An update on the Federal Reserve’s Instant Payments Service | Hacker News Reader

An update on the Federal Reserve’s Instant Payments Service

clevelandfed.org

60 pointslavp93 comments

Of all the articles on the instant payment service, this one is simultaneously the most honest and hilarious (https://www.wsj.com/articles/banks-newest-fed-headache-nonst...)

> FedNow could destabilize banks’ reliance on customer cash, fanning the flames of deposit flight

> In addition to losing revenue from the time between a payment’s initiation and settlement, banks now have to worry about deposit flight outside of business hours.

> The system isn’t expected to be ubiquitous in the U.S. for a few years.

> ...customer deposits were sticky ...That assumption allowed bankers to comfortably borrow cash at low rates and lend for long periods at higher rates.

> But instantaneous transactions allow customers to pull cash with ease, and without notice. That threatens smaller banks...

Meanwhile, the rest of the world, including countries traditionally referred to as "third-world countries," have leapfrogged the US and provide instant payment and settlement without crying about the loss of revenue from the time between initiation and settlement, or a run on their banks.

The funniest thing is when you see that you have multi thousand of billon of dollar sized banks, that are unable to pay agents to be able to process payments on week ends...

This would be great if it can cut down payment processor fees which are mainly driven by the rates that Visa and MasterCard charge, essentially as a duopoly power in the market. They also control what you can and can't buy, such as for example heavily frowning upon adult content, even if you are legally an adult.

We already have debit card and the related networks (like Star) that are cheaper. People are just used to Visa, and like the rewards.

That seems surprising to me as Canada's equivalent system (Interac) is very popular.

Generally, retailers like credit cards because people usually spend more money when they pay with credit cards.

That is why you do not see major US retailers offer discounts for paying with cash/debit card/ACH. The only one I can think of is Target, that offers 5% off if you use Target Redcard, which can be linked to your bank account.

Until Dodd-Frank, the rules for discounts on cash transactions imposed by Visa and Mastercard by merchants were much more stringent.

Many retailers had their hands tied, whether or not they wanted to provide a cash discount or credit card surcharge.

Sure, but that was 13 years ago. Retailers also always had the option of simply not accepting credit cards, and only accepting debit cards.

I presume smaller retailers are hit the hardest with fees, as they face the most payment processing middlemen and have zero leverage in terms of volume from which to negotiate that stuff. So maybe Starbucks doesn't care how you pay, but Joe's Joe down the street has a hardwritten sign up by the till asking you to consider paying with debit or cash because it saves them a few percent on each transaction when you do.

I don’t use debit cards because it’s less secure than using a credit card. If I dispute a charge on a credit card I’m more likely to have a positive outcome than if I use a debit card. With a debit card the money is taken out of your bank account at the point of purchase. It’s hard to get it back in if I was charged inappropriately.

In the US, your debit card and credit card are protected by the same dispute rules under Regulation E.

My guiding principle is that it’s best to not let someone take money out of your bank account since putting it back in is a hassle. What happens in this scenario: You use a debit card to purchase something from eBay and what you got isn’t what was promised. eBay sides with the seller. What recourse do you have? With a credit card, in the worst case scenario, I just don’t pay the credit card company. I don’t care about credit ratings and credit card companies won’t sue me for the money. They’ll just ding my credit rating.

I've seen small towns adopt cash only payments to curtail this. Why should the tax pay effectively a 2%+ tax on the economic activity of the town. Imagine a bunch of people living there, transacting with each other, 2% tax for every movement?

On some levels yes, if getting and keeping cash is your aim, it can work.

But there are costs associated with cash too. It has to be stored safely, counted and reconciled, banked (not always free) etc etc.

I’m not saying credit card fees are ‘cheap’, especially not in the US where they seem to be quite high to support the cashback economy, but cash isn’t free for a business either.

This is for bank to bank transfers, like ACH but different. It won't be used for retail payments directly, though it could make them cheaper in the long run.

Depending on the implementation, I could use them for retail transfers though, if I trust the other party enough. It might not be wise in most cases, due to lacking the protections of credit cards, but it could be in some.

