The US Federal Bank recently rolled out a new system called FedNow, and as expected, the media has gone into a frenzy. Is this the start to a surveillance state? Is this just a mask to a central bank digital currency? Are we going to be a cashless society?
Let’s take a breather and sit down, look at the history, then at the current state of US financial networks, and specifically, where the new FedNow system fits.
Listen in now on our latest episode of Fiscally Savage, as we delve into the basics of FedNow, what it really changes in our current system, and what concerns we should actually have.
Spoiler: Don’t get swept by the media frenzy!
- [01:04] The Federal Reserve Bank’s role
- [02:21] What is the FedNow system?
- [05:03] The history of ACH transfers
- [11:58] Instant payment systems versus digital wallet services
- [14:21] FedNow pros and cons
- [15:53] The validity to common FedNow concerns
[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives and live free. This is the Fiscally Savage podcast.
[00:00:16] Dylan Bain: Hello and welcome to Fiscally Savage, soon to be Intuitive Finance with Dylan Bain. I am your host, of course, Dylan Bain.
[00:00:22] Happy Friday, everybody. I am so excited for this weekend, to be able to kick off. But before we get out there, today’s your daily dose of financial information that we see in the news.
[00:00:33] And today I’m going to be talking about the new system that the Federal Reserve Bank of the United States has rolled out called FedNow. If you haven’t heard about it, you could be forgiven. But if you have heard about it, chances are good you’ve heard a lot of misinformation, or false information, or information that really just forgets that context is a thing that you actually have to pay attention to.
[00:00:54] And so today, on this show, I’m going to be talking about FedNow, what it means, what people are afraid of, and a little historical context. So let’s just jump into it, shall we?
[00:01:04] The Federal Reserve Bank of the United States, if you’ve listened to my series on central banking, you know that one of the things that the Federal Reserve does is it both monitors and manages our currency, but it’s also responsible for being the bank of banks.
[00:01:20] That is to say that when you go to your banking establishment or you log on to your app or your phone to your credit union or bank, that bank has a bank account generally at the Federal Reserve. If they’re a national bank, they definitely do. They’re actually a shareholder in the Federal Reserve System, and so that is who they’re banking with.
[00:01:39] So when we ever hear the Fed is raising rates, what they’re actually doing is they’re raising rates on the money they’re lending to banks, and that’s how they control the monetary policy and the money inside of the system.
[00:01:51] Whenever one bank — so let’s just say that we have ABC credit union wants to send something over to XYZ credit union, those banks don’t just load the cash in an armored car and have it carted across town. They actually communicate with the Federal Reserve because that’s where the money actually is sitting. And they say, hey, can you move that over to this other banking institution that will then credit that other person’s account, thus showing the bank you’re having transferred the funds.
[00:02:21] The FedNow system is an upgrade of how we do that currently. So what FedNow is doing is that it’s an upgrade to our current financial networks. It’s allowing an instant payment system for banks. You and I cannot directly use FedNow is for banks. So XYZ credit union can instantly send funds to ABC bank in order to facilitate some transaction that their customers are doing. This means that the banks themselves — so both XYZ credit union and ABC bank would then have to actually build their own platforms to connect into the FedNow system, and therefore then offer those products to their consumers. It’s a voluntary thing.
[00:03:02] So where JP Morgan has already said, yes, we’re in on the FedNow system, Bank of America has not. And that’s telling that this is new technology that real people are adopting. The other thing that FedNow is going to be able to enable for us is the ability to have 24/7/365 access to being able to move funds around.
[00:03:24] As you know, if you’re one of those people who’s ever had to transfer funds on a Saturday and you realize, oh no, I can’t actually do it because the banks are closed on weekends and holidays. Oh, and by the way, it might be the middle of the night on a Wednesday and you still can’t transfer it because the banks are closed. This is going to solve that problem. If the banks were to set up a way for you to be able to send funds using this system through their own platform, you could instantly transfer to any other bank.
[00:03:52] The last thing that the FedNow system is going to do is it’s going to substantially lower the cost for these types of transfers. As it stands right now, if you’ve ever had to send money through a wire transfer or through an ACH transaction — which we’re going to get into in just a second — you know how expensive it can be. Whereas, wire can cost you $15 or more, and an ACH transaction can cost you up to 50 cents, the FedNow system is going to be less than a nickel, which accounts for almost an 83% drop in cost.
[00:04:23] Sounds like a pretty good system, right? Yeah it does, but the problem here is just that it’s big, it’s flashy, and everybody right now really loves to just indulge in fear and outrage.
[00:04:36] Because remember, ladies and gentlemen, the media has an agenda, and that agenda is to make money. And how do they make money? Selling advertisements. How do they sell advertisements? They promise those advertisers eyeballs and attention, and nothing grabs your attention like fear and outrage. And so when we have a new system, some part of our survival mechanism as humans goes, “No, bad!” And we get really scared because it seems like it’s a huge change.
