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There have been a lot of rumors swirling around FedNow, the payment processor developed by the U.S. government since 2019. While FedNow, as a tool, could revolutionize the way payment processing and bank transactions work (ideally driving the costs of private options such as credit card payment processors, PayPal, Venmo, and others down), there are a few worthwhile concerns to note, including the relevance of fiat currency, moving to an all-digital system, privacy, and others.
In this article, we’ll explore the basics of FedNow, its relevance both in its current form and what may happen if it’s used to regulate a digital currency, and how that can affect your retirement planning.
Before we continue, it’s important to note that given the newness of FedNow and the fluidity of digital currencies and banking, what may be true today might be different tomorrow. We’ll be sure to update this post as we learn more to reflect any changes in the platform and its uses.
What is FedNow?
While our appetite for digital commerce has grown alongside the Internet, our banking system hasn’t kept pace with the speed we’ve gotten used to. ACH and wire transfers offered by banks, for instance, still require a few business days to clear, whereas private payment processors such as PayPal and Venmo offer instant transfer options between their platform and your bank account. Credit card processors can vary in transaction and clearing speeds but also charge usually between 1.5% to 3.5% for each transaction. While this might seem like a small amount, these fees can put a sizeable dent in the income of many small businesses.
FedNow is the government’s answer to two problems: it helps bring our aging banking system into the 21st century with faster transactions; and it provides a competitor to private processors to help drive down fees. Not unlike Zelle – another private payment processor that’s already integrated with a few major banks – FedNow will allow participating banks to offer their customers the ability to transfer money and make payments instantly.
For instance, instead of waiting on rent, mortgage, or utility payments to clear after a few days, the money is sent instantly. Businesses and freelancers can send invoices and be paid within the same day online. Weekends and holidays will no longer get in the way of digital transfers.
For more information on FedNow and its initial rollout in July 2023, you can check it on the Federal Reserve Services website along with its current fee structure.
Benefits of FedNow
In addition to those listed above, there are a few other benefits the FedNow payment processing system worth noting. These include:
- Faster transaction times and increased convenience: you no longer have to worry about late fees due to transaction lag or wondering if a payment was finally pulled from your account, only to accidentally overdraw later.
- Reduced fees and transaction costs: as of 2023, payment requests cost $0.01 compared to 1.5% to 3.5% on transactions typically charged by credit card companies. For instance, a $100 order might cost an average of $2.50 in transaction fees as opposed to $0.01 – that’s a massive difference that adds up over time.
- Improved security and fraud prevention: while banks have their own security tools, FedNow has a suite of options for banks and their customers to minimize the risk of fraud, including transaction value limits, message signing (to validate transaction requests), and enhanced reporting for auditing purposes.
Potential Drawbacks of FedNow
Of course, FedNow isn’t without its concerns, even before it’s released later this summer. Here are a few of the most prevalent ones:
- Potential for cyberattacks and system vulnerabilities: as we rely more on technology, the threat of cyberattacks grows with it. While FedNow isn’t meant to replace physical money or even have its own digital currency, if many banks use this system and it goes down, it can cause a lot of chaos very quickly as people are unable to complete purchases or pay bills during that downtime.
- Industry challenges and uncertainty: FedNow doesn’t seek to replace its competitors, but its fees and backing by the government put it in a unique position that can upset current industry standards. Moreover, if some businesses rely on PayPal, Venmo, Cash App, Zelle, or other processors to do business, this can also affect their bottom line as these companies react to the changes FedNow embodies.
- Unequal access to technology and digital literacy: some people still aren’t used to online banking or using phone-based payment apps. Making sure that those people have access to those options and understand how to use them is an important step that shouldn’t be ignored. Otherwise, these people might struggle to keep up with these new processes to pay their bills and participate in the market.
How Will FedNow Affect Your Retirement Planning?
So far we’ve talked about how FedNow can affect the banking industry and digital commerce overall. But what about if you’re trying to plan your retirement? While time will tell the full impact that FedNow will have as it’s first released and updated, here are a few points to consider for now:
- Increased diversification of investment options: this system might affect how investment banks charge trading and transfer fees, potentially making it more cost-effective for people to make trades and lower the performance threshold for stocks to break even after calculating those fees. FedNow might be used to set up infrastructure for a central bank digital currency or recognize transactions made with cryptocurrency, enabling investors to use other non-traditional options to build their portfolios.
- Potential tax rule changes: last year the IRS was poised to change tax rules regarding commercial transaction reporting for payment processors like Venmo and PayPal, moving the threshold from $20,000 to $600 – though delayed that at the last minute. However, these changes might be back this year. While this change affects businesses rather than retirement investors, keeping up with any tax rule changes regarding reporting and how your money moves is always important.
- Adapting retirement strategies to the digital age: with so many more investment tools from low- or no-fee trading apps to cryptocurrency markets, there are plenty of other options to consider when building your retirement portfolio. As always, it’s important to stick with what you know, but don’t hesitate to learn more. Strategies that might have worked 50 years ago might be obsolete – and strategies that seemed ludicrous before might have merit now.
Prepare for FedNow with Smart Life Financial
FedNow is poised to bring about a lot of interesting changes to the way we use, send, and receive money in the United States. From everyday transactions to paying down your mortgage or saving for retirement, there’s a lot that remains to be seen – and a lot of potential to take advantage of.
If you’d like to learn more about FedNow and how it can affect your retirement planning, give us a call. We know how overwhelming change can be, especially when it comes to money. However, the knowledgeable experts at Smart Life Financial specialize in making sense of all these what-ifs.
