A forthcoming Federal Reserve initiative to enable faster payments could give consumers and businesses more flexibility but bring further risk for banks, according to a Moody’s analyst.
With the Federal Reserve slated to roll out its FedNow instant-payment system in July, Moody’s analyst Stephen Tu weighed in Monday to suggest the service may end up being “credit negative” for banks, particularly smaller ones.
FedNow will allow for bank-to-bank payments through which money is transferred in “near real-time” at all hours, according to the Fed.
See more: What is FedNow, the real-time payments service soon to be launched by the Federal Reserve?
“Smaller banks and credit unions have not always kept pace with larger peers and non-banks in terms of payment developments and technology,” Tu wrote. “FedNow could help them increase competitiveness, particularly among younger consumers. But FedNow could reduce the revenues of payments firms and banks that rely heavily on debit and credit card interchange fees.”
What’s more, with instant payments, banks risk losing out on some “float,” or the money that they “in practice” earn in before they officially register a deposit or withdrawal. Customers will also be able to move their funds around more quickly, Tu noted, potentially reducing the amount that they keep as deposits. And banks may need to spend up early on to get their infrastructure up to speed such that they can support the technology.
“Further, FedNow could make it more challenging for smaller banks to manage their liquidity as payment speed increases, particularly fund flows outside of the normal workday,” Tu wrote. “A notable feature of recent US bank failures was the speed of deposit movement as a contributing factor.”
Don’t miss: Fed says its instant-payments service FedNow will launch in July
That said, it remains to be seen how quickly FedNow will take off in the U.S., and numerous industry analysts have expressed skepticism that the service will drive dramatic changes to the way we pay, particularly in the near term.
“Despite an imminent launch for FedNow in July, the risks to cards are measured on a decade+ time horizon, not years, in our view,” Bernstein’s Harshita Rawat wrote recently.
Tu himself acknowledges that there’s been “more muted” adoption of similar services in economies with more established payments infrastructure, while instant payments have been quicker to catch on in emerging markets.
Additionally, while FedNow will compete with long-running payment technologies in the U.S. like credit cards and Automated Clearing House transfers that don’t process instantly, the service also has a more direct competitor in the Real-Time Payment Network that’s owned by the big banks.
Tu warned earlier this year that Apple Inc.’s AAPL, savings account was another risk for banks given its high yield and the company’s strong standing with consumers.
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June 27, 2023 at 01:49AM
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