A lot more money is about to travel at the speed of light.
The Federal Reserve recently rolled out the FedNow service—a (much-awaited) modernized payment structure that will allow financial institutions to deliver instant payment services. The service, which has been in the works for roughly a decade, is expected to eventually raze the speedbumps consumers currently face in sending and receiving money.
Today, we're going to talk about what it is, what it could be, and what it isn't.
The Tea: You're out to dinner with your friends, and the bill shows up. You say you'll throw down your credit card, and everyone can just pay you what they owe. They could scramble for cash. They could write you a check—that you'd either have to take into the bank or process with your phone, but either way, the money won't hit your account for a couple of days. Or they could make it easy on you and use a money app like PayPal or Venmo, but those still take time to clear, too (unless you want to pay extra for quicker transfers).
YATI Tip: Even kids can use money apps! Check out our favorites.
That's the financial system Americans have been dealing with for a very long time. But on July 20, with the soft launch of the FedNow service, the Federal Reserve set in motion a long-anticipated change that will allow all sorts of financial institutions to offer instantaneous transactions, transfers, and more.
Put differently: The days of waiting for money to hit your account over the weekend, during a holiday, heck, even overnight, are numbered.
"The FedNow service will offer instant payments between participating banks. Unlike third-party services like PayPal, Venmo and Zelle where transfers could take several days to clear, the FedNow service will instantly clear transfers in seconds," says Paul Camhi, Vice President and Senior Financial Advisor at The Wealth Alliance, a registered investment advisory firm. "In addition, these transfers can be processed 24 hours a day, 7 days a week. This will dramatically increase the speed at which money can move through the system in many ways."
One question that a lot of people ask is whether FedNow will replace apps like PayPal and Venmo that allow you to send money instantly. Thing is, Fednow isn't itself an app—instead, it's a program that provides the infrastructure banks and other financial institutions need to deploy similar technology.
Put differently: You might not use a FedNow app, but some of your bank's app functions eventually might be powered by FedNow.
"Eventually" is the key word there. This is a soft launch; FedNow is being rolled out in various phases. The Fed itself says the first release will provide only "baseline functionality"—for now, the service can only be used to process domestic payments between U.S. banks and other depository institutions. And again, FedNow is just the infrastructure, so any banks enrolled with FedNow will still need time to put the technology in place.
Also, this isn't being rolled out to all banks all at once. FedNow is a voluntary program, and so far, only a small percentage of the nation's financial institutions are taking part (though that's expected to grow over time). FedNow currently reports that 25 banks and credit unions—including well-known national banks such as Wells Fargo and JPMorgan Chase—have signed up for the service. So have a couple dozen certified service providers (think payments-enabling companies such as Fiserv) and about a dozen settlement agents and liquidity providers.
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Despite the small number of initial enrollees, "there appears to be momentum building with this launch, with millions of consumers gaining access to real time payments, even if it will take 5-7 years for most banks and credit unions to launch real-time payments (RTP) programs," says Ted Anders, VP, Head of Payment Solutions at Affinity Federal Credit Union.
The Take: Despite all of our hedging language above, FedNow could bring forth a wide swath of improvements for individuals, businesses, even government entities. Just look at all the different transaction types FedNow will support:
- Person-to-Person (P2P)
- Consumer-to-Business (C2B)
- Consumer-to-Government (C2G)
- Government-to-Consumer (G2C)
- Business-to-Consumer (B2C)
- Business-to-Business (B2B)
- Business-to-Government (B2G)
- Account-to-Account (A2A)
This covers a wide spectrum of transactions, but the most obvious gain for most people is getting paid quicker:
"Individuals can instantly have access to their paychecks," Camhi says, "which might allow them to pay their bills in a timelier manner and avoid paying late fees or penalties."
That latter point is especially important to lower-income Americans. The Federal Reserve Banks of Atlanta, Boston, and San Francisco found that "about 16% of consumers earning under $50,000 annually were likely to pay a bank overdraft fee, compared with 7% of consumers earning more than $100,000," reports American Banker. Meanwhile, the Consumer Financial Protection Bureau says "credit card late fees disproportionately burden consumers in low-income and majority-Black neighborhoods."
Other entities could benefit, too. "For businesses, this service could allow them to repurpose the funds from a paid invoice immediately for other capital needs," Camhi says. Governments could remit payments—such as Social Security and tax refunds—more quickly. Same goes for receiving payments, for items such as park passes and driver's licenses.
"When looking at the broader economy, creating more speed in processing money movement transactions helps all parties involved," Camhi says. "It eliminates processing delays and removes the drag as money is working its way through the system."
Looking ahead, mass adoption of the FedNow's instant payments technology could trigger some major changes in both consumer and business behavior.
"A couple of expectations might be gig workers beginning to receive daily wages posting to their bank accounts, or insurance companies will pay customer claims via RTP rails," Anders says. "Some businesses will be keen to divert payments from credit cards and may begin developing ways to offer RTP for their customers so they can reduce costs, but they will still need to identify tactics that are frictionless and provide customers with more value than cash, credit cards, and debit cards."
YATI Tip: Learn to handle money responsibly from a young age with these top kid debit cards.
But of course, like with virtually any new financial technology, Anders says to watch out for the ways in which fraudsters could use RTP to their advantage.
"One thing consumers will need to recognize is that real-time payments are similar to making cash payments—once the transaction is completed, that money is gone and they will have no dispute rights," Anders says. "I highly suspect fraudsters will also focus on RTP, creating further pressure on consumers to be on alert when consummating this type of transaction."
Riley & Kyle
Young & The Invested (Soon to be WealthUp)
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.