Forget the Gossip: Here's the Truth About FedNow

Fear tends to drive rumors and gossip.

As a child, my mother had the habit of dusting off this old proverb: "Believe nothing of what you hear and only half of what you see." In other words, she wanted me to seek the truth, even if it meant doing some digging.

When I began to hear gossip about the Federal Reserve's FedNow Service, I wondered why it was mired in drama. And so, adhering to my mother's advice, I sought the truth. It appeared that much of the concern came from the Black community. There were stories about how the Federal Reserve's new service is an attempt to infiltrate the financial affairs of everyday Americans. There were wild tales of how FedNow would shut down CashApp, Venmo, PayPal, and other payment services.

Why it's so easy to believe the gossip

Racism is alive and well in America, and "banking while Black" can be fraught with humiliating, terrifying experiences. For example, the New York Times told the story of a woman named Clarice Middleton who was accused of fraud by three Wells Fargo Bank employees -- all for trying to cash a $200 check. The police were called, Middleton provided evidence that the check was hers, and the bank finally cashed the check.

Middleton's experience is not unique. Studies show that the largest U.S. banks avoid hiring and promoting minority employees. In addition, New America found that large banks have targeted minorities, including Native Americans and undocumented immigrants, by opening accounts and lines of credit in their names but without their consent. When someone complained, the bank closed the accounts rather than conduct an investigation.

In a nutshell, the gossip regarding FedNow mostly rang true in the ear of those most oppressed by the U.S. banking system.

Fortunately, we have Teri Williams to turn to for a dose of truth. Williams is President and COO of OneUnited Bank, the largest Black-owned bank in the U.S. She is also keenly aware of the uphill battle minorities face in the world of banking.

In a recent phone call, Williams was able to set the record straight about FedNow.

What is FedNow?

Federal Reserve: FedNow Service is a new instant payment service in development. The goal is to enable financial institutions of every size to provide safe and efficient instant payment services in real time, around the clock, every day of the year.

Williams: This is a good thing. The Fed is starting to accommodate consumer and business needs to transfer money more quickly than has historically been the case.

First, there were checks. They were mailed, had to go through the post office, and then deposited into a bank account. It took days for those checks to clear and become available to the consumer or business. Then, there's Automated Clearing House (ACH). Although it was faster than mailing a check, it still takes one or two days for a payment to clear.

FedNow will change all that.

How will FedNow change business as usual?

Federal Reserve: Through financial institutions that participate in the FedNow Service, individuals and businesses will be able to send and receive payments instantly.

Williams: With fintech apps like PayPal, CashApp, and Venmo, money is transferred from one party to another instantly. This makes the Fed's current process too slow.

The Fed has been working to speed up the time it takes to process money through the banking system. In essence, the Fed is catching up with how quickly fintech companies can transfer money.

Why bother making a change when apps like PayPal, CashApp, and Venmo are already making instant money transfers?

Federal Reserve: With FedNow, financial institutions and their service providers will be able to use the service as a springboard to provide innovative instant payment services to customers.

Williams: Remember, what the Fed is doing will allow customers to make instant transfers into their bank accounts. That's not the way apps like PayPal or CashApp work. Currently, users can instantly transfer money from app to app, but it's not in anyone's bank account. If someone wants to transfer money from their app to their bank account, it will still take a couple of days.

When will FedNow launch?

The FedNow Service is set to launch in 2023 and will be deployed in phases. Following the initial launch, additional features and enhancements will be released in stages. By releasing features in phases the Fed has time to make adjustments and improvements as needed.

Williams summed up FedNow this way: "The analogy is the ATM. Remember when ATMs were first available but you could only get money out when the bank was open? That was changed and now you can get money 24/7. What FedNow does is give you access to banking 24/7, 365 days a year. For example, you'll be able to transfer money on a Sunday, something you've never been able to do before."