How FedNow could end one of America’s largest regressive taxes

Here at Finesse, many of our clients have been charged hundreds of dollars in overdraft fees over the course of a few months. When a bank charges a $35 fee for overdrafting a checking account by $20 — repaid four days later when our client’s paycheck hits — they’re effectively charging a 16,000% APR interest rate! Without the income and credit history to apply for no fee checking accounts, many Americans have few short term options but to incur debt to cover their basic living expenses. This can come in the form of credit cards, payday loans, or a more disguised form a debt, overdraft fees. (Last year Americans paid ~$34 billion in overdraft fees!)

Last month the Federal Reserve announced that they’ll be building FedNow, a system that can transfer money almost instantaneously and could be a replacement for the existing private bank-owned ACH system. Why is this a big deal for Americans?

The vast majority of Americans receive their paycheck via ACH. ACH transfers usually take 2–3 days to clear, depending on the bank conducting the transaction, but there’s some variability here. Since they’re only processed by banks during business days, holidays and weekends can stretch out the transfer process to up to 7 days.

With almost 40% of Americans unable to cover a $400 emergency with cash on hand, variability in the amount of time it between doing the work and getting paid can mean that you take out unnecessary debt. This means a payday loan, overdraft fees, or paying for living expenses with credit cards. With the gig economy growing, an increasing number of families don’t have access to the slack of a steady paycheck. The added uncertainty of how long it takes to get paid through the ACH system means that more Americans are strapped for cash when they need it.

At work, how often has a coworker asked HR when their direct deposit will hit, or why it’s been delayed?

At Finesse, our clients often time their bills to when they know they’ll have money in their account. The uncertainty about when ACH payments will hit trickles downstream — if a paycheck is delayed by 2 days, you might not be able to pay your phone bill on time, resulting in a $20 late fee. These fees and charges then add up, and creep into the next pay cycle — your salary in the next pay cycle is cut by the whiplash from the uncertainty of the previous one, and the cycle continues.

We don’t have an opinion on whether or not the Federal Reserve is the best creator and maintainer of critical global financial infrastructure. However, we do know that a reliable system of instant money transfers will undeniably benefit American working families.

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