Last week, a number of American banks could not process payments for a few days, leaving some customers in a precarious financial situation as transfers and deposits failed and highlighting the risks of relying on electronic banking.
The effects of the outages were far-reaching. Many people’s payroll direct deposits failed, leaving them unable to access the money they earned. ACH payments also failed to process, which resulted in late fees. There were also duplicated withdrawals, which left many customers in a bind after their money was taken out twice for a single transaction. Between Wells Fargo, Chase and Bank of America, there were almost a million failed transactions in total.
A precise cause has not been disclosed, but the problem is almost certainly in the backbone of the banking system itself because people experiencing issues were unable to resolve them by going to their local branches.
The Clearing House Payments Company reported that instructions for transactions were sent to the affected banks “with the account number and names of customers masked” because of a processing error. This data is needed to process incoming payments and post funds to accounts, so the payments could not proceed.
The Clearing House said it was “working with the financial institutions with impacted customers, and with the Federal Reserve, to resolve this issue as quickly as possible."
Banks that attempted to send funds during the outage must now send the original instructions again to make the transfers work, which is leading to significant delays for affected customers.
One bank, JPMorgan, said it is automatically refunding the overdraft fees it charged customers who did not have sufficient funds to pay their bills as a result of the problem. The bank, which is the country’s biggest, is still seeing an unusually high volume of problem reports from customers.
Is the FedNow system to blame?
Although the problem is largely under control now, banks have been frustratingly vague in explaining what happened, leading to speculation about the cause of the issue. Some observers, like The Daily Doom’s David Haggith, are convinced that the Federal Reserve’s new FedNow system could be the culprit.
He points to one news report that said “the bank issues were a technical glitch with the Federal Reserve System.” This is not a very clear statement and it’s hard to imagine the entire Federal Reserve system being broken, but it would make sense if it was FedNow that was at fault.
FedNow is an instant payment service backed by the U.S. Federal Reserve that was introduced in July. Banks and credit unions are not required to participate, but the customers of those that do join the program can make payments and transfers outside of business hours, as well as on holidays and weekends. This is not possible with standard online transfers such as Automated Clearing House (ACH) transfers, which are processed in batches and can take a few days to clear.
It’s not unusual for newer systems like this to encounter glitches, but this was a major problem that resulted in hundreds of thousands of failed transfers.
While there don’t appear to be any clear answers about what role, if any, FedNow played in this drama, the incident does highlight the vulnerabilities of these types of electronic systems. It could be a sign of even more trouble in the future if FedNow is, as many believe, meant to serve as a distributed ledger for a future central bank digital currency (CBDC) from the Fed.
As Haggith points out, when these problems occur, people who have cash on hand will have a backup source of funding if electronic banking fails, but with a cashless CBDC system, these types of problems could leave people with no way to cover their necessities until the system is fixed. Technical problems and hacking incidents could bring life to a standstill if people are overly reliant on such systems.
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