April 20, 2023

Needham, MA--The Federal Reserve Banks announced in March that they have moved up the launch of their new FedNow Service to July.

According to the Federal Reserve, FedNow is a “new instant payment service to enable financial institutions of every size, and in every community across the U.S., to provide safe and efficient instant payment services in real time, around the clock, every day of the year.”

Once FedNow is launched, financial institutions, businesses and individuals will be able to send and receive instant payments, giving them full access to funds immediately.

These kinds of financial exchanges have been burgeoning in recent years and are typically known as real time payments (RTP). The Federal Reserve refers to its system as a real-time gross settlement (RTGS) system and often uses the term “instant payment” rather than RTP.

Investopedia defines RTGS as “the continuous process of settling payments on an individual order basis without netting debits with credits across the books of a central bank. Once completed, real-time gross settlement payments are final and irrevocable.”

Impact of FedNow

One of the biggest impacts of FedNow is that it opens up the possibility of more innovation in the RTP landscape.

“It’s going to be a really tectonic shift in payments,” Sam Aarons, co-founder and chief technology officer of Modern Treasury said in an interview on pymnts.com. “The idea of receiving payments 24/7, 365 days a year is already a huge shift from what most American consumers are used to, so being able to have a system that is in real time, that works all the time, and with few restrictions is going to be a dramatic shift.”

That doesn’t mean other payment methods are going away, according to Aarons. He said digitally converted paper checks, automated clearing house, peer-to-peer payment apps and wire transfers will all be in play where they still make the most sense.

FedNow and Real Estate Transactions

The first thing to understand in the real estate transaction space is that the FedNow RTP system will not be replacing wire transfer. Wires will still be the preferred method for exchanging large sums for real estate deals and other large-sum transactions, since they cannot be rescinded and require verification.

However, within the context of the real estate transaction there are other smaller transactions that take place that could benefit from an RTP application, such as the exchange of earnest money deposit. In fact, applications already exist for these types of electronic fund exchanges.

What you will see with FedNow is not only a larger proliferation of applications, but much broader access to instant payments options for community banks and credit unions across the country, which most assuredly will be a boon for mortgage settlements in smaller communities across the country.

At Kriss Law/Atlantic Closing & Escrow, we have a full range of experienced legal professionals to assist your clients with the most complex details of their real estate transactions. Together with our clients, we will continue to explore the safest and most secure ways of handling your client’s funds for each transaction. Contact us if you have any questions about the optimum way to process your funds for an upcoming transaction.

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