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As a society, we not only crave but demand instant gratification. Whether it’s “One-Click” ordering on Amazon Prime for delivery to our doorstep tomorrow (or even today), streaming the latest video or audio entertainment, or making money in the stock market, we want it easy, we want it cheap, and, most of all, we want it right now. Corporate America has done a great job enabling and monetizing our ever-growing collective obsession with immediacy.
In our daily lives, we need to pay for goods or services we purchase. Back in the olden days, we would write a check. Customer A (the “payer”) would write a check payable to Merchant B (the “payee”), who would deposit the check with its bank. B’s bank would credit B’s account and present the check to A’s bank for payment.
This process is costly, slow and cumbersome. Physical checks take time and effort to write and receive/deposit. If you mail the check, there is no telling when it might be delivered (“the check is in the mail”), potentially exposing you to late fees or worse. While your bank may credit your account for the full amount of the check you deposit, you might not actually have access to any of it until the check “clears” (is paid by the payer’s bank). Finally, the payee doesn’t know if the check written by the payer will be honored by the payer’s bank or bounced back to the payee’s bank as “NSF” (non-sufficient funds), leading the payee’s bank to not only reverse the credit but also charge a bounce fee. Ouch!
As a partial solution, wire transfers and ACH (Automated Clearing House) network electronic fund transfers gained popularity, particularly with business users. Unfortunately, these also have important operational drawbacks as far as how and when you can instruct your financial institution to make a transfer and when funds become available.
The widespread adoption of smartphones led to the creation of an entire industry promising to make transferring funds quick and easy at any time, day or night, with a couple of clicks. While platforms like PayPal (PYPL, market value $71 billion), Venmo (owned by PayPal) and Block’s (SQ, market value $39 billion) Cash App represented a quantum leap in electronic peer-to-peer (P2P) money transfers, they still have shortcomings in speed, fees and usage limits. Unless customers are willing to pay a 1.5% to 1.75% fee for instant access to their money, it takes up to three days for transactions to clear your bank. In the meantime, your money resides in your uninsured account on the app, not in your FDIC-insured bank account.
In response, seven of the nation’s largest banks (JPMorgan Chase, Bank of America, Capital One, PNC, Truist, U.S. Bank and Wells Fargo) formed fintech company Early Warning Services to run the Zelle private payments network. Zelle launched in 2017, eight years after Venmo and four years after Cash App.
Despite ceding a huge head start to its competitors, Zelle processed 2.3 billion payments with a total payment value (TPV) of $629 billion in 2022, up 26% and 28% over 2021, respectively. By contrast, PayPal processed 22.3 billion payments (up 16%) with a TPV of $1.36 trillion (up 9%), Venmo processed $245.3 billion of TPV (up 7%), and Cash App processed $17.1 billion of payments (up 14%).
Zelle offers direct transfers between bank accounts in only minutes. Its extraordinary growth can be attributed to the fact that 1) about 1,700 banks and credit unions have partnered with the network and 2) Zelle appears to customers through their bank’s online portal/mobile app, giving it both high visibility and credibility. Unfortunately, as a private network with limitations in fighting fraud and ensuring consumer safety, Zelle has faced intense scrutiny from Congress.
Recognizing the United States was lagging behind the European Union in creating a real-time payments network, the Federal Reserve in 2019 announced its plans for the FedNow Service. More than 120 banks and payment providers have been part of the pilot program since 2021. The upcoming launch of FedNow in July will align our expectations for bank processing times with those of our payment apps (24/7/365), while offering significantly lower costs (4.5 cents per transfer—possibly crushing private-sector competition) and the backing of our federal government. By enabling cheap and instant transfers, it dramatically increases liquidity in the system, eliminating the anxiety of waiting for checks to clear and payments to settle.
While FedNow will be a game-changer available to all of the more than 10,000 banks and credit unions that operate within the Fed’s network, participation is not mandatory. The rollout will be a “chicken vs. egg” proposition, and we think financial institutions will join FedNow if their customers demand it or if they believe it gives them a competitive advantage.
“Instant” can be a two-edged sword. Once you click “transfer,” it’s the same as handing cash to the recipient—it’s gone. Additionally, it’s terrific when your product becomes so ubiquitous your company name becomes a verb (“I’m going to Venmo you”), but it doesn’t guarantee you’ll live long and prosper. Ask Xerox.•
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Kim and Lee are chief operating/compliance officer and director of research, respectively, for Columbus-based investment adviser Kirr Marbach & Co. They can be reached at 812-376-9444 or mickey@kirrmar.com and roger@kirrmar.com.
Editor’s note: This column has been updated to correct a formatting issue in FedNow.
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