In anticipation of the rollout of the Federal Reserve’s new money transfer service, “FedNow,” in July, I explored the evolution of electronic payments in the US to better understand the likely impact of this infrastructure upgrade.
The first leap towards digital currency transfer occurred when Western Union used its telegraph lines and a series of codes to allow money to be transferred from one office to another in 1871. Sending cash “over the wire” exploded in popularity and to this day the term “wire” has stuck.
Two of the more common methods of transfer today are the wire transfer through the Federal Reserve’s Fedwire system and Automated Clearing House “ACH” transfers through FedACH, both of which have not changed much since they were updated during a period of banking reform in the 1980s.
Domestic wire transfers are processed individually and are typically immediate between large financial institutions. Wires are more expensive (typically $15-25 per transaction but negotiable with each institution – wires we send through Schwab are free) and best for transferring large amounts or amounts that need to be delivered at a specific time. However, wires can only be sent during bank business hours, and none occur over the weekend. ACH transfers, on the other hand, are completed in periodic batches and are typically free for most people sending cash from one account to another or paying bills. ACH transfers can take much longer to process though, often several days, which generally makes ACH transfer the better option for sending smaller amounts.
In the 40 years since the last modernization of the Federal Reserve’s transfer systems technological advances have enabled faster, more reliable, and cheaper transactions, bringing on competition from fintech firms like PayPal (Venmo), CashApp, and Zelle. These innovators offer users the ability to transfer money instantly, for free.
The latest solution from the Federal Reserve, FedNow, will for the first time, offer an instant, essentially free, 24/7, 365 days per year money transfer option which is also backed by the US government. This is seen as a game changer as it replicates the speed of consumer-facing solutions like CashApp in the traditional ecosystem of wires and ACH transfers. In 2022, the ACH network handled 30 billion transactions totaling $77 trillion, and FedNow is expected to absorb a large portion of the high volume, lower value ACH transactions as a more modern, instantaneous solution.
Some of the criticisms of the FedNow program have involved accusations that it is a censorable central bank digital currency (CBDC) or cryptocurrency, neither of which is true. Those are both interesting topics to tackle another day, but what we have with FedNow is simply the evolution of our legacy ACH system, which has the immediacy we have all grown accustomed to thanks to technology. Time will tell how smooth the rollout will go, but hopefully, as soon as July, FedNow will give us a transfer option with the speed of a wire at the cost of an ACH!