[00:05:03] And when it comes to the financial systems, most people don’t actually understand how they work. Some of the people have said, if we allow the Federal Reserve to do this, won’t it allow the government to monitor and freeze transactions? Isn’t this just the first step on the way to a surveillance state? Isn’t this just a central bank digital currency in disguise, thus ending cash and creating a cashless society, completely dependent on the government and the Federal Reserve for its currency needs?
[00:05:31] No, it’s not any of those things, and most of the things you’re worried about, they already can do. This isn’t new. One of the things that I’ve said before, that the Fed’s role in the financial system is to clear payments. Up until about the 1960s, this was really paper checks. And if you’ve ever written a check, and I have to keep in mind that I’ve had to write checks in my life, and I do so very infrequently, most of my audience probably hasn’t.
[00:05:57] So what they would do is they would get out a checkbook and they would have this form on it. You’d fill out the form, you’d say who it’s supposed to be paid to, how much money it is, you’d sign it, and then you’d hand that check over to the person or institution that you were attempting to pay.
[00:06:11] So if you’re writing a check at a store, you buy the good, you hand them the check and they take your word for it, that this check actually has money to back it up. What then happens in the background is that paper check is taken by the merchant that you just bought stuff for to the bank. And then the bank takes that check and they send it off to the Fed to be validated that the money and funds actually exist. The Fed then makes the transfer between the two banks because they’re the bank of banks. They have their own accounts there. So they’re literally just taking some dollars from one bank account and putting it in another. But they’re the bank accounts of the banks themselves.
[00:06:49] And, of course, what’s the problem with this? Sometimes people write bad checks. And I’ve already walked away with the goods, which is why writing bad checks is, in fact, a crime.
[00:06:58] This was a huge problem, particularly when we started coming out of World War II. Consumerism was a big thing. We were having this huge economic boom. People are writing a lot of checks. And this isn’t necessarily efficient. So in the 1960s, what happened was a lot of entrepreneurial people started experimenting with these new things that they could use. They weren’t quite computerized yet, but we were well on our way there. That eventually was implemented first in a large scale in 1972, which became known as the Automated Clearing House, or ACH.
[00:07:32] What this was — I mean, we’re talking 1970s technology here, so we’ve already put a man on the moon. Computers exist and only really wealthy institutions or individuals could afford them. But we could in fact, send this through the telephone network if we were clever about it, which is what we actually did. The Automated Clearing House just meant that instead of sending the check through the mail or having to bundle them all together and send them on a Friday, I could actually use the computer system.
[00:08:00] Again, we’re going to 1970s technology here to actually facilitate the exact same thing as a check. So I don’t even need the check now, I can actually have the teller enter the information into the terminal, which then will transmit into the Fed, the bank of the banks, who will then make the fund transfers in the bank accounts of the banks, and then the banks would then give you the debit into your account as it needs to go.
[00:08:23] The ACH system was revolutionary, and this is one of the things about living in the United States. We tend to be on the bleeding edge of a lot of these technologies when they’re very first developed. Credit cards are a great example of this. ACH payments are a great example of this. But as time goes on, we start to fall behind because we spent a lot of money in developing this technology, but other nations and governments will look at it and say, but yeah we can do that, but let’s do it two or three steps better. And then they will put in that infrastructure instead of our infrastructure.
[00:08:58] One point that I want to just bring up here is that ACH transfers are different than wire transfers, and ACH transfers are far more common. Wires are expensive, and they’re not as secure, and they’re a great way to lose a lot of money if you don’t know exactly what you’re doing. Just keep that in mind in your back pocket. We’re going to come back to wires here in a second.
[00:09:17] Let’s talk about where you see ACH payments already. The most common place that you probably encounter ACH payments in your life is when you get a paycheck, payroll. Almost all companies, it’s payroll. So stop and think about how your direct deposit occurs into your bank.
[00:09:34] So unless you’re actually picking up a physical check and then you’re on pre-1960s technology, you’re getting a direct deposit into your bank. The bank that your company uses and the bank that you use are using an ACH transfer to do this.
[00:09:48] This is why, ladies and gentlemen, you will see sometimes on payday, the money will show up in your bank early, but you can’t access it. What’s happening there is that the bank has acknowledged that it’s received money on your behalf, but the transaction hasn’t settled yet. And what is settling? So this kind of goes back to the check type of thing. In order for the check to settle, we have to actually verify that the funds are there in your account that you wrote to check against. And so they will take the money and do the transaction, but then the money has to settle, which means the actual transfer of the money has to take place.
