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.
Instant payments won’t cause liquidity risks immediately. Participants in FedNow — like those already using a similar privately owned network called RTP — will have significant leeway to set withdrawal limits on individual accounts. Many lenders connected to RTP restrict their customers’ instant transactions to “receive only.” What’s more, risk managers have cracked down since the recent failures, leaving banks with significantly stronger liquidity.
Over the longer term, though, some challenges are likely. RTP is gaining traction as a way for companies to pay contract workers immediately or to offer low-wage employees real-time access to their earned wages instead of waiting for the payroll cycle. FedNow could supercharge users’ awareness of instant payments. Financial institutions may find a competitive advantage in offering businesses and individuals greater speed and flexibility. Liquidity management, at the forefront of bankers’ minds now, could take a back seat over time.
Reduced friction in the financial system also may pose risks to everyday users. One is a fraud, already a hot political issue for the Zelle service controlled by the biggest US banks. Unlike with credit cards, payments over Zelle — and instant services like FedNow and RTP — generally aren’t revocable or refundable.
So what can regulators do?
Since at least 2019, the Fed has been analyzing whether to extend the discount window’s hours to include nights and weekends. The rollout of FedNow and similar services will only strengthen the argument for doing so. The 12 Federal Reserve banks should start making significant investments in personnel and technology to ensure they’re prepared for such changes.
As for user risks, the Consumer Financial Protection Bureau is leading talks to find ways to reimburse victims of fraud over electronic payment services like Zelle, and banks are trying to educate customers about common scams. Monitoring how consumers respond to these tools and staying on top of novel threats should be a priority.
The fact is, the world of 24/7 digital transactions is already upon us. The sooner regulators get up to speed, the better.
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