On August 29, the Federal Reserve Board (Fed) announced that its real-time payments system, FedNow, will launch sometime between May and July of 2023. FedNow will provide a platform on which banks can build their products. Products enabled by FedNow will allow a common consumer or business to send and receive payments instantly, instead of the government’s current system that is closed on weekends and holidays and can sometimes take days to process transfers. What differentiates FedNow from other instant payment services is that FedNow will service all federal reserve banks, which provides payment services to thousands of financial institutions. More than 120 banks and payment processors currently participate in the FedNow pilot program.
“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. Immediate availability of funds could be especially important for households managing their finances paycheck to paycheck or small businesses with cash flow constraints,” according to Vice Chair Lael Brainard in a speech at a FedNow Early Adopter Workshop.
Vice Chair Brainard also urged financial institutions and software providers to update their systems in anticipation of the summer launch. “The time is now for all key stakeholders — financial institutions, core service providers, software companies, and application developers — to devote the resources necessary to support instant payments. This means upgrading back-office processes, evaluating account procedures to accommodate a seven-business-day week, arranging liquidity providers, deploying a new customer-facing application, and promoting instant payments for key use cases to customers.”
Some of the expected benefits of the FedNow system include:
- Making instant payment technology more accessible to smaller community banks;
- Reducing the payment processing costs for banks and other financial institutions; and
- Providing consumers with instant access to payments and other electronic fund transfers.
Some say the launch of the FedNow service will provide an alternative to the creation of a central bank digital currency (CBDC). As we discussed previously, in January 2022, the Fed issued a report titled, “Money and Payments: The U.S. Dollar in the Age of Digital Transformation.” The report was widely viewed as “the first step in a public discussion” regarding the creation of a CBDC — legal tender just like a paper bill, but in digital format, which would be “a digital liability of a central bank that is widely available to the general public.” Some maintain that the instant payment capability of FedNow could negate the need for a CBDC.
Troutman Pepper will continue to monitor important developments involving the FedNow system and will provide further updates as they become available.