FedNow isn't so ominous

FedNow isn't so ominous

You may be seeing ominous social media posts about the Federal Reserve and the US dollar. Some even reference "the Federal government's plan for July, 2023." While there is a plan, it's not particularly sinister. The Federal Reserve is basically replacing the ACH system with a newer and faster system called FedNow. Even for gun owners, this is probably the best thing to happen in American payment technology for 50 years.

There are conspiracy theories about FedNow, but they're too late. The Federal government took control of the currency decades ago. All else being equal, FedNow is faster and more reliable than ACH.

What is actually happening in July, 2023?

The Federal Reserve has spent years preparing to launch infrastructure for "instant payments." It calls this infrastructure FedNow. It's finally launching FedNow in July, 2023.

While FedNow will only be available to pre-registered adopters at first, the Federal Reserve plans to rapidly expand access. Banks are likely to adopt the new infrastructure quickly, because it is far superior to what they have been using in recent decades.

What are instant payments?

Instant payments are exactly what they sound like – money moved instantly. If that doesn't seem like a big deal, you're in for a surprise: the vast majority of payments actually take 1-4 business days.

Instant payments are a huge improvement. They eliminate that delay of 1-4 business days so money is truly transferred instantly. They also eliminate "chargebacks", so your money can't be seized on a whim. This is why FedNow is such exciting new infrastructure.

Why does the US have slow payments?

In the United States, most payments are made by credit card or bank transfer. Both of these rely on the Automated Clearing House (ACH) system. You might be familiar with transferring funds between accounts at different banks, or with merchant processing for credit cards. If so, then you're familiar with that delay before the funds appear in your bank account; 1-2 business days for "credits" and 4 business days for "debits".

Even with PayPal, Venmo, and Cash App, where your payments seem instant, they usually aren't. Those platforms might display the funds in your account, but you're generally still constrained by the ACH system. If you want to disburse funds to your bank account, you have to wait 1-2 business days for an ACH transfer. In many cases, you have to wait even longer because the platform waits for the funds to be ACH transferred to them before passing the funds along to you.

Although the ACH system currently handles around $76 trillion in payments per year, it's old. It was launched more than 50 years ago, in 1972. At that time, 1-4 business days seemed reasonably fast. Now, everyone agrees it's quite slow.

Further, ACH payments are subject to "returns" (basically chargebacks), meaning payments can be pulled out of your bank account if the sender had insufficient funds or simply asks for the money back.

Basically, ACH is slow and unreliable. It is obviously time for a payment system that doesn't suffer from these problems. The Federal Reserve is finally getting around to delivering that infrastructure.

Do other countries have instant payments?

The United States has lagged far behind in payments technology globally. Most developed countries already have instant payments infrastructure. For example:

  • Australia: NPP
  • Brazil: Pix
  • India: UPI
  • Netherlands: iDeal
  • Norway: Vipps
  • Poland: BLIK
  • Singapore: SGQR
  • Sweden: SEQR and Swish
  • Switzerland: Twint

These countries have been enjoying the benefits of instant payments for many years. Just because another country is doing something doesn't mean the United States should follow suit, but in this case it's time for us to join the modern age with instant payments infrastructure.

What are the conspiracy theories about FedNow?

There are a few conspiracy theories about how FedNow is part of a Federal government plot to take control of the banking system. The problem with these theories is they're all too late. Ironically, the Federal government has already done everything the conspiracy theories predict.

  • Theory: FedNow is about replacing the US dollar with a Central Bank Digital Currency (CBDC). Reality: No need, the US dollar is almost entirely digital, and has been for decades. The Federal Reserve doesn't print most money, it creates most money digitally. Likewise, banks and people don't use much cash – they send money digitally.
  • Theory: FedNow is about the Federal government taking over the private banking system. Reality: Again, no need. The Federal government has largely controlled the private banking system since the Federal Reserve was created in 1913. That control has only expanded since then. The Federal Reserve is the intermediary for most transactions.
  • Theory: FedNow is about the Federal government snooping on your private transactions. Reality: Once again, no need. FedNow will displace ACH. These two systems are very similar, with banks representing individuals and businesses, and the Federal Reserve serving as intermediary between banks. If the Federal government is going to snoop on FedNow, it's already snooping on ACH. Nothing will change.
  • Theory: FedNow will enable the Federal government to prohibit firearm and ammo transactions. Reality: No need. The Federal government already controls the ACH system that FedNow will displace. It won't be any easier for the Federal government to prohibit firearms and ammo with FedNow than with ACH. (And do be clear, it wouldn't be easy while the 2nd Amendment exists and people have an explicit legal right to firearm and ammo transactions.)

These conspiracy theories seem to be a waste of time. FedNow won't meaningfully change the extent to which the Federal government controls the banking system or the currency. It already has control.

