Instant Payments

Next month, November 2020, Brazil’s central bank (the Brazilian equivalent of the Federal Reserve) will unveil its new instant payments system, called PIX. It will feature the ability to send and receive money instantaneously, even if sent from another institution, available every day, at any time, and costing only 0.01 BRL per 10 transactions (that is, it is essentially free).

Instant payments?

Instant payments are exactly what you think they are: everything is processed in mere seconds. You no need to wait minutes or hours to receive a payment to your bank account. And the bureaucracy is also slimmer: you only need one of the recipient’s PIX keys in order to make the transfer.

And Brazil was not the first. Japan pioneered instant payments in 1973 with the Zengin system, and the EU has been implementing it since 2017, with the RT1 and TIPS systems, and some other countries have also implemented similar systems this last decade, such as Mexico and Australia.

So, why does the US not have it already?

It has some similar technologies, but they are not widely implemented.

Since 2017, The Clearing House, one of the largest developers of payment systems in the US, has been implementing the RTP network in order to allow instant transactions. However, it still has not reached complete coverage status, especially in the Midwest.

Apps like Zelle and, most famously, Venmo, provide digital wallets in USD currency which allow users to transfer directly from one another instantaneously. Thanks to recent advances in informational and banking technology, the future of money transfers is looking rather bright.

Even though we are in the information age, and that the 4.0 Industry brings many apps to fill the gaps that traditional industry practice has created, the smartphone age with feature rich apps may not be the entities that will fully implement instant payments and make them widespread. The initiative is coming from the Federal Reserve itself.

Meet FedNow

While Venmo is a great app and has many uses, it also has its flaws. It allows a person to be anonymous, similarly to PayPal, making it easier to fall into scams. Also, it is not intended for B2B use, as it has a $5000 weekly limit for transactions.

Banks, however, are linked to a person’s or company’s identity. The stakes are higher, meaning it is safer to use. Banks also invest much of their earnings into increasing the security of transactions, accounts, credit cards and debit cards.

However, traditional wire transfer methods made them very slow. But now the Federal Reserve is improving it by developing a system called FedNow.

FedNow is an instant payment system designed to be adopted by banks in the entire country. While larger banks already use RTF, this would also give smaller banks access to real-time payments, at any time, at any day. While there are no information about processing fees or other kinds of fees yet, this system is in active development and is expected to launch in 2023 or 2024.