The FinTech Chemist: Federal Reserve Announces FedNow

Studying the properties and composition that make up the FinTech ecosystem

Welcome to this week’s industry analysis with the FinTech Chemist. While I may not be literally mixing solutions and preparing reagents, I am studying and testing out the latest and greatest in FinTech. It’s pretty clear by now how much I love new technology because it means new experiments to track and test! Last week, the United States Federal Reserve announced its plan to enter the real-time instant payments sector with a new service called FedNow. So, what does this mean for the ecosystem?

FedNow is intended to launch in 2023 or 2024, which seems like a lifetime away in FinTech years. While the Fed is keeping its cards close when disclosing information about the project, FedNow will initially support transfers up to $25,000. FedNow claims it will make managing budgets more intuitive for many users and benefit small businesses. Interestingly, it puts the Fed at odds with large banks as this program directly competes with the one being developed by The Clearing House, which is owned by some of the world’s biggest banks, including Bank of America, JP Morgan Chase, Capital One, Citibank, Wells Fargo, and Deutsche Bank. On the other hand, smaller banks (which have resisted signing up for The Clearing House) are praising the decision because it would allow them to access RTPs without having to outsource and pay larger competitors. A little competition is good for the financial system, so score one for the little guys!

Lael Brainard, a member of the Federal Reserve Board of Governors, delivered an insightful speech in Kansas City, Missouri, stating that, “To ensure fast payments are available to everyone, FedNow will be accessible to all banks, no matter the size. Given our long-standing service connections with more than 10,000 banks across the country, the Federal Reserve is uniquely placed to deliver this outcome.”

The other question being raised is, “How is FedNow different than a Venmo or Zelle?” According to an article by TechCrunch, “While Venmo, Zelle, and other apps already allow users to transfer money instantly to one another, the Federal Reserve Bank described services like those as a “closed-loop” because both parties need to be on the same platform in order to transfer money, and they can only be linked to accounts from certain banks. On the other hand, FedNow will be a universal infrastructure, enabling all banks, including smaller ones, to provide real-time payments.”

The industry is not so patiently waiting to hear how the Fed will make its platform interoperable with the system already built by The Clearing House. Brainard said that while interoperability is an essential goal, it is not yet clear whether interoperability will be a fundamental feature of the Fed’s system. Now, onto my next scientific… I mean FinTech hypothesis adventure. And, as always, remember to take your vitamins!

Read the previous edition of The FinTech Chemist.