> “If you were to lower interchange fees, you probably have to also lower rewards,” Joanna Stavins, principal economist and policy advisor at the Federal Reserve Bank of Boston told CNN last month. That’s because “rewards are financed by interchange fees.”
Yeah, the only money Visa/MC make is from fees. I think we ought to take away her business and economic degrees - she's just trying to keep her piece of the pie by literally being a mouthpiece that's "independent". I'm sure they have industry insiders everywhere to make sure things happen they way they "need" to.
The Federal Reserve runs FedNow instant payment rails in a utility/cost recovery model, as they were directed to do by Congress. With FedNow, you can move money, up to $10M at a time, for less than a nickel. Credit card rails are fighting to maintain their skim on the economy. Rewards help them have unsophisticated consumers fight to keep interchange fees higher. Walmart is going to roll out pay by bank shortly in their app to bypass credit card rails, where consumers can make instant payments right from their deposit accounts to make payments, saving Walmart ~$1B/year in interchange fees. Others will follow, the incentives to do so are too great to ignore above a certain volume.
This is the equivalent of UPI in India and Pix in Brazil. The US is just late, as always, to the future, and incumbents are fearing extinction due to progress that makes their existence unnecessary.
Visa and Mastercard make money two main ways. They charge merchants a fee. They also take a fee upon the loan they offer consumers who don't pay their credit card bills in full every month. Most sophisticated consumers pay their cards in full every month and do not earn the card networks any loan fees. These consumers have no need to actually use a card and either have the capital to pay for their purchases outright or have enough wealth that they can borrow against their wealth to pay for goods at much lower rates than credit card rates. As such, rewards are an incentive to keep this user on the platform. That's why there's entire communities dedicated to card churning and finding the cards with the best rewards. There's no loyalty to be had when the sophisticated consumer can just pay their bills with cash.
I'm hoping that FedNow becomes more widely available but my suspicion is that only the big merchants, like Walmart, that have the technical sophistication to incorporate FedNow will benefit from this. Every mom and pop merchant that uses Square or Clover will just defer to the payment processor that will incorporate FedNow and charge their own management fee to these merchants. Then the bank the consumer uses will need to offer a way to use FedNow to pay and my guess is that banks that offer credit cards will resist this for as long as possible.
Just look at the rollout of Zelle. Only a handful of banks offer it. They differ widely in their implementation of it. Different banks offer different limits both in transaction frequency, per transaction limits, maximum transaction limits per month, and more. Then there's a Zelle app for banks that don't actually provide Zelle. On top of that Zelle has its own in-network fraud management that's a separate layer on top of the risk management that each bank and account offers. In practice this makes using Zelle frustrating. I suspect FedNow will work the same way.
Fintechs like Wealthfront, Mercury, Robinhood, Venmo/Paypal, and CashApp will probably be the first to offer it. Newer fintechs probably will too. But bank choice is often a family decision and many people bank where their parents banked. In general financial education in the US is very poor and banks and legacy credit cards know this and will use this knowledge to hobble FedNow.
Zelle is owned by the largest US commercial banks in the US, through the Early Warning consortium. FedNow was in part a response to Zelle and RTP from The Clearinghouse (another bank consortium). Zelle no longer has a stand alone app, the capability must be integrated in the financial provider’s UX. FedNow was a direct result of Congress directing the Federal Reserve to create a universal access instant payment rails system so that the largest commercial banks could not gate access to the rest of the smaller banks in the US.
> However, the dedicated Zelle app is being discontinued. Why? It turns out that while Zelle boasts a massive user base, only a small fraction – about 2% – actually use the standalone app. The vast majority access Zelle through their bank’s own app or website. This low usage is the primary reason behind the decision to shut down the Zelle app.
Anyone can plug into FedNow, either as a bank or licensed service provider. I expect it to take time for FedNow to become the default rails, but I’m highly confident it’ll happen, as there is very little anyone can do to stop the Fed from offering it.
That sounds hopeful and I certainly hope direct bank payments take hold. I'm still a bit worried because I still think payment providers will just end up becoming the new middlemen.
The old fashioned bank I use when I need in person banking (most of my money goes through fintechs or brokerage accounts) is on the FedNow list you link but doesn't offer FedNow use for its users. I can't, for example, pay my wife through FedNow.
Visa and Mastercard only make money from interchange fees. They don’t loan money to anyone. Credit cards and charge cards are issued by the bank and the banks make money from interest.
Yeah you're right, sorry I got my wires a bit crossed with companies that offer credit cards as opposed to the payment networks themselves.
That doesn't change the thrust of my argument, that middlemen will end up eating whatever efficiencies that FedNow opens up.
(Sorry if this sounds flippant. I don't want it to be. I think publicly admitting to being wrong is important on this site, even though very few people do it.)
“Unsophisticated consumers” aren’t using reward cards with annual fees. It’s just the opposite. The ones with the higher incomes are getting rewards for spending. Why wouldn’t higher earners want reward cards? The merchants for the most part aren’t giving cash discounts and they aren’t going to lower prices - they are going to increase their margins.
> “If you were to lower interchange fees, you probably have to also lower rewards,” Joanna Stavins, principal economist and policy advisor at the Federal Reserve Bank of Boston told CNN last month. That’s because “rewards are financed by interchange fees.”
