The Fed's new Instant Payments system could be a problem for PayPal, Venmo

Zoom tired | iStock Unpublished

Yesterday, the US Federal Reserve officially launched FedNow, a new system deployed to 35 early stage banks and credit unions for processing instant payments between financial institutions. The Fed's goal is to eventually connect more than 9,000 banks and credit unions nationwide, eliminating the legacy payment system and speeding up payment processing between all US institutions.

If FedNow becomes popular enough, it could one day create problems for apps like PayPal and Venmo, which act as intermediaries for making fast payments between banks. Cash apps can eventually seem so slow or useless that they become obsolete. For now, peer-to-peer payment apps appear safe, however, as analysts told NBC News that FedNow "is likely to benefit consumers and small businesses the most."

"The Federal Reserve has created the FedNow service to help make everyday payments for years to come faster and easier," Federal Reserve Chairman Jerome Powell said in a press release. "Over time, as more banks choose to use this new tool, the benefits for individuals and businesses will include the ability for an individual to immediately receive a paycheck or for a business to instantly access funds when a bill is paid."

Ars reached out to institutions large and small on the Fed's early adopters list to find out how they are using the new payment technology.

Major banks listed as early adopters include Wells Fargo and JPMorgan Chase. Wells Fargo declined to comment, but a JPMorgan Chase spokesperson confirmed that FedNow is already enabling one of the world's leading financial services providers to "deliver faster, more transparent and more efficient payment services" to its customers.

As the Federal Reserve looks to expand adoption, big banks like JPMorgan Chase could serve as a key model proving the benefit of moving to FedNow's instant payment rails. The JPMorgan Chase spokesperson told Ars that the financial giant also expects "given the rapid pace of innovation, our participation will help us learn, grow and better serve our customers."

Many regional banks and smaller, early stage credit unions helped test FedNow before its launch and formed the basis of the nation's first government-designed instant payments system. Others are still waiting to see how FedNow works before adopting it. Financial services consultancy Cornerstone Advisors reported that nearly a quarter of financial institutions said they are waiting for the launch of FedNow before even considering developing their own instant payment strategies.

Massachusetts-based Avidia Bank's press release says it is "positioned to offer consumers and businesses the ability to transfer funds instantly, offering the choice to send and receive payments to manage money, make bill payments and avoid late fees." This press release included a statement from Federal Reserve Bank of Boston Senior Vice President and FedNow Program Director Ken Montgomery, who said banks like Avidia are leading the way “for industry-wide progress, setting an example for others who want to play a role in supporting a modernized American payments infrastructure.”

The more financial institutions that participate in FedNow, the more opportunities Americans have to transfer money instantly. Currently, FedNow has a default transaction limit of $100,000, but individual banks can adjust it up to $500,000, Forbes reported. A