If you read carefully they clearly are not disrupting anyone’s gig. This is America man, the a public instruction isn’t going to step in and eat their business alive especially not something as big as payment processing. This is Zelle 2.0, ACH 2.0, etc. It won’t ever be for payments.

Given the numbers they quote re: cashless payment, it doesn’t matter if retailers don’t like the credit card processors. Consumers do - and with all the points and rewards and convenience of cashless payment, they will demand they at least support such payments and most people will use them even with passing on the fees. It’s hard for me to see a world where that changes any time soon.

Adult content has a stupidly high chargeback rate. Chargebacks are expensive and card processors don't like adult content for that reason.

Well if it's a direct bank to bank transfer, there's no chargeback, problem solved. Of course, you assume a lot more risk for getting back that 3% transaction fee, but if you know what you're buying, at least you can make the purchase you want to.

The EU didn't this effectively by just regulating them.

It's a failure of US regulation only that VISA and MasterCard etc charge what they do

I always found it funny when dealing with the money transfer to folks in the US that they had to use terrible 3rd party apps to move money between accounts.

You end up in situations where moving money can almost be impossible when the banks don't support the same apps. Here in the UK immediate transfers between accounts has been a thing for a very long time.

Glad to see the US catching up, because sometimes the pace of technology is amazing and other times with much simpler things it's positively archaic.

All the major banks in the US have supported online ACH or Zelle money transfers for over a decade now. ACH takes a few days, Zelle is instant, but there has not been a need to use 3rd party apps for many years.

IMO, Zelle qualifies as a terrible 3rd party app...

My landlord takes payment via Zelle, and I tried to setup a payment from Discover but it told me that my limit was something ridiculously low like $500. I called to ask them to increase it and they said they were unable to.

Meanwhile, I can send huge amounts from my Ally bank account with Zelle...

Sounds like your bank (Discover) is restricting you from transferring a certain amount of money. Why would you hold that against Zelle?

Zelle's job is arguably to abstract over banks; the fact that they pretend to do instant settlement by using debit transactions (which are then subject to all kinds of weird per-bank and per-network limitations) means that they fail at this basic task.

Isn't Zelle one network already, that the big banks got together and made to provide a better experience than ACH?

Presumably, the limits are set by each bank (for their own customers). For example, BoA has these:

https://www.bankofamerica.com/online-banking/zelle-transfer-...

There is no limit to receive, but if you want different limits for sending, then perhaps you should change banks? Although, the above limits seem pretty generous for an instant, non reversible transfer of money.

If you want to instantly transfer more than, say, $15k, then presumably you would want more reversibility.

> Isn't Zelle one network already, that the big banks got together and made to provide a better experience than ACH?

Zelle is lying when it says that it's a "network." All it does is shoot debit payments between supported banks; it's not doing any settlement on its own. The fact that it can be pushed around/constrained by each bank shows this.

> There is no limit to receive, but if you want different limits for sending, then perhaps you should change banks? Although, the above limits seem pretty generous for an instant, non reversible transfer of money.

I bank with a large investment bank that otherwise has excellent service (as in, "a human picks up the phone anytime of day" levels of service). I'm not going to drop them because Zelle fails to abstract over them correctly; every other third party payment app does this correctly.

> If you want to instantly transfer more than, say, $15k, then presumably you would want more reversibility.

My bank's Zelle limit is well below $15k per month, not even day. And to be clear: I don't personally care about instant settlement; I'm forced to use Zelle.

Zelle doesn't control what limits your bank puts around electronic transfers. My bank let's me do $5k a day on zelle.

Because Zelle chose to use Visa and MasterCard.

Why would you hold it against Discover to prefer to not use Visa and MasterCard networks?

This is all a scam to force low-volume customers to use costly wire transfers.

Even those wire transfers are not instantaneous. They often don't get sent on weekends and you have to wait hours. Sometimes days like in the case of Synchrony bank. You have to call customer service to initiate a wire from them too. What a shit show.

Meanwhile, iDEAL exists for so long and its effortless. Just not for Americans. https://dutchreview.com/expat/financial/what-is-ideal/

My landlord also wants Zelle. My bank limits it to $1000 per day, but even if I was willing to pay over multiple days, Zelle will not deliver to their account. They also said they can't increase the limit, and can't tell me what the other issue is. My girlfriend is at a different bank, with both no limit and the payments actually go through. I Zelle her my half of the rent and it "works".

