The Fed is looking to speed up payments
Traditional money is speeding up. The Federal Reserve has promised a new service to banks and credit unions around the country called FedNow, a 24/7 payment settlement service.
- Why it matters: More and more services function round the clock, but payments are still on something of a 9-to-5 schedule. For payments in the U.S., FedNow will really settle payments immediately, all day, every day.
The program is a sign that the Federal Reserve is willing to iterate on how fiat money works in the United States. It should launch sometime in 2023.
- Jargon check: "Fiat" is a shorthand term for money sanctioned by a nation-state. It's legal tender, somewhere.
Context: Consumers clearly want more ways to transact in fiat, smoothly.
- In 2018, debit cards were the most popular way to make a payment in the U.S., and fees to run those networks are a big source of bank revenue, according a 2021 report from The Fed.
- Debit card fees are variable, complicated and function on a percentage, but they averaged $0.23 to $0.44 in 2018, according to MerchantMaverick. FedNow fees are slated to be a fraction of that, about $0.045 per transaction, paid by the sender.
Don't look for FedNow to make international payments any easier any time soon, however.
The intrigue: Banks haven't been idle on speed.
- The largest commercial banks have already come together and built a similar service, known as Real Time Payments (RTP). It runs through its organization, The Clearing House.
- Zelle is a service banks run that uses RTP. It's like Venmo built into your banking app.
- It goes straight from bank account to bank account, but for whatever reason it just doesn't seem to have the mind share of competing apps, as Google Trends shows.
State of play: You're probably wondering what FedNow can do that Venmo or Cash App can't.
- Fintech companies have been showing there's more demand for some sort of digital cash. Apps like Cash App, Venmo and PayPal are very popular, though still not as popular as debit cards. (Songs about Cash App are nearly their own hip hop sub-genre, however).
- Still, those apps have friction, too. Venmo users can only pay Venmo users, for example. Plus, if someone who gets paid wants the money in their bank account, that will take one to three days.
- Venmo and the like are closed, whereas FedNow will be a platform banks and credit unions can build on, so users should be able to pay each other across FedNow-based apps and tools.
Quick take: Reporting out FedNow and anything about payments illuminates how complex and opaque so much about payments-as-we-know-them are. Fiat may get faster, but crypto still wins on transparency.