- The credit ratings agency Moody’s Investors Service this week spelled out potential drawbacks of the real-time payments system FedNow, which the Federal Reserve plans to launch next month, saying some payments players that “rely heavily” on card interchange fees for revenue could suffer.
- Moody’s also noted in the June 26 report that around-the-clock availability of the new digital payment rail may require some FedNow users to increase investments in technology and staff to more closely monitor money movement 24 hours a day to guard against cyberattacks.
- Given payments will move more quickly, the new system could also increase the possibility of bank runs, Moody’s said, pointing to the speed of withdrawals being a factor in the spate of bank failures earlier this year.
Moody’s acknowledged the new, more efficient FedNow system will likely reduce payment costs over time, partly by increasing competition in the payments sphere. That will be a benefit for consumers and companies alike, in that they’ll have more access to cheaper, faster payments and thereby be able to manage their liquidity more efficiently. That will be especially true for small businesses to the extent that they can reduce delays in payments and lower handling costs, Moody’s said.
“FedNow will likely be positive for households and businesses, giving them additional low-cost instant payment options,” the Moody’s report said.
The central bank has been developing the new real-time system for several years, and it will be the first significant new U.S. payment system backed by the federal government in decades. A key aim has been to create a system more appealing to small banks and credit unions, which have been reluctant to use the only existing real-time payments system: the RTP network, a privately owned system operated by their larger rivals through The Clearing House.
With more bank participation in FedNow, the Fed may be able to increase nationwide use of real-time payments and spur a more efficient economy with increased adoption of faster rails. Some banks may opt to adopt both FedNow and RTP because the systems won’t be interoperable, taking on higher costs. Overall, the U.S. has lagged other countries in fostering the use of such instant payments.
While FedNow may give smaller banks increased technological wherewithal to compete with larger rivals, it may also ultimately eat into all financial institutions’ revenue to the extent that consumers and businesses opt to use the new payments system instead of credit and debit cards, Moody’s noted. That’s because merchants pay banks and credit unions interchange fees when cards are used.
In addition, revenue banks earn from investing depositors’ funds could also be decreased if they hold that “float” for shorter periods of time, Moody’s noted.
“FedNow could reduce the revenues of payments firms and banks that rely heavily on debit and credit card interchange fees,” the report said. “Banks would also lose the interest that banks and credit unions earn on ‘float,’ the money that is in practice earned during the time a bank takes to register a deposit or withdrawal.”
The Moody’s report arrives as the Fed is gearing up to go live with the new real-time payments system late next month. The central bank said Thursday in a press release that 41 financial institutions, 15 corporate service providers and the U.S. Treasury Department have been certified to use the new system.
Nonetheless, some executives in the industry suspect the rollout will be slow and quiet at first, with more fanfare about its availability later in the year.
Some of the early adopters cited by the Fed on Thursday include big banks such as JPMorgan Chase, Wells Fargo, BNY Mellon and U.S. Bank. There are also a number of smaller financial institutions on the list, including Bridge Community Bank, First Internet Bank of Indiana and Quad City Bank & Trust.
In addition, some of the service providers that have signed on as FedNow participants include Dutch digital payments provider Adyen, bank technology provider Jack Henry & Associates, processors FIS and Fiserv and ACI Worldwide.
However, the disclosure of participants by the Fed this week was almost as remarkable for how many big banks it didn’t include as early adopters, such as Bank of America, Citi, Capital One, PNC, Truist and Citizens Bank.
“I’m surprised at how many of the biggest banks are missing from the initial list,” said Jim Angel, a Georgetown University professor who served on the former Faster Payments Task Force. “Are they just slow because of their size, or are they intentionally slow-walking faster payments to protect existing revenue streams?”
The Fed is likely to continue its marketing and education efforts to bring more banks onboard.