Yeah, the only money Visa/MC make is from fees. I think we ought to take away her business and economic degrees - she's just trying to keep her piece of the pie by literally being a mouthpiece that's "independent". I'm sure they have industry insiders everywhere to make sure things happen they way they "need" to.
The Federal Reserve runs FedNow instant payment rails in a utility/cost recovery model, as they were directed to do by Congress. With FedNow, you can move money, up to $10M at a time, for less than a nickel. Credit card rails are fighting to maintain their skim on the economy. Rewards help them have unsophisticated consumers fight to keep interchange fees higher. Walmart is going to roll out pay by bank shortly in their app to bypass credit card rails, where consumers can make instant payments right from their deposit accounts to make payments, saving Walmart ~$1B/year in interchange fees. Others will follow, the incentives to do so are too great to ignore above a certain volume.
https://news.ycombinator.com/item?id=44750373 (citations)
FedNow Is Live - https://news.ycombinator.com/item?id=36801491 - July 2023
This is the equivalent of UPI in India and Pix in Brazil. The US is just late, as always, to the future, and incumbents are fearing extinction due to progress that makes their existence unnecessary.
Visa and Mastercard make money two main ways. They charge merchants a fee. They also take a fee upon the loan they offer consumers who don't pay their credit card bills in full every month. Most sophisticated consumers pay their cards in full every month and do not earn the card networks any loan fees. These consumers have no need to actually use a card and either have the capital to pay for their purchases outright or have enough wealth that they can borrow against their wealth to pay for goods at much lower rates than credit card rates. As such, rewards are an incentive to keep this user on the platform. That's why there's entire communities dedicated to card churning and finding the cards with the best rewards. There's no loyalty to be had when the sophisticated consumer can just pay their bills with cash.
I'm hoping that FedNow becomes more widely available but my suspicion is that only the big merchants, like Walmart, that have the technical sophistication to incorporate FedNow will benefit from this. Every mom and pop merchant that uses Square or Clover will just defer to the payment processor that will incorporate FedNow and charge their own management fee to these merchants. Then the bank the consumer uses will need to offer a way to use FedNow to pay and my guess is that banks that offer credit cards will resist this for as long as possible.
Just look at the rollout of Zelle. Only a handful of banks offer it. They differ widely in their implementation of it. Different banks offer different limits both in transaction frequency, per transaction limits, maximum transaction limits per month, and more. Then there's a Zelle app for banks that don't actually provide Zelle. On top of that Zelle has its own in-network fraud management that's a separate layer on top of the risk management that each bank and account offers. In practice this makes using Zelle frustrating. I suspect FedNow will work the same way.
Fintechs like Wealthfront, Mercury, Robinhood, Venmo/Paypal, and CashApp will probably be the first to offer it. Newer fintechs probably will too. But bank choice is often a family decision and many people bank where their parents banked. In general financial education in the US is very poor and banks and legacy credit cards know this and will use this knowledge to hobble FedNow.
Zelle is owned by the largest US commercial banks in the US, through the Early Warning consortium. FedNow was in part a response to Zelle and RTP from The Clearinghouse (another bank consortium). Zelle no longer has a stand alone app, the capability must be integrated in the financial provider’s UX. FedNow was a direct result of Congress directing the Federal Reserve to create a universal access instant payment rails system so that the largest commercial banks could not gate access to the rest of the smaller banks in the US.
https://www.wrdw.com/2025/04/04/what-tech-why-zelle-is-shutt...
> However, the dedicated Zelle app is being discontinued. Why? It turns out that while Zelle boasts a massive user base, only a small fraction – about 2% – actually use the standalone app. The vast majority access Zelle through their bank’s own app or website. This low usage is the primary reason behind the decision to shut down the Zelle app.
Anyone can plug into FedNow, either as a bank or licensed service provider. I expect it to take time for FedNow to become the default rails, but I’m highly confident it’ll happen, as there is very little anyone can do to stop the Fed from offering it.
https://www.frbservices.org/financial-services/fednow/organi...
(day job is in financial services at a fintech, all of my personal financial service providers are on FedNow)
That sounds hopeful and I certainly hope direct bank payments take hold. I'm still a bit worried because I still think payment providers will just end up becoming the new middlemen.
The old fashioned bank I use when I need in person banking (most of my money goes through fintechs or brokerage accounts) is on the FedNow list you link but doesn't offer FedNow use for its users. I can't, for example, pay my wife through FedNow.
Visa and Mastercard only make money from interchange fees. They don’t loan money to anyone. Credit cards and charge cards are issued by the bank and the banks make money from interest.
Yeah you're right, sorry I got my wires a bit crossed with companies that offer credit cards as opposed to the payment networks themselves.
That doesn't change the thrust of my argument, that middlemen will end up eating whatever efficiencies that FedNow opens up.
(Sorry if this sounds flippant. I don't want it to be. I think publicly admitting to being wrong is important on this site, even though very few people do it.)
“Unsophisticated consumers” aren’t using reward cards with annual fees. It’s just the opposite. The ones with the higher incomes are getting rewards for spending. Why wouldn’t higher earners want reward cards? The merchants for the most part aren’t giving cash discounts and they aren’t going to lower prices - they are going to increase their margins.
That is the only money that Visa and MC makes. Annual fees and interest go to the banks.
The only way they would change things is if it’s more revenue for them so I’m guessing retailers and consumers will get screwed