Federal Reserve set to oversee bank transactions

The federal government this month is set to launch FedNow, a “safe and efficient” instant payments service which will allow the Federal Reserve to facilitate payments between bank customers and receive their transaction data.

With FedNow, the Federal Reserve will act as a middleman in transactions between banks and credit unions. Currently, transactions pass through a financial institution called a clearing house, which facilitates the payments. But at the end of this month, the clearing house will instead be the Federal Reserve for many banks.

For example, if John Doe wishes to pay a bill, he would initiate the transaction as he normally would through an end-user platform like his banking app. John’s bank would then send the request to the Federal Reserve, which would notify the recipient’s bank that funds are about to be transferred and would give the go-ahead to John’s bank to release the funds. The Federal Reserve would then take the funds from John’s bank and deposit them in the recipient’s bank. This would all happen in the span of six seconds.

John would be none the wiser that the Federal Reserve had not only just seen his transaction but had conducted it from beginning to end. 

At least 57 banks and service providers including JPMorgan Chase, Wells Fargo and US Bancorp have signed up for the service, meaning they will be using FedNow to conduct their customers’ transactions.

"When the Fed says something happens, it happens," Modern Treasury CEO Dimitri Dadiomov told Axios. "Banks don’t say no to the Fed."

The benefit of FedNow, according to the Federal Reserve, is that funds can be transferred and settled in accounts not only instantly, but at any point during the day or night. Currently, transaction settlement time — when the funds actually hit the recipient’s account — can take up to three days.

It is unclear what future ramifications FedNow might have, given that the federal government could now have access to records of a private citizen’s transactions. For example, whereas the Biden administration now requires any transaction over $600 using payment apps to be reported to the IRS, the IRS may already have a record of the transaction.

The Federal Reserve does not deny that it will be able to see transaction details, but says it is legally unable to deny transactions or access customers’ bank accounts.

“FedNow is an instant payments service that the Federal Reserve will offer to banks and credit unions to transfer funds for their customers,” the Federal Reserve told the AP in a statement. “The Fed and FedNow cannot access individuals’ bank accounts or control how they choose to spend their money.”

Cato Institute Policy Analyst Nicholas Anthony says that while FedNow does expand the Federal Reserve’s “footprint” he does not believe it will increase surveillance.

“While there are many sound concerns around FedNow being an unnecessary expansion of the Federal Reserve’s footprint,” Anthony stated, “I do not share the same concerns that FedNow will expand surveillance.”