I really need to switch banks.

Literally my point.

Not all banks support Zelle.

It's a 3rd party app.

Zelle is owned and operated by the biggest banks in the US, it's basically like using your own bank. You do not even have to use the Zelle app, you can just log into your bank's app and transfer money from there.

And sure, there would have been no need for it to exist had the US government done its job 20+ years ago as opposed to waiting until the 2020s, but the reality is that most Americans have been able to instantly transfer money online using their bank for quite a few years now.

Please explain to me how the government prevented instantaneous ACH transfers.

Zelle is a shitty middleman with ridiculously low transfer limits.

Zelle does not set transfer limits, the banks do. For example:

https://www.bankofamerica.com/online-banking/zelle-transfer-...

Zelle is just a payments network.

https://en.wikipedia.org/wiki/Zelle_(payment_service)

Also, as far as I understand, the mechanism of ACH prevents it from being instantaneous, requiring old school processes every night to reconcile and finalize transactions. ACH does not check if accounts have money in real time, it assumes it, and then deals with problems later, which is why transactions take days to finalize.

LOL. The Zelle limits are ridiculously low. Most Americans don't have online access to transferring money. Wire and ACH online transfers are usually not available to the average b2c consumer.

Only the smallest local bank or credit union would not have the ability to transfer money online via ACH for their customers. Pretty much everyone can login, go to the transfers tab, and enter an account/routing number to transfer money to (or give their account/routing number to another bank to transfer money in).

If you do not, then you should probably sign up for a free account at any of the multitude of online banks that do have the capabilities.

For example, at CIT Bank, which I easily opened a free online account, I have ACH limits of $250k outgoing and $500k incoming, PER DAY. All I had to do was enter my account #/routing # for my other bank accounts.

Are you able to do outgoing ACH and wire transfers to third party accounts online as an individual?

Yes, all you need is an account number and routing number. I have done this at BoA, Chase, Marcus, Ally, TD Bank, CIT Bank, Key Bank, Wells Fargo, Citibank, Capital One, Schwab, etc.

TD bank does not support this!

Oh yes, I guess I misremembered. Well I guess there’s a reason I stopped using them. Anyway, lots of banks do, and I would switch to one that does let you do it.

Isn't that a problem?

The biggest banks got together and created a new network for transfers, and charge all the smaller banks fees to access it?

It sounds like another method of crushing competition.

Well they allow any other bank/credit union to use it, and based on the fact that 1,600 financial institutions participate/80%+ of the US population, it must not be costly (or or is free).

It sounds like the US government was asleep at the wheel and the big banks got together and did what they had to to enable US residents to be able to instantly send money to each other electronically.

You need to read up on it. It uses the Visa and MasterCard networks. It is not free.

Bank of America and Wells Fargo do not get charged the same as your local Credit Union. So smaller institutions get screwed.

If the situation was so fine and dandy you wouldn't still have $30tri of cheque transactions

"ACH takes a few days" Americans in denial about this and their "open market for tax filing solutions" is interesting

I don’t know how this devolved into an America bashing thread but it’s worth noting that cheque transactions have other causes. You could make the same argument about the popularity of cash as a payment method abroad.

ACH sucks but Zelle is at least second party; every major bank supports it and I don’t need any details to transfer money beyond their phone number.

Well, cash is cash, I don't think its use is mainly due to lack of technology access (for the most part)

Apart from cashier's cheques (which also are pretty rare in places with functioning quick payment systems) what do you think are the other uses of cheques?

I didn't mean for this to be an American bashing thread I'm just surprised that it's taken this long.

Zelle is not universal, I think it's around 20% of banks/credit unions don't support it, and has high fees associated with it. It's good to see the Fed doing something about it.

I have never seen an fee associated with transferring money with Zelle.

That has to be the worst take in this entire thread.

Zelle does a debit charge over the Visa and MasterCard networks. Larger institutions get discounts on these networks through volume agreements, while smaller ones have to eat the larger charges per transaction because larger banks don't pass their smaller costs on.

