When thinking of instant direct deposits, it’s easy to think of gig workers. An example is Uber drivers who can cash out at the end of their workday. Although gig workers have popularized these instant payments, the need does not stop there. According to a 2021 American Banker report, 31% of consumers with household incomes of more than $100,000 say they have ditched their banks. This is because the money simply was not moving fast enough for them.
Quicker Payment Settlement Is Stickier than Standard Settlement
According to an article from The Financial Brand, consumers and businesses are driven by speed and convenience. They want instant payments so badly that they’re willing to switch banks to access them. Instant payments allow consumers to get money instantly – whether that’s direct deposits, bill pay, or paying their friends back. In fact, that $25 your friend owes you for lunch appears in your Venmo account instantly. You receive your funds before you even take the last bite of your lunch! This is instead of you waiting three days for the transaction to clear.
This poses a unique opportunity for FedNow. The Federal Reserve’s new solution for instant payments is poised to launch mid-2023. FedNow promises to be an ally to small banks and credit unions who traditionally are slow to adapt to new emerging payment technologies. The Financial Brand explains FedNow works as it is “applied against the master accounts that depositary institutions hold at the Reserve Banks, there’s no outstanding obligation between financial institutions and less need to move around liquidity to pre-fund instant payment activity.”
Faster Payments: Nothing is Perfect (Yet)
It’s important to note that this is the first new payments platform launched by the Federal Reserve in over 40 years. The National Consumer Law Center warns that FedNow seriously lacks protection against scams and fraud. When the speed of payments is prioritized, fraud prevention automatically takes the back seat. In the United Kingdom, where instant payments first hit the payments market, 96% of fraud caused by a consumer sending money to a scammer was processed on instant payment rails. The United Kingdom will now be requiring banking institutions to offer these victims of scamming compensation. The United States is still failing short to protect consumers in this type of fraud. While FedNow will be covered by the Electronic Fund Transfer Act (EFTA), that very act currently does not protect a consumer in the event of sending money to a scammer.
Overview by Sophia Gonzalez, Research Analyst, Debit Advisory Service at Mercator Advisory Group.