How gas stations and Facebook's Libra pushed the Fed to build a new payments system

Great spot and explanation on Yahoo Finance!

If you’re an employee looking for a paycheck to hit your checking account or a supplier waiting for pay from the last delivery of goods to a grocery store, you’re probably familiar with the three- to five-day waiting period for a payment to clear.

In the era of electric cars and meatless meat, why is there no instant payment processing person-to-person, person-to-business, or business-to-business?

Enter: the race to build a real-time payments network. Private market players like The Clearing House are trying to revamp bank-to-bank transfers while fintech companies like PayPal’s (PYPL) Venmo offer instant peer-to-peer fund transfers. Then there’s the Libra project, Facebook’s (FB) effort to create a digital currency that would facilitate instant payments on a blockchain.

The latest player to throw its hat into the ring: the Federal Reserve, which announced plans last week to launch its own real-time payments system, FedNow, by 2023 or 2024.

“[O]ne thing is clear: consumers and businesses across the country want and expect real-time payments, and the banks they trust should be able to provide this service securely — whatever their size,” Fed Governor Lael Brainard said August 5, while unveiling plans for FedNow.

The Fed, which usually interfaces the most with the banking industry, found an unusual cheerleader in its proposal to build a real-time payments system: the gas station lobby.

While some express concern over the ability of private players to compete with the Fed, gas stations say the central bank is long overdue on building an accessible and reliable utility that would reduce friction in the payments system.

A pair of kicks

Mike Fortson’s cousin wanted to hook him up with a pair of all-white Nike Vapormaxes, retail price $190, as a gift. The plan: send the money by PayPal so he could deposit the money at his bank and then withdraw the cash for the kicks.

But then PayPal said Fortson had to wait three to five days for the money to be available. He reached out to PayPal but a representative said “there was nothing really they could do.”

“It’s ridiculous,” Fortson told Yahoo Finance, noting that he ultimately turned to Square’s Cash App (SQ) to transfer the money.

PayPal was mostly true in defending its three- to five-day waiting period, which is also standard in bank-to-bank transfers. That’s because the current infrastructure involves a middleman that few consumer know about: the clearinghouse.

Let’s consider a person trying to pay their monthly $800 rent through an online portal where they’ve linked their bank account for payments. When the tenant authorizes the bank to send the rent money to the landlord, the landlord’s bank will request $800 from the tenant’s bank. The tenant’s bank then debits the tenant for the funds requested and sends the data to an automated clearinghouse (ACH) that is currently operated by the Federal Reserve and the Electronic Payments Network.

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An example of the automated clearinghouse (ACH) processes underlying a person-to-person bank transfer. Credit: David Foster / Yahoo Finance


The ACH verifies that the tenant has the funds available and then sends the information to the landlord’s bank, which credits the $800 to its account.

The problem: ACH processes transfers in batches only three times a day and does not operate during bank holidays or weekends.

For Mike Fortson, not being able to access funds meant waiting a little longer on those Vapormaxes, but for people who live paycheck-to-paycheck, lacking access to more immediate payment methods can mean turning to temporary solutions like payday loans with dangerously high interest rates.

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