The FedNow introduction tops this year’s “What’s New” entries. Also included is a discussion of the proposed regulatory and policy changes following the SVB and other bank failures and the potential impacts on consumers. Finally, we will provide updated lists of best rates and updated data on how many people in the US are “unbanked.”

FedNow

For a comprehensive discussion of the FedNow program, it is worth reading this speech given by Loretta Mester, President of the Cleveland Fed earlier this month to the National Bureau of Economic Research. The speech is the basis of the description below, and the figures included are from her presentation. For a brief summary of FedNow, including some editorial commentary, try either the Economist article of the Forbes article. (Subscription may be required to read these if you are over your allotment of free articles.)

From President Mester’s speech:

The payment system is a crucial part of the infrastructure of the U.S., and a well-functioning and secure payment system is vital for a sound economy. The Federal Reserve System has responsibility for fostering a safe, efficient, and widely accessible payments infrastructure, and the Reserve Banks have provided payments and settlement services alongside the private sector for more than 100 years. The Fed has this responsibility because as the country’s central bank, it can uniquely provide interbank settlement without introducing liquidity or credit risks. Settlement refers to the debiting and crediting of accounts to transfer funds for a payment. Settlement is the foundation for most payment systems, allowing the sender’s depository institution to settle a payment by moving funds to the receiver’s depository institution. The Fed’s payment services include check processing, automated clearinghouse (ACH) services, and wire transfers. In addition to settlement, these services include clearing, which refers to the exchange of information about a payment.

The Fed offers its payment services on behalf of the public in competition with and in support of similar services provided by the private sector. Unlike central banks in other countries, the Fed has not been given complete regulatory or supervisory authority over the U.S. payment system. But by offering payment services, the Fed has been able to promote accessibility, safety, efficiency, and innovation in the payment system.

Technology facilitated the rapid rise of electronic payments in recent years, and since it all seems to work seamlessly, you (the consumer) probably don’t think too much about what goes on behind the scenes. But the need for an instantaneous system for moving funds and accounting for the transfers have grown too. This is where FedNow comes in.

This is the first new Fed payment “rail” (system) in fifty years. The figure below explains how FedNow works. What transactions between the insitutions happen in mere seconds, 24/7. The previous system only operated during business hours, transactions were processed in batches, and the entire process could take 2-3 days. (This would be why when you deposit a check you can’t cash it unless your account has sufficient funds to cover it should it bounce.)

Even “instant” person-to-person payment apps like Venmo and CashApp aren’t instantaneous behind the scenes. There are banks behind them, and the receiving bank takes some risk that there might not be sufficient funds to cover the deposit.

Here are the advantages of FedNow:

Here is an example of a how a transaction would flow using FedNow:

Banks use either the Fed to clear transactions, or the Clearing House’s Real-Time Payments (RTP^®) service. Not all of the 10,000 banks in the US will participate initially in FedNow. Some will choose to continue using the Clearing House RTP.

Again we go directly to President Mester’s speech for a description of the rollout of the program. The explanation of the parameters institutions can set suggests how the risk of any sort of bank run can be mitigated:

The FedNow Service is being tested and certified with a diverse group of first adopters that were part of the pre-launch pilot program; the group includes financial institutions, processors, service providers, and the U.S. Treasury.

At rollout, the FedNow Service will include features that focus on clearing and settlement.⁹ At its most basic level, the FedNow platform provides interbank settlement that enables funds to be transferred from a payment sender’s bank account to a receiver’s bank account immediately and at any time. No prefunding is required. The limit per customer credit transaction will be $500,000, but the initial setting of the transaction limit will be $100,000. A participating institution will be able to adjust that default limit down or up, to a maximum of $500,000, depending on its preferences. Participants will be able to decide whether they want to both receive and send payments or whether they want to only receive payments. And they will be able to specify a list of suspicious accounts to and from which they neither want to send or receive payments.

As I see it, the bottom line would be that FedNow will be most beneficial to those with limited liquidity—those who currently pay premiums to get paychecks cashed who would instead have instant access to their pay, perhaps even more frequently, and at no cost to them. Those who receive government funds, particularly in emergencies, where waiting days for a check to clear could be onerous, would have instant access to the assistance. For the average person, it would mean that your stated balance in your bank account is really your balance, and that when you use online bill-pay, for example, the payment would be instantaneous, and the funds would not leave your account until that moment, not days earlier as often happens now.

Changes proposed following this year’s Bank Failures

The FDIC collects quarterly fees from all banks offering FDIC deposit insurance to keep its Deposit Insurance Fund full.   But following the SVB, Signature Bank and First Republic failures, it is in the hole by almost $16 billion. The FDIC has proposed that it replenish its fund by imposing a special assessment on banks larger than $50 billion. This would mean 113 banks would cover 95% of the cost, and 96% of all banks would not have to pay anything extra. (Yahoo Finance)

The Federal Reserve is also going to propose changes to how it supervises and regulates banks after these bank failures. There was a specific examination of what happened with SVB bank, and shortcomings discovered in the current supervision and regulation processes of the Fed will be remedied. (AP)

Banks are pushing back a bit and warning that any increases in capital requirements (how much cash banks must hold) will end up costing customers more in some way or push them to unregulated service providers. (Reuters) An increase in capital requirements was called for to put the US banks more in line with global bank requirements. (Reuters2)

If you would like to revisit this year’s bank failures in more depth, including a comparison to 2008, this New Yorker article is for you. You can also revisit EconExtra posts on the SVB Failure, follow-up on the SVB failure and First Republic takeover.

Interest Rate Updates

Here are a few lists of institutions offering the highest rates on:

• high-yield savings accounta (CNN),
• CDs (Business Insider)
• And the best money market funds (Fortune)

The Unbanked

The percentage of people who are “unbanked” in the US fell to 4.5% in 2021, the lowest level since this statistic has been measured by the FDIC in 2009. For more detail, here is the FDIC household survey press release.

If you have eight minutes, it might be worth watching this PBS News Hour segment on what it means to be unbanked. Some of these anecdotes might be useful to add to any class discussion of the topic.

How do you send money to someone without a bank account? Here are a few options:

1) Prepaid Debit Cards

2) Money Orders

3) PayPal, Venmo, CashApp, Western Union

(Business Insider)

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.