FedNow Is Here, RIP Venmo and Paypal?

FedNow is a newly activated instant-payment system developed over the last several years by the U.S. Federal reserve bank. The FedNow system facilitates instant transfers from bank to bank. While the Federal reserve bank has specifically stated that the program is not intended to replace Paypal, Venmo, or other cash transfer apps, it seems hard to imagine a useful reason for those systems to remain in place once FedNow is fully implemented.

The Problem With Existing Bank Transfers

Typically, when you wanted to transfer money from one person to another, the process was pretty slow. Due to clearing and verification procedures between banks, the recipient of funds might have to wait several days from when the transfer was initiated to when they could put the money to use. Plus, weekends and holidays delayed payments even longer. Private parties realized this shortcoming and developed solutions that facilitated instant transfers. Cash App, Venmo and Zelle are industry leaders. But CashApp and Venmo have shortcomings of their own. If you want to transfer money from either provider to your bank account(i.e., where you keep your real money), you still might have to wait up to three days for the funds to clear. Basically, both of those systems work as a middleman between each user’s bank accounts and if you use the systems for business transfers, you’re charged a processing fee. Zelle, eliminated the middleman problem and allows instant transfers directly from bank to bank, but not every bank offers Zelle so not everyone can use it.

What’s the difference?

FedNow addresses the shortcoming of all of the above. FedNow is a national system that will be made available to all banks and credit unions who opt in. The system will allow instant funds transfers from one account to another 24 hours a day, seven days a week. This system can be used to make funds available the same day for transactions such as person-to-person transfers, bill payments, paychecks, and tax refunds. Because it is a national system and it is being adopted by federal institutions like the U.S. Department of the Treasury, it’s likely to be widely adopted. The Federal Reserve will charge banks 4.5 cents per transaction; whether individual banks pass that fee on to their customers or not is yet to be seen.

Will there be a FedNow app for me to use?

No. There is no FedNow app. The Federal Reserve does not provide payment services directly to consumers and businesses. Banks and credit unions can provide their customers with access to instant payments through new features on their mobile apps, banking websites, or other interfaces such as those used for business payments. Bank and credit union customers will probably not even see the name “FedNow” on their bank’s instant payments platform. The FedNow Service is the high-speed highway that helps payments move from one financial institution to another. Banks and credit unions build new products for their customers that connect to the highway.

When will my bank or credit union provide me access to these new instant payment services?

The Federal Reserve’s goal in providing the FedNow Service is for consumers, households, and businesses across America to have access to instant payments through their banks and credit unions in the coming years. There are about 9,000 banks and credit unions in the United States, and sign up will happen gradually. It is up to them to adopt the FedNow Service and offer instant payments to their customers. Initially, consumers and businesses will only be able to send and receive payments via the FedNow Service with other consumers and businesses whose financial institutions have also signed up to use the FedNow Service. In the long run, however, once most financial institutions have signed up for the FedNow Service, I expect instant payments will be a routine part of everyday commerce.

Is the FedNow Service replacing cash? Is it a central bank digital currency?

No. The FedNow Service is not related to a digital currency. The FedNow Service is a payment service the Federal Reserve is making available for banks and credit unions to transfer funds for their customers. It is like other Federal Reserve payment services, such as Fedwire and FedACH. The FedNow Service is neither a form of currency nor a step toward eliminating any form of payment, including cash.

Does the Fed have access to my bank account with the FedNow Service?

No. The Federal Reserve and the FedNow Service cannot access individuals’ bank accounts or control how they choose to spend their money. The FedNow Service is an instant payment service that the Federal Reserve offers to banks and credit unions to transfer funds for their customers. The Federal Reserve does not provide accounts or offer instant payment services to individual consumers and businesses.