive funds from their customers and pay their workers immediately, potentially simplifying cash management. Consumers, especially those with the lowest incomes, will have faster access to wages and other payments, helping to avoid the need for check-cashing fees or high-cost short-term loans. More flexibility in when they pay bills could also reduce charges for late payments.
Yet a world of 24/7 transactions also creates new risks that the Fed must monitor. These will affect financial institutions and consumers alike.
Two bank collapses in March demonstrated one potential problem. To the surprise of regulators, customers of Silicon Valley Bank and Signature Bank were able to use existing electronic payment networks to drain deposits from both institutions within days. SVB failed to secure emergency liquidity when it couldn’t find enough collateral before the Fed’s discount window — which provides loans to stressed banks — closed at 7 p.m. Signature Bank scrambled to borrow from the window just a few minutes before it closed.