Over the last five years, we’ve fielded quite a few questions about cryptocurrencies, blockchain and central bank digital currencies (CBDC). The latter appears to be popping up more frequently and tied to concerns about the rise of big brother and the potential of lost privacy. Along these lines, there have been a number of recent inquiries about FedNow and whether it is a CBDC or some new nefarious technology.
Fear not as FedNow is not a digital currency nor a replacement for the dollar. Instead, it is simply a payment service. Try to think of it as Venmo, Zelle, PayPal or Cash App but created by a public entity. FedNow is the first U.S. government created and backed payment service that allows for safe and efficient (instant) transfer of funds outside of bank accounts between individuals and businesses – 24 hours a day, seven days a week.
FedNow is an evolution of the Fedwire Funds Service, which is also a real-time (instant) settlement system that has been designed to transfer funds electronically between banks, businesses and government agencies. FedWire, however, is subject to limited availability, meaning it is only available during business days and hours. FedNow, on the other hand, is a 24/7 service and will never be subject to holiday closures. While FedWire does not have a limit on transaction size, FedNow will initially limit transactions to $500,000 for banks and $100,000 for participants. Also, like many other banking services, it will not be free. As of today, it is unclear if banks will pass this cost to customers.
Interestingly enough, the U.S. is actually late to the party with this service as there are central banks in over 50 countries that have already implemented instant payment services. The European Central Bank (ECB) and the Reserve Bank of Australia (RBA) are a few worth naming.
If this is the first time you’ve heard about this, get ready because you’ll likely begin to hear a lot more about it in the weeks to come. The Fed intends to begin rolling this service out over multiple phases, with the first phase beginning in July. The first phase will be the pilot program and will include more than 120 organizations including the US Department of Treasury Bureau of Fiscal Service.
Availability of this service will depend on whether your bank chooses to participate. Additionally, there is no indication that consumers would be forced to utilize it. Washington Trust Bank is actively evaluating this new tool as we would any other for assurance that it is secure, efficient and effective.
Stay tuned as we will likely have more to report in the months ahead.
Matthew Clarke, CIMA® is a Vice President and Senior Client Portfolio Manager for Washington Trust Bank’s Wealth Management & Advisory Services. Within the Portfolio Management Group, he works with a team of portfolio experts who analyze and coordinate strategies on behalf of our clients who require both a high level of customization and expert communication. Working with our Relationship Managers, Matthew represents a client-focused, comprehensive and disciplined approach to investment management that emphasizes our consideration to the client’s “big picture.” His active participation in our client relationships is instrumental for our continuous success in meeting their goals. Matthew has over 10 years of financial industry experience and is often called upon for investment strategies that support the sale of business, concentrated stock holdings and other financial events that require significant consideration and analysis.