The Federal Reserve is on track to deliver an instant payment service called FedNow between May and July 2023, the central bank’s clearest timeline yet for a new system enabling the settlement of U.S. payments in seconds.
The FedNow service also potentially negates the need for the creation of a central bank digital currency, or CBDC.
“The FedNow Service will transform the way everyday payments are made throughout the economy, bringing substantial gains to households and businesses through the ability to send instant payments at any time on any day, and the funds being immediately available to recipients to make other payments or manage cash flow efficiently,” Fed Vice Chair, Lael Brainard, said in a speech Monday.
The Fed has been testing the system with a limited number of banks and institutions, but Brainard called on financial institutions, service providers, and software companies to adopt the FedNow Service now to ensure the system will work smoothly come next spring.
“The time is now for all key stakeholders…to devote the resources necessary to support instant payments,” said Brainard.
FedNow, which will enable consumers and businesses to send payments instantly, could offer some of the same benefits as a central bank digital currency.
Fed Governor Michelle Bowman has said that FedNow may deliver many of the same benefits as a Federal Reserve-issued digital dollar, while senior administration officials have also pointed to the FedNow service as an alternative to a CBDC. The Fed has released a study on a CBDC but has made no decision on whether the U.S. should adopt one.
Officials are thinking through what needs a CBDC would fulfill after the release of the FedNow system.
Cowen analyst Jaret Seiberg said he thinks FedNow eliminates the business case for a stablecoin-based consumer payment system.
“FedNow provides the cost-reduction and settlement speed of stable coin payments without the need to convert into and out of tokens,” said Seiburg. “FedNow could then slow the growth of these tokens, which may help address policy concerns regarding stablecoins.”
Rolling out the FedNow system would involve upgrading back-office processes, evaluating accounting procedures to accommodate a seven-business-day week, arranging liquidity providers, and putting in place new technology to interface with customers.
The Fed maintains making funds immediately available will help Americans living paycheck to paycheck, or small businesses with cash flow constraints, by avoiding late payment fees or freeing up working capital for small businesses to finance growth.
Analysts say FedNow could also cut demand for payday loans as consumers won’t have to wait for a check to clear. For businesses, there could also be an upside for better-paying suppliers on time, and businesses could embrace it as a less costly and more certain way to accept consumer payments.
The FedNow system would help the government transmit emergency relief payments to Americans faster, avoiding making citizens wait for checks during the pandemic.
Financial regulators also want faster payments because it reduces systemic risk. During the financial crisis, the fear was that the financial system would shut down because banks would not trust that other banks would make good on intraday credit.