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Open the Venmo app on your phone, especially if you want to observe issues in the US. Click “Me” and then click “Forward.” If your account has a balance, you will be given two options. Option 1 offers free money, but for “up to 3 days”. Another option is “instant”, but comes with a price tag of 1.75% for transfers, up to $25 for large transactions. You can access your money by paying either in time or in cash.
This issue is relatively trivial when it comes to setting up restaurant bills with friends, but for more life-like things like rent and pay, these delays are really important. That's particularly embarrassing when other countries like Brazil, Japan and the UK moved ubiquitous, affordable instant banks a few years ago.
“If Americans get over the full cost of what they pay for the payment system,” said Dan Early, a Cornell Law School professor and payment system expert, “at a pretty big margin, perhaps the most expensive payment system in the G20.” Aaron Klein of the Brookings facility is one of the few vocal supporters for immediate payments, and estimates that the cost to consumers from late payments could be $10 billion a year, up to the interest on loans placed on Americans to cover costs.
To put it in fairness, the US is trying to get better. For years, the Federal Reserve has built an instant payment system called Fednow. This is intended to supplement or ultimately replenish traditional ACH (automatic clearing house) transfers. But so far it has been primarily bust. The latest quarterly report for the service for the third quarter 2024 reported only 336,000 transactions. In contrast, the Fed handled that quarter. Next to it, Fednow is a rounding error.
FedNow offers banks faster payments at lower prices. This allows workers to earn pay early, move money between accounts more easily, and avoid expensive overdraft fees. Why did so few banks switch?
Klein describes it as an example of industrial obstruction. “Banks maximize profits,” Klein sums up. “A slow payment system is more profitable for them.”
Back up for a moment to understand why. To be precise, how is money moving around the banking system now?
The main method is ACH, which is familiar to you, as you get a direct deposited salary or deposit physical checks. This is known as a deferred net payment system. Individual checks are not processed on their own: if my granddad sends me a 50-dollar check and I deposit it in my checking account, my bank won't make it my bank, the second tells my grandfather's bank to add $50 to my balance and send $50 to his balance. Instead, several times a day, payment authorities (in the US, this is almost always the Federal Reserve) will match millions of check payments, either pay by a particular bank, or pay when all payments are processed, or deduct or add the total outstanding amount. This is the “net” part of online payments. Once your book is resolved, the bank will check the individual check or savings account fees.
Although ACH has been changing and surged over the years, this basic approach remains. Even the so-called “same day ACH” often doesn't post the day they started. (Zelle, a “instant” peer-to-peer payment system offered by many banks, is just an ACH wrapper. Even if customers become available earlier than usual, payments still take a few days to settle.)
Therefore, payments are not processed in real time and not in batches on a regular basis. That means waiting.
Who will benefit from this system? Of course, he is not the one who sends or receives payments. However, banks are profiting in several ways. While payments are being processed, the sending bank can use the money being handed over (“float” in financial terms) to make a profitable loan.
The slowdown in the system was once back to an even bigger problem when it had to physically exist in a bank that was deposited before processing a transaction. The bank had to use Shrep Checks using car and plane courier services. On September 11, 2001, the plane was grounded, stranding $47 billion medium-term processing payments, which could not be resolved. To avoid repeating that experience, in 2003, Congress eventually passed the Check 21 Act, eliminating the requirement that the checks physically exist. This reduced one day's check processing time per survey, saving over $1 billion a year.
Although the decline in bank float revenues in check 21 has decreased, ACh delay means they still get some. If payments are instantaneous, the source of profit will disappear.
Delayed payments can lead to issues like account overdrafts, which allow banks to charge consumer fees. The average fee is $27 per overdraft for users. In 2023 alone, the bank won $5.8 billion from the fees. Most major banks earn small incomes to savings account holders from fees charged to overdrafts and savings account holders, the most common of which is the most common. JPMorgan Chase thus earned 2.1% of its revenue for each latest available data, while Bank of America earned 2.7%. However, a small number of banks rely heavily on fees to survive.
