Have You Heard Negative Things About FedNow?

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Have You Heard Negative Things About FedNow? 

Some of you may have heard the term FedNow, but you may not know what it is. There’s been a great deal of misunderstanding about FedNow, and I’ve been asked about it a few times in recent weeks, so we’re going to dedicate today’s episode in understanding this service and how it could be of benefit to you. So what is FedNow? Before I tell you what it is I want to tell you what it is not. Fed Now is not a crypto currency. You can refer to our Podcast episode on April 17th to hear more about what a Central Bank Digital currency is; but FedNow is not that. It has nothing to do with crypto. FedNow is also not the first foray into the world of payments by the Federal Reserve. Actually, every time you send a wire transfer, you are using the Federal reserve to facilitate your payment through Fed Wire. So, the Fed is not getting involved in something new. They’ve always had a critical role in our payment infrastructure.

FedNow is also not a completely new concept. We’ve actually had another consortium of banks that have been facilitating the kinds of payments FedNow is looking to provide. So that leads us back to the original question: What is FedNow? FedNow is an instant payment infrastructure developed by the Federal Reserve offered to any size financial institution that wants to participate as well as their clients. In layman’s terms it’s a fast set of rails to provide instant payments. Let’s talk about the concept of an instant payment. Unless you’re sending a wire, none of the payments you’re making are truly instant. Most payments use a set of rails called ACH which stands for Automated Clearing House. This is a network that almost every bank in the country participates in and through which most electronic money transfers flow. If you have your electric bill automatically debiting your checking account each month – that’s ACH. If you have your payroll automatically being deposited, that’s likely ACH. ACH works really well but, there is typically a one-day delay or longer between entering the payment and it’s being transferred to the recipient. FedNow, on the other hand, is instantaneous. If your bank participates in the FedNow network, you’ll be able to go into your bank’s mobile app, input an instant payment, and it will hit the other person or entity’s account almost immediately. That’s what is meant by instant. Now I mentioned that instant payments are not truly new, as of October 25, 2022 the Real Time Payments consortium that I mentioned earlier, or RTP as it is sometimes called, had 274 participating banks, according to S&P Global Research. The number of banks joining the consortium has been slower than hoped. Because all banks are already using Fedwire, it is expected that the adoption for FedNow will be much faster. Now let me answer a few questions you might have about FedNow.

What are the advantages of FedNow for consumers? Convenience and Speed – pure and simple. What are the risks of FedNow? There are many. The most serious is consumer fraud. All it takes is for a fraudster to make you think you are paying a legitimate entity, only to find out you’ve sent the money to the wrong place. Once that money is gone, it is going to be nearly impossible to get it back. Currently, if you want to send a real-time payment through a wire, you have the layer of security of the bank doing certain manual verifications to make sure you intended to send the wire and that the recipient is truly who you wanted to receive the wire. You might think of FedNow as the ability to send a wire personally, without those extra human verification steps.

So in a world where everyone has access to FedNow, you could get an email from a fraudster telling you that owe the IRS money. They may provide an account number that you can send your money to in order to avoid any costly penalties. If you take the bait and send the money, it’s likely gone. So, consumers are going to have to be more responsible than ever with their finances.

Will every bank participate in FedNow? Not initially. There is a cost for banks to participate, and those banks will have to weigh whether there is truly customer demand for their client base to offer it. If you send an instant payment through FedNow to a friend, and that friend’s bank does not participate in FedNow, the payment will be returned. There are also two ways a bank can participate. The first is deposit only, meaning that its customers will be able to receive instant payments, but not initiate them. Receive only is much less risky, obviously. Full participation in FedNow would give customers the option of both sending and receiving. When will FedNow be available? FedNow will be available in July of this year. Not all banks will jump on the bandwagon at once. The rate at which banks decide to participate will probably depend on the demand from its customer base. There are times when consumers want the ability to do something, but once it is available, don’t always utilize it. Bill Pay is one of those services. People want to option to pay their bills online through their mobile banking app – but a smaller percentage in our part of the country actually do this consistently. What we may find is that even once FedNow is available in financial institutions, people prefer to continue using ACH, just because the delay actually helps ensure that you entered the information correctly and it gives you the option to modify if you didn’t. Can’t you already do this with Venmo? No. When you pay someone in Venmo, your money is actually not in your bank account, it’s in Venmo’s. Every Venmo user has their own subaccount within Venmo. Technically, if Venmo were to file bankruptcy there would be a risk that you could lose your money. Only when you make a transfer out of Venmo to your bank account manually is the money in your bank. So it might be a good idea to transfer your Venmo balance to your bank each time you receive money. There is no benefit to leaving it at Venmo.

Speaking of Payment Transfers, I want to give you an idea before the summer starts. Have you ever heard of a Christmas Club account? How many of you get to Christmas only to find that you’ve not set aside gift money in advance? A Christmas Club account allows a certain amount to come out of your checking or savings account each pay period or each month and sit in a separate account that you can’t access until closer to Christmas. It earns more interest than a traditional savings account and allows you to be prepared when its time to buy gifts. At MBC and Foundation Bank we have a host of creative ideas on how to be a better manager of your money. Start your conversation with us today by visiting our website at Foundationbank.org. If you’ve found this podcast helpful, we hope you’ll subscribe to it in your favorite podcast app and share it on social media. Please remember that this does not constitute a recommendation specific to your own unique circumstances, so please consult your own advisor. MBC and Foundation Bank are a member FDIC and equal housing lender, and until our next episode, God bless you.

-President Chad P. Wilson, CFP

Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of McKenzie Banking Company / Foundation Bank on May 16, 2023. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.