The upcoming launch of the Federal Reserve‘s FedNow instant-payment system in July could have both positive and negative implications for banks, particularly smaller ones, according to Moody’s analyst Stephen Tu.
FedNow will provide consumers and businesses with faster payment capabilities and increase competitiveness for smaller banks, it may also lead to potential risks and challenges
One potential downside is that smaller banks and credit unions have been slower to adopt payment technologies compared to larger institutions and non-bank entities. The implementation of FedNow could result in credit negative impacts for banks heavily reliant on debit and credit card interchange fees, as the new system may reduce their revenues.
Furthermore, with the introduction of instant payments, banks face the risk of losing out on the “float” income they generate from the time between receiving a deposit and officially registering it. Faster fund transfers may also lead to reduced customer deposits as funds can be moved more quickly. Smaller banks may struggle to manage liquidity effectively as payment speed increases, especially outside regular business hours.
The analyst also highlights the possibility of increased costs for banks as they invest in upgrading their infrastructure to support the new technology.
The speed at which deposits can move with FedNow could potentially contribute to liquidity challenges, as witnessed in recent bank failures
However, it is uncertain how quickly FedNow will be adopted in the United States, and some industry analysts express skepticism regarding its immediate transformative impact on payment systems. Market analysts suggest that the risks to card-based payment systems are more relevant on a decade-plus time horizon, rather than in the short term.
In addition to competing with existing payment technologies like credit cards and Automated Clearing House transfers, FedNow also faces competition from the Real-Time Payment Network, owned by major banks. Earlier this year, Moody’s analyst Stephen Tu also raised concerns about Apple Inc.’s savings account, citing its high yield and strong consumer appeal as potential risks for banks.
While the FedNow launch in July is eagerly anticipated, its long-term impact and the extent of changes to payment systems will become clearer over time.
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