Announced back in August by Federal Reserve governor Lael Brainard, FedNow is pitched as a state-funded, real-time payments network for the US – one that will operate in parallel with the widely used Clearing House Interbank Payments System (CHIPS) owned and run by 24 major banks.
The driving factors are essentially scale and stability. As Brainard explained, the Fed has readymade links with 10,000 financial institutions, and is therefore “uniquely placed” to deliver an outcome that is “accessible to all banks, no matter the size”, and will suit as much of the country as possible.
On the stability front, she pointed out: “We are seeing some companies looking to establish a payment system that bypasses our banks and our currency. Facebook’s Libra project raises numerous concerns that will take time to assess and address.”
She noted: “Safety is also vital. If the Federal Reserve does not establish the FedNow service, there will be a single provider of real-time retail payment services. We are mindful of the serious safety issues associated with a single point of failure – a risk that will rise as faster payments grow.”
Brainard added: “Stakeholders have noted the importance of having access to more than one real-time payment service for back-up purposes in order to provide resiliency through redundancy… the Federal Reserve has always had a vital role in promoting the safety and stability of the US payment system by providing liquidity and operational continuity, especially in times of stress.”
Intentionally slowly. In recent comments picked up by PaymentsJournal, project leader Kenneth Montgomery – vice president of the Boston Fed – said that the developers are taking an incremental approach to the scheme. A phased launch is planned for 2023 and 2024, with further tweaks and features to follow thereafter. “We want to take the time to get it right,” Montgomery said. “As we continue to refine business requirements [and] hear from the industry about what they’re looking for, our objective will be to have subsequent releases after that initial release of FedNow.”
Only Google has offered any significant thoughts – and they were characteristically assertive. In November, the search giant’s vice president, government affairs and public policy, Mark Isakowitz wrote to the Fed’s board urging the organisation to use India’s sprawling Unified Payments Interface (UPI) as a template for FedNow.
“First,” he noted, “UPI is an interbank transfer system (there are now over 140 member banks, after initially launching with nine participating banks). Second, it is a real-time system. Third, it is ‘open’ – meaning technology companies can build applications that help users directly manage transfers into and out of their accounts held at banks.”
He added: “After just three years, the annual run rate of transactions flowing through UPI is about 10% of India’s GDP, including 800 million monthly transactions valued at [a total] $19bn.”
One hardly needs to read between the lines to get a sense of Google’s thought process.
Absolutely. Three voices have been particularly scornful. Former congressman Ron Paul – founder of constitutionalist pressure group Campaign for Liberty – said after the scheme was announced: “Consumers already have numerous options to make real-time payments, so the Federal Reserve’s decision to begin work on a central bank-run and -controlled real payments system… is baffling."
He added: “A Federal Reserve-run real payments system will crowd out private alternatives, leaving consumers with one government-run option for real-time payments."
“This will be bad for consumers and real-time entrepreneurs but good for power-hungry Federal Reserve bureaucrats who will no doubt use FedNow to help ‘protect’ the Federal Reserve’s fiat currency system from competition from cryptocurrencies.”
In the upper echelons of the financial industry, Bank Policy Institute president and CEO Greg Baer offered some stern words: “In 2015, the Federal Reserve called on the private sector to build a real-time payments system. The Clearing House – and only The Clearing House – responded by building the most advanced payments system in the world.”
Fast-forward just a few years, he said, and the Federal Reserve looks set to “pull a bait-and-switch and build its own system… perhaps completely undermining the goal of a ubiquitous system where any US consumer or business can pay any other.”
But among the scheme’s various critics and opponents, perhaps the most significant is within the Fed itself, in the shape of its vice chair for supervision Randal Quarles. In his view, the government should step in with initiatives such as FedNow only “when the evidence of market failure is clear and alternative means to achieve public goals are not feasible”.
He added: “In this case, I do not see a strong justification for the Federal Reserve to move into this area and crowd out innovation when viable private-sector alternatives are available.”
No – quite the reverse. According to Reuters, in a 14 February speech to industry stakeholders, Cleveland Fed president Loretta Mester said that FedNow’s developers are “exploring collaborations with the private sector and other groups” to bring the project to fruition.
Reuters reported Mester as saying that “it will be important for the service to work across multiple systems for commercial banks, and… different models are being tested.” Echoing Montgomery’s words, she noted: “The project is complex, and we want to get it right.”
Matt Packer is a freelance business, finance and leadership journalist