[00:10:29] This is why ACH payments take a couple of days, because they used to take a couple of days. But stop and think about this for a second. In our modern age, with all the computer technology and AI intelligence that we have, why is that the case?
[00:10:44] We can log into our bank accounts and verify we have the money. Surely the other banks and institutions could do the same things. No? Of course they can. And so it’s been silly that it’s taken us this long to be able to develop a system like FedNow to be able to make this process faster, where we in the United States are having to wait a couple of days for our transfers to settle.
[00:11:08] If you were in another country, India comes to mind who leads the charge in instant payment technology in terms of their banking sector, they’re light years ahead of us in this. And so FedNow is really stepping us up.
[00:11:20] But here’s the kind of the key point that I want to bring out. When the ACH system was developed, were there private entities doing it? Yeah, totally. And there still are today.
[00:11:30] The CHIPS network is what handles a lot of private ACH transactions. And the Fed is the vast majority of the ACH transfers. And more to the point, the Fed is the major regulator for the financial sector, which means the Fed already has authority over the process. So as you can see where I’m going here, the ACH system, our current existing technology is both antiquated and already controlled by the Fed.
[00:11:58] And you might ask, but hold on a second, Dylan, why do I need an instant payment system with the Federal Reserve when I have things like Venmo and Zelle?
[00:12:05] Here’s the deal. Venmo, Zelle, Cash App, and any of these other digital wallet services that you have — when I Venmo money, and I just did this, my mother called me and said, hey, I’d like you to help me cover some costs for this joint thing that we’re doing. And I said, sure. Pulled out my phone, I hit Venmo, sent her the money, shows up in her digital wallet. That was a transfer, right? Not really, because what’s ended up happening here is I didn’t have anything in my Venmo wallet, but my mother wants to be able to get that money now. So when I Venmo’d her, Venmo is not actually doing a transfer yet. What they’re doing is they’re fronting me the money.
[00:12:44] Basically, they have a relationship with me and they have established assurances that I’m not just gonna transfer BS money. And what they’ve done is they fronted me the money and then credited my mother’s account at the same time they debited mine. And because I didn’t have any money in the Venmo system, they’re now going to initiate an ACH process to pull money out of my credit union to bring into Venmo to cover the money that they just fronted me.
[00:13:12] This system, that interlocking chain can go all the way down because my mother tries to transfer that money now from Venmo into her bank, they’re going to say, no, it’s going to take a couple of days for it to get your bank. Why? Cause they’re using an ACH process.
[00:13:25] Essentially, what Venmo is doing is it’s functioning as a de facto Federal Reserve in miniature, in that they’re just saying I’m just going to be the bank for these two people, and so I’m just going to transfer it inside and I’m just going to cover it, and then if it turns out that Dylan doesn’t have the money to cover what he just sent to his mother, we’ll just reverse out all those transactions and cancel her transfer to her bank, which is exactly what they would do.
[00:13:49] It’s actually how a lot of Venmo fraud occurs, is that people will Venmo money in, or say, “Hey, I sent this to you by accident. Can you send it back?” You send it back and they cancel the transaction, but it takes a day or two to come through the system. And by that point, they’ve already moved the money out.
[00:14:04] So Venmo is not the same type of thing, but it’s operating on a very similar platform and it’s running as a private entity in parallel. Zelle is the same thing for banks. And Cash App, of course, is another one of these vendors that allows you to do something extremely similar.
[00:14:21] And this is basically how FedNow works because they’re doing the same thing, but at the banking level. So when they come in and they say, I want to send money from XYZ credit union to ABC bank, my credit union is going to verify I have the funds. They’re going to put it in the FedNow system. The FedNow system is then going to make the transfer and switch in their bank of banks. And so they’re going to take money out of XYZ credit union and put it into ABC bank on my behalf and put it in there. And then they will notify ABC bank, hey, this person now has more money in their account. And that’s how the transfer works is expected to take about 20 seconds to get done even at peak volume. So this is settling at the master account level at the bank of banks.
[00:15:04] The downside here though is that very similar to when you send a wire, using the FedNow system is going to be irrevocable. The ACH process with the couple of days to settle is what really makes it a secure process versus something like a wire.
[00:15:21] This is why people prefer to get an ACH because it’s actually secure and if there’s something that’s suspicious or there’s something that doesn’t look right, that process can be stopped and reversed. Any money that goes through FedNow will not have that option.
[00:15:35] And so this is an, in part, why the Federal Reserve is basically saying, you as the financial institutions have to build your own interfaces to this network, and then you can use it to do these transfers, but you, the banks, are going to have to figure out how to keep the consumers safe.
[00:15:53] So now let’s address some of the things that people are concerned, and the most common one of these things people are concerned about is, isn’t this the start of a surveillance state?
