Episode 79: FedNow will be like Zelle but not like CashApp, Paypal, or Venmo

CashApp, PayPal, and Venmo are Automated Clearing House (ACH) whereas Zelle is Real-Time Processing (RTP).

Hello, I am Bobb Rousseau and this is Apostrophe Podcast. Today I present FedNow, an upcoming new platform for online payments. 

But first, let me tell you the steps that take place when we send or receive payments via CashApp, Venmo, Paypal, or Zelle. 

When friends send you money via CashApp, PayPal, or Venmo, they put that money, not into your bank account, but into a business account owned by CashApp, PayPal, or Venmo. Then, CashApp, PayPal, or Venmo send the money to your bank, your bank deposits that money into your account and after several hours or within three business days, the money is available on your account. 

Conversely, when we send or receive money via Zelle, there is no third-party payment system involved because Zelle is linked directly to the sender and the receiver’s bank account. Senders deposit the money directly into the recipient’s accounts and the money is available in real-time, instantly, or without lags. 

Now, let me explain to you the types of payment platforms that CashApp, PayPal, and Venmo use as compared to Zelle. 

CashApp, PayPal, and Venmo are Automated Clearing House (ACH) whereas Zelle is Real-Time Processing payments (RTP). To send and deduct automatic payments, ACH requests account and routing numbers. It also asks recipients to link their debit card to their profile. ACH transfers funds into checking and savings accounts within three days. However,  it transfers funds into debit cards instantly for a fee. Instant deposits are loans that CashApp, Venmo and PayPal make out to recipients and the 1% is the fee that users pay for that loan. When sending payments through ACH, the banks withdraw the funds instantly from the requester’s account but those funds are not instantly available on receivers’ accounts. 

In contrast, RTP requires users to login to their bank system to enable the icon to their profile. The recipients do not provide their account and routing numbers. RTPs like Zelle do not process bill payments, clear checks, or receive direct deposits. However, it processes funds instantly without a fee. Both ACH and RTP are private financial platforms.

Finally, let me tell you what FedNow is

The Federal Reserve; the United States central bank, will launch FedNow this July. This will make it a government sponsored platform. FedNow will do the same thing Zelle, CashApp, PayPal, and Venmo do, except it will process wires, check deposits, store refunds, and weekend and after-hour deposits instantly, faster, and more efficiently. Consumers will no longer have to wait 72 hours for their checks to clear or for payments to be available on their accounts. 

So what’s in it for consumers who will be using FedNow? 

Once all the rolling phases are completed and banks agree to use it, the FedNow icon will appear on users’ accounts the same as Zelle does. Recipients who enable it will transfer funds and receive payments and store refunds within seconds. Banks will also process bill payments and clear checks instantly, which in turn will reduce overdrafts and bounced checks. Consumers who sign up for FedNow should ensure they have money in their account before paying their bills or transfering funds to external accounts. Otherwise, transactions will be rejected instantly. 

In summary, FedNow will take banking to the next level by placing instant payments at consumers’ fingertips. It will process check deposits, store refunds, and weekend and after-hour deposits instantly and more efficiently than other payment platforms such as Zelle, CashApp, PayPal, and Venmo. When compared to these services, FedNow will deploy a functionality that will allow users to receive funds in real time or as they are being sent. Moreover, the platform will eliminate overdrafts and bounced checks and make store refunds available within seconds. To use the platform, consumers must link their bank accounts to FedNow and ensure they have sufficient funds before sending payments or paying bills.

Bobb Rousseau, PhD
Apostrophe Podcast