I did not say it was fine and dandy, but it has been pretty easy to instantly send and receive money in the US for years now.

I wish there was a bit more detail about this part:

> The initial release of the FedNow Service will include features to help banks manage fraud risk and mitigate fraud losses. [...] In addition, there will be tools that help a financial institution investigate erroneous or suspected fraudulent transactions.

Let's say Alice's "Bank A" processes a FedNow transfer of $1,000 to Bob at Bank B. What happens if Alice calls her bank and says the payment was unauthorized?

If Bank A investigates, and finds evidence that Bob hacked Alice's account, do they then have to call up Bank B and persuade them to return the money? Does the Fed get involved as an arbiter? Or is Alice just out of luck?

(To be fair, I'm not sure exactly how this happens behind the scenes with credit/debit cards, either.)

I'm wondering about that. This is a debit transaction that clears within seconds. The recipient has good funds immediately and can take them out of the destination bank, just like a wire transfer. Or, for that matter, cryptocurrency.

ACH is daily. It really is a batch system, with a daily batch at 4:30 PM Eastern Time, and settles around 6 PM. There's a whole "undo" system built into ACH. FedNow does not have "undo".

Credit card transactions have good consumer protections in US law. The whole concept of credit card transactions is that you buy something and pay for it. Both the "something bought" and "pay for" parts are logged. And you have to be a "merchant" to accept credit cards. So you can order stuff and get a refund if it doesn't show up.

FedNow, like Zelle, seems to be only have a "pay for" part. It just sends money. Using this service with any unknown payee for anything you haven't already received (such as dinner) is probably a bad idea.

The Fed's discussion of FedNow fraud is not comforting.[1]

[1] https://www.frbservices.org/financial-services/fednow/instan...

There are tons of everyday use-cases where it's preferable to sacrifice fraud protection to achieve instantaneous money transfer. Credit card companies have normalized using credit cards (with their attendant fees) for all sorts of small-denomination transactions, like public transportation, where the fraud protection machinery of the credit card system is of negligible benefit; it's a rip-off.

That makes sense for those stored value "gift" cards that are on racks at drugstores. But FedNow allows transfers of up to $100,000 at launch. That's big for instant irrevocable transfers.

In my country (Singapore), the instant payments system was rolled out in 2017 but took several years to get traction. The pandemic seems to have marked a turning point: it's now accepted pretty much everywhere, and it's great. You can use it to pay plumbers, small-scale food vendors who don't take credit cards, car workshops, people on Craigslist, friends you split a bill with, etc. Very convenient.

Will this replace ACH transfers?

hopefully! for now it will be up to financial institutions to implement the service and pass on the savings.

Pass on the savings...

LOL.

IMO it depends on who ends up being responsible for fraud and insufficient funds. It sounds like FedNow will provide liquidity for instant settlement but the page doesn't make it clear what happens if the sender somehow has a insufficient balance. If a $500 FedNow transaction occurs and a $500 ACH transfer settle on the same day (and the account only has $500), who get's paid and who made the mistake?

With ACH most banks/financial services provide some amount of instant funds but wait 1-3 days for the transfer to complete before providing the full balance. This is very useful since it gives the bank 1-3 days to be alerted of fraud, insufficient funds issues, etc. While ACH can technically be clawed back after 3 days, it's a much more difficult process which mitigates risk by forcing the sender through a lengthy fraud claim process.

I think this is the first time I’ve ever seen ‘an update on’ something that wasn’t an end-of-life announcement.

If this is what I think it is, I can't wait. My bank's Zelle experience is abysmal, and it's annoying to manage a Venmo balance. I will strongly consider switching banks if it means a convenient FedNow UX

If you’re willing to switch banks anyway, most of the too big to fail ones have a great Zelle experience, i bank w chase and BoA and both offer a pretty first class solution with Zelle (chase especially, as they actually created the precursor to what eventually morphed into zelle).

This is great to know, thanks!

Remember this story from a couple months ago? https://news.ycombinator.com/item?id=36041059

Does this system prevent abuse?

Using Fednow is no worse than using zelle/venmo/paypal when it comes to such abuse. Law enforcement agencies have direct access to banks these days.

