Terry’s Columns Fast Money

Fast Money

By Terry Savage on August 09, 2023

Money if moving faster than ever, and that’s a good thing for businesses, consumers, and the entire economy. The Federal Reserve has created a new and instantaneous money transfer technology that will allow immediate receipt of payments, even over the weekend when the Fed’s current ACH transfer system is closed. It’s called FedNow.

Let me say up front, that this new “pipeline,” which will be used by all financial institutions including local banks and credit unions, has nothing to do with a digital currency. Instead, it applies the latest technology to remove the lag that exists in current payment processing.

You may already benefit from using apps like Zelle, Venmo, and PayPal. To consumers, it looks like the money is being transferred to you instantly when using the apps. But there is actually a slight delay. FedNow removes all that, enabling the behind-the-scenes banking system to work instantaneously.

Remember When
If you’ve been around for a while, you remember when it took two or three days to clear a local check, and as long as five business days – a full week – to clear a check on a bank from our of town. In fact, some companies took advantage of those delays by issuing paychecks and other payments on out-of-state banks, and using the “float” (money in transition) to earn interest until the checks cleared.

These days, although some people continue to write paper checks, they are all processed electronically, using the code embedded at the bottom of the check. Paper is scanned, codes allow transfers, and you can check to see that the money has arrived safely by looking at your bank account balance online.

In other words, we are already in an era of electronic, digital money transfers. But FedNow will be used by many currently popular apps, and others soon to be developed, to make the time lags disappear. That should reduce costs for all providers.

The Benefits of Instant Transfer
Think of a small business such as a restaurant, that takes in a lot of credit card payments on Saturday night. The processing system is closed down over the weekend, so even though the owner uses the latest financial technology, the card payments have to wait until Monday to be put through the system. And the money may not drop into his business account until late Tuesday or even Wednesday – a significant delay before she spend it on new food supplies.

With FedNow, those payments will be put into process late Saturday night, and the money will be available instantly to the business owner!

Or think of an Uber driver or other independent gig economy worker, who wants to get paid on a daily basis. Even using today’s apps, the payment appears to arrive on a late night or over the weekend. But actual use of the money waits a day or two until the back-end of the payment is processed by the banks. FedNow will make that money spendable immediately.

Technology at Work
When radio first started about 100 years ago, people were astounded that sound came over the air! At the time, there was great debate over whether this technology was a blessing or a curse! One headline read: “The transmission of intelligence has reached its height in radio!”

This new invention and its impact on society were widely debated. Was it a “blessing or a curse”? For those interested in reading more click on this link. Some feared this intrusion into American homes was a way for government to spy on our daily lives. The term “radiophobia” was coined to explain not only the fear of radiation but the social impact of radio.

Fast forward to today’s Internet, which abounds with warnings about government intrusions into our financial lives and confiscation of our currency. And they aren’t just talking about the IRS! Conspiracy theories abound. But those worries are misguided. The U.S. government cannot create a “digital dollar” without specific authorization from Congress. And the government is not about to confiscate your paper money!

On the other hand, our current spending and payments are already highly digitized. Debit cards, credit cards, online banking, and payment apps do indeed track all our money movement. And unless you’re either a criminal or a tax cheat, you shouldn’t fear faster financial technology. It will cut costs and benefit you in the long run. Just like radio! That’s the Savage Truth.



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