I just read a commentary piece by Harsh Sinha on CNBC’s website titled Despite how earnings go, US banks remain far behind on this big tech issue. In the piece Mr. Sinha, the chief technology officer at TransferWise, makes his case for the U.S. government’s FedNow initiative to create a national faster payments network.
Once implemented, “FedNow” will be a real-time gross settlement system that settles retail payments by debiting and crediting an institution’s account(s) with a Federal Reserve Bank. Alongside this, I proposed that the Fed should enable 24x7x365 access to a liquidity tool like FedWire for all financial institutions.
He makes some very valid points in his commentary, among them: The current ACH system is old and may need to be brought into this century, smaller financial institutions can feel locked out of the current system, and other countries are adopting new real-time settlement processes.
That said, the development of FedNow or, anything like it, to serve the entire financial institution ecosystem is much more difficult than one may think. The U.S. has a uniquely complicated financial system. Developing something that works for a $100 billion community bank may not be the same as a multi-trillion dollar mega bank. Not to mention the ancillary player who want to get into the game.
The other countries mentioned by Mr. Sinha, generally speaking, have less sophisticated financial system or a less developed financial ecosystem, making development of such a platform much simpler.
I think that this issue is far more complex than some would like us to believe. When evaluating the FedNow issue, like anything else, it is more complicated than first thought.
These are my two cents. I am not an expert on this matter. I highly recommend reading some of the work our own Sarah Grotta has written on the subject (and others for that matter).
Overview by Peter Reville, Director, Primary Research Services at Mercator Advisory Group