It's petty of me, but I hope that FedNow utterly eradicates Zelle: I've spent my entire life in the mess that is the US's banking system, and every trouble I've ever had pales in comparison to the troubles that Zelle gives me on a near-daily basis.

Can you say more?

Zelle basically never worked for me at my local credit union (every single attempt to use it locked my account on suspicion of fraud), but I use it regularly with Chase with no issue.

How do you hope FedNow will improve on the concept?

Same experience

Sure.

I was a Chase customer for a long time, and I tried to enroll with Zelle through Chase. This failed in two separate ways:

1. I was unable to enroll through Chase: I got everything ranging from generic error pages, to server errors, to actual Java stack traces in both my email and browser.

2. I was unable to enroll directly through Zelle's site: their site would claim that I was already enrolled, invite me to log in, and then...not log in.

It took weeks to get a combination of Chase and Zelle's customer service to (1) acknowledge the issue, and (2) diagnose it: Zelle appears to (or did) use US phone numbers as primary keys, and I was partially registered in two separate places. They didn't have a resolution available to me so I told them to delete my account entirely, which they said they did.

Fast forward about 3 years: I'm no longer a Chase customer. For unrelated reasons, I am asked to attempt to use Zelle again. I try and enroll, only to discover that:

1. Zelle can only be linked to one bank at a time;

2. Chase never actually bothered to un-enroll me.

At this point, I'm no longer a customer of Chase, and have no active account to reference. I can't log into either Chase or Zelle to "un-enroll" this account that doesn't exist, and neither is willing to do it for me. I end up convincing the person that wanted me to use Zelle that it's fundamentally broken, and ignore it.

Fast forward another year: I am now forced to use Zelle. This time, somehow, my new bank is able to enroll me. I log into Zelle to make a payment; I am instantly banned for having "insufficient personal information" (how this is possible is unclear to me; it is literally linked to all the information on my bank account). I convince my bank to talk to Zelle and unban me, and finally things mostly "work": I can enter a crappy webview within my bank's app to send money through Zelle. Except that I still have to split it into smaller payments, since Zelle uses the debit network for settlement and won't let me send very modest amounts of money in single amounts.

To summarize: after about 6 years of fighting, I can half-use Zelle by splitting already small payments into smaller payments. I have to be careful about when I split these payments, because if I do them on the wrong calendar intervals I exceed my "monthly limit" and have to wait another month to make essential payments. Getting to this state took literal dozens of phone calls with two banks and Zelle themselves.

> How do you hope FedNow will improve on the concept?

I hope none of the above will ever happen to me again.

Yeah, that sounds about right.

While I was with the credit union, the buck was just passed between them and Zelle. Zelle seems to have been set up assuming that banks will somehow support it, and either they’re not actually prepared to do it or not given the proper tools to detangle the mess.

I've been in the US for only a few years now, and Zelle works seamlessy for me. Granted, I think everyone I zelled had a bank account with Chase, BofA, PNC, and Wells Fargo - only the big ones.

Doesn’t this essentially spell doom for Ripple and similar “CDBC” crypto plays in the US?

Time to go bigger on metals and crypto

Why?

Hard to be easily debased, hard to mass censor/prohibit payments to unpopular organizations.

So, they just ban crypto, and then they take your precious metals.

Think I'm kidding about the last one? The US government has already taken gold from citizens (by law, and without recourse) before, and nobody did anything about it.

"just ban crypto" doesn't work. They tried that with cocaine already.

They also didn't get a very large percentage of the privately held metals, either.

Because BRICS will adopt a gold-backed currency to resolve oil transactions without USDollars. This should happen late August.

lol BRICS is a predictable failure.

You're not going to reliably bully people away from transaction their species-backed stores of value for petroleum. Particularly not dozens of non-USDollar-backed countries eager to transact differently.

See: recent price of gold and bitcoin and oil (and stock market, in general) IE: NOT USD

See, also: several countries request physical return of their alleged gold holdings

Is there somewhere to read about this specific plan?

See: https://duckduckgo.com/?t=h_&q=%22BRICS%22+gold-backed+curre...

