Fed Announces Launch of ‘FedNow’ Real-Time Payment System, Sparking Debate

Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a meeting of the Federal Open Market Committee at the headquarters of the Fed in Washington, D.C., on Sept. 21, 2022. Mandel Ngan/Getty Images

The Federal Reserve has announced a timeline for the launch of its long-awaited FedNow payment service that will let banks offer customers instantly available funds and execute real-time payments, with critics flagging concerns like lack of cross-border payment processing and raising questions about surveillance.

The Fed announced on Wednesday that it will begin formal certification of participants in the FedNow system in April in anticipation of a July launch.

First announced in 2019, FedNow will allow banks to instantly transfer payments across the financial system.

“With the launch drawing near, we urge financial institutions and their industry partners to move full steam ahead with preparations to join the FedNow Service,” Ken Montgomery, first vice president of the Federal Reserve Bank of Boston and FedNow program executive, said in a statement.

As banks and other financial institutions join the program, this will create a growing network with clearing and settlement features that lets businesses and individuals send and receive instant payments at any time of day.

Recipients using the system will have full access to funds immediately, making it easier to make time-sensitive payments.

Some analysts have said that FedNow could reduce demand for payday loans because customers who use the system would receive their pay immediately, without having to wait for checks to clear.

“The 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,” Tom Barkin, president of the Federal Reserve Bank of Richmond and the FedNow Program’s executive sponsor, said in a statement.

The system will have the capacity to support various types of transactions: consumer-to-consumer, consumer-to-merchant, merchant-to-merchant, and bank-to-bank.

Fed governor Michelle Bowman said last year that FedNow could offer some of the same benefits as a central bank digital currency (CBDC) and thus weakening the case for the adoption of a CBDC, which is, anyway, years away in the United States.

During congressional testimony in early March, Fed chair Jerome Powell was asked by a lawmaker whether there’s an advantage to the FedNow payment system over a CBDC or stablecoins that also tout faster payment services.

“A CBDC is going to be years in evaluation,” Powell replied. “And I think we can get this into the hands of the public very quickly, and we'll have real-time payments in this country very very soon.”

FedNow “will enable all the banks—any bank in the United States, not just the big ones—to offer instantly available funds and real-time payments to their customers,” Powell said before the House Financial Services Committee on March 8. “That’s a great thing.”

A similar private-sector payment system that offers instant settlement features like FedNow has been around since 2017.

Reactions

The Fed’s announcement of a timeline for the launch was met with mixed reactions. Some sought to draw equivalence between FedNow and a CBDC.

“Right on schedule. Here is your CBDC launch,” Lawrence Lepard, investment manager at Equity Management Associates, stated in a tweet.

Scott Santens, author of the book “Let There Be Money,” disputed this characterization, arguing in a series of tweets that FedNow doesn’t have any smart contract ability and is not equivalent to a digital dollar.

“FedNow implementation is one of the arguments against launching a CBDC. It’s so not a CBDC that it actually reduces the odds of starting a CBDC,” he wrote on Twitter.

“If conspiracy theorists who are afraid of CBDC had any sense at all, they‘d argue that FedNow obviates the need for a CBDC. They’d welcome FedNow as an alternative that already exists, so don’t do a CBDC. But they have no sense,” Santens added.

Jordan Schachtel, publisher of The Dossier on Substack, raised concerns about surveillance.

“FedNow appears to be a prototype CBDC,” he stated in a tweet. “While instant, 24/7 payments seems good, there’s implications to leaning into credit-based system. FedNow can quickly transform to a surveillance system.”

“Does FedNow have AI or human circuit breaker managing it? FedNow is a giant red flag,” he added.

According to a review of FedNow by PYMNTS, the new platform might, over time, incorporate anti-fraud features that “could provide the ability to fine-tune controls for different types of customers and screen non-value messages, such as requests to send payments to potential bad actors.”

“Other updates under consideration would leverage the FedNow Service network to monitor for aggregated concentrations of inbound and outbound activity (a sign of potential mule activity) and use machine learning to score transactions,” PYMNTS noted.

The Fed said in its announcement that the service will launch with a “robust set of core clearing and settlement functionality and value-added features” and that that enhancements would be added in future releases including ones related to “safety, resiliency and innovation.”

Matt Stoller, director of research at the American Economic Liberties Project, welcomed FedNow as a better alternative to currently used payment systems.

“The administration needs to push the Fed to get FedNow working ASAP. It’s just ridiculous the U.S. payments system is so corrupt and expensive, versus the fast and efficient systems of almost everywhere else,” he wrote in a tweet.

Payment systems used in the United States face criticism for lack of interoperability, high transactions fees, and slow processing times, which in some cases can take several days.

Rina Wulfing, policy and campaign manager for London-based cross-border payments company Wise, said that a shortcoming of the FedNow system is that it doesn’t include nonbanks and cross-border payments.

“Unfortunately, the current framework does not address the other most pressing issues in the U.S. payments system,” Wulfing wrote in a recent op-ed. “By not including nonbanks and cross-border payments, FedNow puts itself at risk for success and doesn’t take into account the needs of U.S. consumers. ”

CDBC Controversy

Controversy has surrounded the adoption of CBDCs, with House Republicans warning of the risk that they could amount to an “authoritarian-style” and “surveillance-style” digital dollar.

House Republicans recently introduced the CBDC Anti-Surveillance State Act that would restrict the “unelected bureaucrats” from establishing and issuing a CBDC that they say would threaten the financial privacy of the American people.

“Any digital version of the dollar must uphold our American values of privacy, individual sovereignty, and free-market competitiveness,” said House Majority Whip Tom Emmer (R-Minn.) in a statement. “Anything less opens the door to the development of a dangerous surveillance tool.”

Rep. Warren Davidson (R-Ohio) argued that the Fed must concentrate on its dual mandate—price stability and maximum employment—instead of “eradicating financial autonomy.”

“A retail CBDC would essentially allow the government to mediate all transactions, which would mirror what we see in China. It’s vital to ensure this does not happen here,” Davidson said in a statement.

Andrew Moran contributed to this report.