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What is FedNow?

As the spotlight remains on the Fed in the midst of persistent inflation, banking turmoil, and high interest rates, the central bank has also recently made headlines for another reason: the planned summer release of FedNow. FedNow, in a nutshell, is an instant payment service that would enable participating banks and financial institutions to transfer electronic funds between one another and to customers in a matter of seconds, regardless of time or geography. This system of processing electronic funds serves to replace the existing Automated Clearing House (ACH), which has served as the go-to platform for electronic funds transfer (EFT) since the 1970’s. Under the ACH, transfers in funds between banks and customers are made in bundles, and take one to three business days to fully process due to clearing (exchanging information about the payment and checking for fraud) and settlement (moving money to the customer’s account). Furthermore, ACH transfers can only occur during the bank’s hours of operation, so it often excludes holidays and weekends. 

In contrast, FedNow claims to be able to process clearing and settlement in a matter of seconds, meaning that FedNow transfers between banks and customers can happen virtually instantly. Whereas ACH transfers only process during banking hours, FedNow, too, claims to be working 24/7, for 365 days a year. Finally, although instant payment seems to be the norm to the average consumer thanks to services like PayPal or Venmo, it still actually takes such services around three to five business days to clear their payments. Although receiving money via Venmo, for example, may seem instant, such money can only be used on one’s credit or debit card after the payment has been cleared in a matter of days. With FedNow, such payments would be made instantly available for expenditure.

The appeal in such a service seems to be rather obvious: enabling the more efficient transfer of cash and capital reduces transaction costs and incentivizes economic activity that may have otherwise been inconvenient under the ACH. Just as the construction of railroads and highways as well as the digitalization of currency have all extraordinarily boosted economic growth by enabling the requisites of economic exchange to travel faster, so does FedNow seek to shift aggregate supply to the right. In other words, FedNow seems to be an unusual example of supply-side economics at a time when government micromanagement of demand has grown to become the norm.

Ultimately, of course, this is only the theoretical backdrop and reasoning behind FedNow’s instant payment service, which is currently planned to be released in July of this year. It’s doubtless that as FedNow is introduced to the mainstream that new issues and challenges may arise with the service; after all, in the words of the economist Friedrich Hayek, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” Time will tell if FedNow can navigate through economics’ curious task.


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