Why the U.S. needs a better instant payments system
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Illustration: Eniola Odetunde/Axios
There's a new instant payments service in town. This one was invented by Varo Bank, months after the Federal Reserve introduced an instant payments service of its own.
Why it matters: "Varo to Anyone" is proof that the U.S. remains years away from a simple, ubiquitous payments system available to all. It's a bit janky and far from perfect, but even so, it's clearly better in many respects than any of its competitors.
The big picture: In a well-functioning payments system, anybody can send money directly to anybody else's bank account, instantly, for free.
- Digital wallets like Venmo, PayPal, Cash App, and Apple Cash generally charge a fee if you want the money to arrive in a bank account instantly rather than remaining in their own system.
- Zelle is free and fast, but it doesn't work with all bank accounts. Specifically, it doesn't work with neobanks like Chime or Current, which don't have their own banking license.
How it works: The new Varo service takes advantage of the fact that everyone with a bank account has a debit card. Debit cards don't just allow you to instantly spend money in your account; they also allow you to instantly receive money into your account. (That's how refunds are processed, for instance.)
- For a Varo customer to send money to a friend, they enter in their friend's email or phone number and the amount they want to send. The friend then receives a link, where they can enter their debit card number — and once that's done, the money is transferred.
- The money doesn't move over typical payments rails like ACH or RTP; it doesn't even move over FedNow. Instead, Visa processes the payment. That costs Varo a small amount of money, which the bank is happy to pay for the sake of becoming more visible and useful.
The catch: This service is available only to Varo customers. They can send money to anyone, but they can't receive money back through the same channel.
- While the money does appear instantly, it doesn't carry the sender's name, just "Varo Bank."
The bottom line: In a well-functioning modern payments system, Varo to Anyone wouldn't be necessary. Instead, it's meeting what CEO Colin Walsh tells Axios is a "pretty fundamental need of paycheck-to-paycheck consumers."