FedNow is not related to cryptocurrency. It is not a Central Bank Digital Currency (CBDC), nor a cryptocurrency. There's no particular reason to believe it's a step toward abandonment of the US dollar like some people on social media are implying. It's simply payment infrastructure, with payments denominated in US dollars.

Is it possible the US government will introduce a CBDC in the future? Sure, anything is possible. But FedNow wouldn't particularly help or hinder that effort.

Will FedNow facilitate government snooping?

Some people are concerned that FedNow will facilitate government snooping into their transactions. While government snooping is always a legitimate concern, especially when it comes to firearm transactions, FedNow probably doesn't meaningfully change the privacy landscape.

Most FedNow transactions would have been ACH transactions otherwise. Under both systems, banks move money from one account to another, with the Federal Reserve generally serving as the actual money-moving intermediary. So there's not much difference in privacy protection between the two systems.

One minor privacy difference is that under the ACH system, sometimes the intermediary was not the Federal Reserve, but a private company called The Clearing House Payments Company. Ironically, moving away from this private intermediary might actually help protect against government snooping. If we've learned anything from recent government disclosures, it's that private companies have fewer legal restrictions on their data. The government often simply buys the data it wants, without the need for a warrant. Getting a warrant is harder than paying money, and theoretically warrants are necessary for Federal Reserve transaction data.

Another minor privacy difference is that under the ACH system, only short transaction notes were allowed. Under FedNow, much longer transaction notes are allowed, which might include information about the merchandise being purchased. If you're concerned about government snooping, you can leave your transaction notes as ambiguous as they were under the ACH system.

Will FedNow payments be safe?

For people receiving payments (sellers), FedNow is safer than credit cards and bank transfers. There are no chargebacks or "returns" for insufficient funds or buyer's remorse. If a seller receives a payment, it's theirs to keep. That's much safer than current payments, which are almost invariably subject to chargebacks.

For people sending payments (buyers), FedNow is somewhat less safe. Think of FedNow payments like cash. If you accidentally pay a scammer, you probably can't get the money back because there's no way to file a chargeback. You need to be certain you're paying someone legitimate, or you need to have escrow protection like GunTab.

You might wonder why buyers would want payments that are less safe. The simple answer is, they probably don't. But they increasingly won't have a choice.

Merchants are tired of losing 2.9% of their income on credit card payments, and sick of chargebacks that are frequently illegitimate. Fundamentally, credit cards prioritize convenience over security, which fosters billions of dollars in fraud that merchants are forced to pay for. That's not fair. So although buyers may not like FedNow as much as credit cards, FedNow is certainly more fair because neither side is being held accountable for the other side's mistakes.

Will FedNow prohibit any lawful transactions?

PayPal, Venmo, Cash App, and Zelle are the closest things we've had to instant payments in the United States. They all prohibit various lawful transactions, in particular gun-related transactions. So the obvious question is: Will the Federal Reserve prohibit any types of lawful transactions?

No, the Federal Reserve cannot prohibit any lawful transactions. The Federal Reserve was created by the Federal government, and is an extension of the government. It does not have authority to prohibit lawful commerce. Where private companies can prohibit whatever they they want, the Federal Reserve does not have that flexibility. FedNow will support all lawful transactions, including firearm and ammo transactions, just like the ACH system before it.

Will people actually use FedNow?

Yes, you should expect FedNow to become very popular. You might not necessarily know you're using FedNow, because you might be using a platform built on top of it. But you'll be using it, and reaping the benefits, regardless.

FedNow is particularly compelling for merchants. For most merchants, credit cards are the primary payment method. Credit card payments have many drawbacks: the 1-2 business day delay on receiving funds, the ever-present threat of chargebacks, and the cost of around 2.9% per transaction. Contrast that with FedNow: instantly receive funds, no chargebacks, and cost of a few cents per transaction. Currently, the only advantage of credit cards is familiarity. As more people gain access to FedNow payments and become familiar with them, merchants are likely to begin requiring FedNow payments, or at least asking customers to cover the 2.9% cost of credit card processing.

When will FedNow start to appear in the wild?

It's too early to say how soon we'll start seeing FedNow instant payments in the wild. But it's safe to say it will happen quickly, because the benefits are so great. For example, GunTab is hoping to implement FedNow instant payments as soon as possible. GunTab will start with "instant disbursements" to sellers, eliminating the 1-2 business day delay before sellers see the funds in their bank account.

What is GunTab?

GunTab is "the PayPal for guns". It's the safest, easiest online payments for guns, ammo, and more. If you buy or sell on GunBroker, Armslist, or anywhere else online, GunTab is the best checkout experience available. It's free to open an account, try it now.