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There is a TON of chatter all over social media about the Fed’s new money-transfer service, FEDNOW, which it rapidly rolled out ahead of schedule this week, quite uncharacteristically for a government project. ...

The new Federal Bank service is an INTERBANK system (at least for now) allowing financial institutions to instantly transfer money through the Federal Reserve. That simple concept confuses people, because they naturally assume that banks can ALREADY do this. People therefore think instant transfers can’t POSSIBLY be all there is to it, because it’s so seemingly … insubstantial.

But nope. That’s all there is to it, all right. Banks cannot already handle instant transfers. It still takes up to 24 hours (for a fee) or even days. Most other countries — and this will be important in a minute, so remember it — most other countries can centrally clear instant transactions. But the U.S. lags disgracefully about fifty years behind in the technology.

I know, it’s unbelievable. The only two options businesses can use to clear transactions through their banks at present are ACH and wire transfer. ...

You probably still can’t believe our payment system is that archaic. I can prove it. Think about the proliferation of alternative services like Venmo, services that work around the banks and allow people to pay each other ‘directly.’ Why don’t banks offer that service? Why is there even a market for Venmo in the first place? Why can’t I just use my bank’s mobile app, and just pay whoever I want, whenever I want, without waiting?

The reason is because that service has never been available to banks. Not before now. Thus, FedNow is a third option for payment processing, joining the antiquated ACH and wire transfer services. ...

Why haven’t they done this before now? Because banks didn’t want it. Guess what they did for the three days while all our payments were clearing? The banks collected interest on our money. Apparently it adds up to a lot. So, to preserve that lucrative line of inter-transactional profit, the U.S. banking lobby stopped captured government agencies from modernizing our country’s payment processing infrastructure. ...

“Okay Jeff,” you are saying, “I see it’s not actually a CBDC, but why NOW? Hmm? Isn’t it curious it’s coming out just when they want to make a digital dollar? How about that?”

Well, yes and no. As much as they’d like to control every minute aspect of our lives, I’m not completely sure our politicians even want to give up dollars. I mean, how will Hunter get paid, if Ukrainian oligarchs can’t roll up hundred-dollar bills, wrap them in rubber bands, and put them in ziplock bags? But that’s another story. Let me offer you an alternative, sufficient hypothesis for “why now.”

Consider this headline that ran in Bloomberg yesterday:




As you know, the “BRICS” coalition (Brazil, Russia, India, China, and South Africa) has been working on a new global currency to compete with the dollar — along with a competitive payments transfer system. What do you want to bet the new and improved BRICS payment transfer system is instantaneous, and doesn’t take up to three days to clear transactions like our system does?

In other words, our creaky, fifty-year-old payment processing technology was a MAJOR weakness in the upcoming battle of the currencies. It HAD to be fixed. Other countries might choose to go with BRICS just because it clears payments faster and more conveniently. At scale, instantaneous transfers shifts a significant amount of interest from banks back to customers. It’s just basic economics.