[00:16:03] This is the thing about whenever we see media frenzies around stuff like this. A good and thriving society requires citizens who will ask questions. And there’s always cause for concern, particularly when the government starts doing something new. I’m not going to sit here and pretend that the government’s trustworthy, because they’re absolutely not. Whenever there’s money involved, you can’t trust those motherfuckers. And that’s just part of life.
[00:16:28] But at the same time, a good and thriving society also requires rational thinking and a knowledgeable population. So the concern, to the idea that somehow, the government will be able to freeze your account, and they’re gonna be able to monitor all your transactions, and they’ll know where every penny you put through the system goes… isn’t really a big change. It’s more or less exactly what can go on now, and FedNow is not going to give them any greater surveillance control than they have this second.
[00:16:54] Because the Fed is already the oversight for the ACH wire transfers. If you’re like, wow, I’m going to use wire transfers just to go around the Fed. Yeah, but whatever institution you’re trying to put a wire transfer for goes through the Fedwire network, which is controlled by you guessed it, the Federal Reserve.
[00:17:12] FedNow is more or less going to replace these systems. It’s not going to go after existing private platforms because the Fed has never really gone after the existing private platforms that stand in direct opposition to the Fed’s ACH program and the Fed’s wire transfer program.
[00:17:29] There are other private institutions who are operating in parallel to the Federal Reserve right now with the existing network. FedNow is going to replace the Fed system, but if history is any guide, the Federal Reserve has never made any attempt to try to shut down those private alternatives. And that’s more or less what we can expect going forward here.
[00:17:49] Zelle, Venmo, and CashApp, they’ll probably just keep on keeping on. Because, why would they? The Fed is big enough and powerful enough, they don’t have to shut this down to create a monopoly. They already have that in the current system. And these newer technologies have not gained anything anywhere close to the amount of money that the Fed is putting through its ACH system and its wire network.
[00:18:13] So it’s not a real big change. It’s more or less just an upgrade. It’s a new coat of paint. It’s bringing us into the 21st century. The claims that somehow this is going to usher in a surveillance state above and beyond what we already have through things like the US Patriot Act that was passed in the early 2000s, I don’t think the evidence there, and with all things, big claims require big evidence.
[00:18:37] But the last thing that I want to address here before I sign off is the idea that it’s going to — the FedNow system is just a Trojan horse for creating a central bank digital currency.
[00:18:47] Look, I get this. I see where people are going. That cash is important, a cashless society would be terrifying, and we do want on some level some options, at least, for anonymity in our transactions. I get all that.
[00:19:01] And of course, when you look at other famous surveillance states like China, they’re of course, leading the charge on central bank digital currencies with their digital yuan. The thing about the United States though, is that while the Fed is in charge of maintaining the currency, they can’t just invent new bills. If we’re actually making rational decisions with our money, we would have already abolished the penny, and probably the nickel as well, because they don’t make any sense for us to be able to have. And as far as dollar dollars, we wouldn’t have dollars. We’d have dollar coins, probably $2 coins, and maybe even a $5 coin, because mathematically, that’s what makes the most sense in terms of maintaining a currency.
[00:19:40] But of course, that’s not what happened. why is that not what happened? Oh yeah, that’s right, because any change to the currency requires congressional approval. And there’s already enough people in Congress who absolutely hate the idea of a central bank digital currency. So if you think that for some strange reason everyone’s going to get on board with this, I got some ocean front property in Arizona to sell you.
[00:20:03] I just don’t see a central bank digital currency being actually a viable thing in the United States under the current political climate. All this is to say is that there’s a lot of hysteria that’s going around about, this change in how the Fed is doing things, and it’s not really that big of a change.
[00:20:22] The reason it’s scary is because we don’t have a full understanding. I read stuff so you don’t have to. I studied this so you don’t have to. That’s a byproduct of a specialized economy. And if you understand how the system works, this is actually not nearly as interesting as a lot of the online commentary around this wants you to believe that it is.
[00:20:44] And don’t get me wrong, ladies, gentlemen, I always like a good dumpster fire and something that’s entertaining to watch. Nothing would make me happier than be able to have this to be. It is nearly as interesting as people think it is, but for the people and the players in the game, it’s not. It’s a snoozer. And on some levels, we’re just happy that they’re moving along with the rest of the technology here.
[00:21:06] That’s all I’ve got for you, ladies and gentlemen. I’d love to know what you think. Feel free to find me on Instagram. I’m no longer @FiscallySavage. I’m @TheDylanBain. That’s the word “the,” T-H-E, and then my name Dylan Bain, at Instagram. I’m also on Threads now. I’m probably going to be discontinuing Twitter.
[00:21:24] And I’m excited to complete the rebrand. So stay tuned for that. It’ll be happening next week until then. I love each and every single one of you. Go out and have yourself a lovely weekend and I will see you on Tuesday.
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