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Instant payments with FedNow... or Fed “5 years from now”
Angela StrangeThe Federal Reserve announced last month that they will begin building FedNow, a real time payments network. The system will eventually be available to all banks, 24/7. Why does this matter?
The lack of a universally adopted real-time payment system in the US is one of our largest regressive taxes. Most employees live paycheck to paycheck, and it’s the people who need their cash the most who suffer the most from unpredictable payment delays—for instance, the lag between when a check is deposited and when that money is available. Why pay 1 to 5% of your check to cash it immediately when banks can do it for free? Because you can’t afford to wait the 2 to 7 days for the bank to clear it. Every mistake can result in a $30 overdraft fee; overdrafts last year totaled $34 billion!
Interestingly, we already have a real-time payments network in the US that’s run by the Clearing House, an association owned by many of the large banks. The problem: The rest of the 10,000 banks in the US have been reticent to adopt the system. For one, the Fed has been talking about building an instant payment network since 2015, which led many banks to wait until this decision played out. In addition, there is some mistrust around allowing large banks to own such critical infrastructure and the associated pricing control.
With the introduction of FedNow, the Fed plans to act as both an operator and a regulator, as it does with ACH. Hopefully, the announcement will further shine a light on this regressive tax and prompt faster progress overall. Ironically, “FedNow” may be a bit of a misnomer: the Fed expects the launch of its instant payment service will take up to five years. To delve deeper into the need for real-time payments—and learn why we’re lagging so far behind—listen to the recent 16 Minutes on the News podcast.
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Capital abundance pushes fintechs to innovate
Capital is increasingly digital, driving down marginal distribution costs, while total capital stocks have become increasingly abundant. Capital is so abundant, in fact, that in some parts of the world, banks will pay you to take it off their hands. In Denmark, for example, you can now get a 10 year mortgage with a negative 0.5% interest rate.
What happens to financial services companies when capital is easier to come by—at least for prime customers—and distribution costs are low? Fintechs need to offer a greater number of services to provide added value. As one example, Tally, which manages debt by automating your credit card payments, recently introduced a savings app that rewards users as they set aside money. SoFi, whose core business is providing better rates on student loans, also provides budgeting tools and wealth management. Negative interest rates are far from the only force driving fintech companies to continue innovating. But, while they last, they are a tailwind to a secular trend.
Apple unbundles the credit card
Anish AcharyaLast week, Apple launched the Apple Card, a new credit card available to all US iPhone users that can be used for Apple Pay and online purchases. It’s issued by Goldman Sachs—the bank’s first consumer credit card—and you can apply for it directly through your phone’s Wallet app. But the card itself (whether digital or off-white titanium) is actually the least interesting thing about this news.
When stacked against traditional competitors, the Apple Card’s specs—its cash-back rewards, interest rates, design, etc.—aren’t particularly stand-out. What is exceptional is how its product features are organized around transparency to help customers make better financial decisions. The Apple Card has no annual fee, late-payment fees, or foreign-transaction fees. Beyond that, the card offers greater visibility into interest paid.
While those features could easily be copied, the major credit incumbents are unlikely to do so because they are strongly incentivized (via revenue and profits) to maintain the status quo. That means Apple gets to claim that it’s the first credit provider to offer features completely aligned with consumers’ interests.
On a macro level, Apple is unbundling the credit card—disintermediating the credit card issuer from the consumer relationship. This means that, in the future, Apple can potentially lower interest rates by running an auction amongst debt providers, a process that would be invisible from the consumer experience perspective. If Apple becomes your default payment tool, white-labels debt, and more generally owns the consumer conversation around money, the upside to the brand and business is enormous. To hear more about Apple’s foray into financial services, tune in to our 16 Minutes on the News podcast.