Fed is moving so slowly compared to China or India. Going to be left in the dust soon.

They need to open settlements up to everyone not just "financial institutions". Fed deposit accounts for everyone or Interest bearing CBDCs should be rolled out to every one. The fucking banks need to be disintermediated from all transaction involving Depositors. Convert them to pure lenders.

If the goal is to "improve settlement efficiency without introducing liquidity or credit risks" then provide a path to get the dumb sender and receiver banks out of the loop in every dumb transaction.

If I want to send my grandma cash, why do 2 banks have to be sitting in the middle? It's 2023 get those fuckers out of the loop. So when the next bank collapses due to "credit and liquidity risks" they haven't thought about why should grandma worry about her savings?

If you're actually interested in why the US banking is so fragmented, it's on purpose and it works very well. The US wants banks to be small to distribute risk and encourage local investment. Small banks and credit unions are much more willing to give small business loans, auto loans, etc. to people/clients with worse credit, etc. These policies only work if small and medium banks have depositors so that's why everyone has a different local bank, etc.

> ...worry about her savings

All deposit accounts are insured up to $250k and (given recent events) unlikely the Fed would even allow any regular persons deposits to be at risk. Essentially, the Fed can't loan or invest like small/medium banks can. The Fed can't go bankrupt so it has no real way to measuring risks when giving out loans which would make it impossible to price loans.

What does any of that have to do with electronically sending and receiving money?

gstatic is correct with this:

>If I want to send my grandma cash, why do 2 banks have to be sitting in the middle?

The US government should be offering electronic money accounts to everyone as a utility, and they should be constitutionally guaranteed (even to felons), with no ability to lose them. Anyone should be able to send and receive money at any time. In conjunction, US government should also provide identity verification services as a utility, utilizing the USPS, which they already use to verify identity for US passports.

If people then want to invest their money, then they can make that choice individually.

Instead what will happen is they will gamify your deposits (see what the WEF says about CBDCs) or freeze them because you hit some AML rules and you will have no recourse

Hence the need to amend the constitution.

If people were depositing their money with the Fed then traditional banks wouldn't have (as many) deposits.

How are you getting money into this "FedAccount" does your paycheck get sent directly to it? Do you first send money from another bank? If it's the former option then real banks will have less money to lend, if it's the latter option then it's no different then using Zelle or any other intermediate.

Honestly what you want sounds exactly like what the Fed is building which is a common electronic exchange platform. I agree with the other points in that I hope this is mandatory to some degree.

> If people then want to invest their money, then they can make that choice individually.

I think you're underestimating how much such a service (if it accepted direct ACH from your job) would impact our current banking system. Companies would just bypass actual banks and send all paychecks to everyone's "FedAccount" that would be billions of dollars moved. Money in real banks is lent out, money in a "FedAccount" would/couldn't be (if banks have fewer deposits then they can't get as much money from the Fed). This isn't just adding a minor service for the government to provide, it would be a complete redesign of our monetary policy. A lot of countries wish they could have a banking environment as diverse as the US, it's a huge feature not a bug.

> How are you getting money into this "FedAccount" does your paycheck get sent directly to it? Do you first send money from another bank?

No, electronic money is just a number in a database. The US government can give you an account number like any other bank does now. Of course, you would still have the option to use a non US government electronic money account.

>If it's the former option then real banks will have less money to lend,

Yes, currently banks are earning money for an inefficiency from back in times when cash was the primary money. A lot of their purpose is obviated with todays’ technology of computers, databases, and instant communications.

> Companies would just bypass actual banks and send all paychecks to everyone's "FedAccount" that would be billions of dollars moved.

Possibly, if that is what people want.

>Money in real banks is lent out, money in a "FedAccount" would/couldn't be (if banks have fewer deposits then they can't get as much money from the Fed).

Banks can still offer people interest to entice them to deposit funds with them rather than the US government.

> These policies only work if small and medium banks have depositors so that's why everyone has a different local bank, etc

Ofcourse. But this should be a choice. Depositors should be allowed to choose between a fed deposit account or a local bank deposit.

This separation of payment processing on the one hand and savings and loans on the other is something I hope to see in CBDC proposals.

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