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Federal Reserve Vice-chair Lael Brainard gave a timeline for the launch of FedNow, the platform it has been working on to enable nearly instant payment settlement within the U.S.
Driving the news: FedNow should launch in 2023 between May and July. This is the most specific the Fed has been yet about when the service will go live.
"The payment system is a critical part of America's infrastructure that touches everyone.," Brainard said in a speech she gave today via webcast to the FedNow early adopters workshop in Rosemont, Illinois.
Why it matters: Consumers probably don't realize that every time they swipe a debit card, it costs the merchant an average of $0.23, according to Merchant Maverick. Those costs stack up and ultimately get passed on in sticker prices.
The FedNow platform, meanwhile, will cost a fifth of that to make a transaction.
How it works: FedNow is a platform the Fed will provide for banks to build on top of and create payment features in existing or new products. Products enabled by FedNow will have nearly instant settlement around the clock.
Ever needed a cashiers check after all the bank branches had closed? FedNow could be an answer for that kind of situation.
Depending on how its partners implement FedNow, it could be used consumer-to-business, business-to-business or consumer-to-consumer.
"Immediate availability of funds could be especially important for households managing their finances paycheck to paycheck," Brainard said. "Having the capacity to manage money in real time could help households avoid costly late payment fees."
Our thought bubble: One would hope all the services built on FedNow will also be interoperable (unlike Venmo, Zelle and Cash App, for example), so it won't matter which app your friends and family use or where they bank.
Brainard spoke about her desire for interoperability in payments in a prior speech, but it's going to be more up to the Fed's partners than the Fed itself.
Of note: FedNow is not a blockchain-based product and it's not a central bank digital currency (CBDC). It still very much relies on third parties, to operate, for example.
But — if it catches on — it would make money as we know it more competitive with cryptocurrencies, by lowering the cost to transact and providing low risk settlement around the clock.
"The shift to real-time payment infrastructure requires a focused effort, but the shift is inevitable," Brainard said.
Flashback: The Fed finalized the rule to govern FedNow in May.
The bottom line: "We have been working hard to deliver on time, but ultimately the number of American businesses and households that are able to access instant payments will depend on financial services providers making the necessary investments to upgrade our payments infrastructure," Brainard said.
FedNow vs. CBDC
The Federal Reserve announced this March that FedNow, a new instant interbank settlement system from the Federal Reserve, will begin rollout in July after participating institutions are formally certified this April.
While consumers have been feeling instant settlement on mobile and digital financial platforms, the legacy banking infrastructure has been struggling to keep up. The FedNow instant settlement infrastructure will enable institutions to settle transactions between banks as fast as retail customers experience them on their apps. At participating financial institutions, businesses and individuals will be able to send and receive instant payments 24/7. Recipient banks will have full access to funds immediately, giving them greater flexibility to manage their money and make time-sensitive payments.
Real-time, 24/7 interbank settlement could reduce liquidity risks faced by financial institutions—an acute need exposed by March’s Silicon Valley Bank failure. The new infrastructure could also reduce the overdraft fees imposed on retail customers, improve cashflow management for businesses, and speed up government transfer payments to recipients of programs like Social Security.
While the Federal Reserve is actively exploring what a US central bank digital currency (CBDC) would look like, FedNow will use traditional dollars to settle transactions between financial institutions. Importantly, FedNow is not a CBDC but a currency infrastructure service. A CBDC is a digital form of government-issued currency. Digital Dollar Project’s January 2023 White Paper 2.0 differentiates between two basic types of CBDC: wholesale and retail. Wholesale CBDC would be used for interbank settlement, while the general public could use retail CBDC.
Much like FedNow, a wholesale US CBDC would enable instant 24/7 settlement but also with the potential for more efficient international settlement. A retail CBDC would have additional utility like programmability and the ability to bank the unbanked directly. For example, the world’s first retail CBDC, the Bahamian Sand Dollar, allows individuals without bank accounts to hold a limited amount of money in an individual account with the central bank as part of its goal to expand financial inclusion.
Currently, the Federal Reserve cannot house individual consumer accounts; it only operates accounts for other financial institutions. Without amending the Federal Reserve Act, any future US CBDC will be an almost exclusively wholesale tool for financial institutions that will complement the FedNow infrastructure.
Federal Reserve Launching ‘FedNow’ Instant Payment Service in July 2023
The Federal Reserve recently announced the launch of FedNow, a new real-time payments service that will enable faster and more secure financial payments for consumers and businesses. This system has the potential to revolutionize how people make payments in the US by providing instantaneous transfer of funds between banks in a matter of seconds, available 24 hours a day, 365 days a year.
“With the FedNow Service, the Federal Reserve is creating a leading-edge payments system that is resilient, adaptive, and accessible,” said Tom Barkin, president of the Federal Reserve Bank of Richmond and executive sponsor of the FedNow program. “This launch reflects an important milestone in the journey to help financial institutions serve customer needs for instant payments to better support nearly every aspect of our economy.”
As of April 1st, the Fed has started to certify banks to join the program and conduct customer testing. With several banks of varying sizes and the US Treasury already onboard, the Fed is urging financial institutions to join the FedNow service ahead of the launch, as growing the network of participating banks will be key to increasing the program’s value. Many countries already have similar real-time payment systems, including England.
According to analysts, FedNow will have numerous benefits, including:
Modernization of the country’s payment infrastructure
Immediate availability of funds for consumers living paycheck to paycheck
Fewer overdraft fees and late fees for banks and their customers
Reduced cash flow constraints for small businesses
Timely payments for suppliers
Enhanced security and transparency
Potential drawbacks include:
If FedNow does not become widely adopted by financial institutions or merchants, its usefulness may be limited
Global payments may be slower due to international settlement times
In response to claims on social media that the new service is a step toward digital currency and the end of physical money, the Federal Reserve has reiterated that FedNow is not a form of currency, nor is it a move toward eliminating cash—rather it is an upgrade to a decades old payment system.
While it is true that the US is one of more than 100 countries exploring the creation of digital currency—commonly referred to as a “central bank digital currency” or CBDC—that is a separate endeavor from FedNow. That research is reported to be in early phases and, according to the Federal Reserve website, no decision has been made, or would be made, without clear support from Congress and legislation from the Executive Branch.