For example, Woodforest National Bank in Texas won 22.4% of revenues in excess of $192 million from owner fees last year. That exceeds the profits that banks made over the $154.6 million that last year. Without the fee they would have turned red.
There are several banks in such a situation. Texas First National Bank won depositor fees in 2024 more than three times its profit margin. Gate Citibank in Fargo, North Dakota, cost more than twice its profits. So did Arvest Bank in Arkansas, owned by the Walton family of Walmart fame. The Consumer Financial Protection Agency has been trying to cut these fees in recent years, with some success, which appears likely to end with the Trump administration moving to that institution.
Outside of the formal banking system, it checks for liquidation delays and creates demand for expensive, sometimes predatory services, such as check cuts, which charge customers for free deposits at regular banks. According to Brookings' Klein, about 70% of people using the Check Cash service already have a checking account. now. Immediate payments not only remove the check ship market, but also remove the revenue of banks that rely on overdraft fees.
What do you need to get a quick payment?
That being said, it would be overly simplified to completely condemn bank greed for slow payments in the US. Credit and debit cards allow consumers to experience more payments as if they were paid out right away, so consumers don't want faster payments.
They are not in fact instantaneous – credit and debit card network payments happen in batch fashion on the net, just like ACH – and the fees involved are outrageous.
“What we have is in demand for something better than what we have because what we have is reasonably efficient.”
– Timothy Massad as chairman of the Commodity Futures Trading Commission from 2014 to 2017
Major credit card networks charge dramatically differently, but for credit transactions, the fees usually range from 1-3%. Retailers pay each time they charge a credit card. David fees were within that range until Barack Obama signed the Dodd Frank Act in 2010. However, some debit transactions like winning Venmo are still falling outside of that cap. Therefore, you will be charged a 1.75% fee to win cash on Venmo. It's not just Venmo, as banks like PNC also charge around 2% to get cash quickly.
Credit and debit fees are ultimately passed on to consumers in the form of higher prices. However, they are usually paid by retailers and hidden from customers, so there is little reason to object. They are not listed on receipts like sales tax.
“For individuals, we have a very broad credit card industry, and more recently the fact that we have mobile banking and apps on your phone…the people felt pretty pleased,” Timothy Massad, chairman of the Commodity Futures Trading Commission from 2014 to 2017 and addressed the issue of payments. “What we have is in demand for something better than what we have because what we have is reasonably efficient.”
Among small retailers, there is a greater demand for better things. The battle against the high retailer fees charged by Visa and MasterCard is now the mainstay of Congressional politics and courts. Last year, the two networks agreed to the CAPE cap after decades of antitrust lawsuits by retailers.
The interest here can be huge. Empirical research Awrey is currently working on, he said, and he discovers that for many small businesses, card swipe fees can eat up a large portion of their net profits and make the difference between feasibility and failure. “If you look at the marginal aperture for small businesses, a surprising large range can be explained by merchant fees and exchanges,” he says.
But what needs more than retailer anger is to turn systems like Fednow from my current close relative status into what Vox uses to send me pay or to send rent to landlords, for example. Common threads between the countries I have it Like Brazil and the UK, Klein says Klein is a central bank that has fought hard to adopt the new system and overcome objections from banks worried about losing.
That push can result in a big dividend. In Brazil, the deployment of PIX's instant payment system has pushed expensive debit and credit cards, as well as regular stores to PIX. According to a study by Ohio State University economist Sergei Sarkishan, PIX promoted more competition between traditional banks, allowing more Brazilians to get accounts and loans with interest, resulting in a profit of around $380 per quarter for the average Brazilian.
But here in the US, the Federal Reserve is not motivated to launch such a push. Payments are probably not the focus of the Fed board, naturally, obsessed with monetary policy and banking regulations (“Have you ever met someone who said they were excited to serve the Federal Reserve because they wanted to focus on payments?” Crane is actually excited by those who don't want to focus on board.
Without action from the federal governing body, the problem lies with the institution's staff. This is not the client bank's and tends to not want to lock the boat. But not rocking the boat may mean that we will sadden us with an expensive, dilapidated, outdated payment system for years to come.
