Financial institutions will soon gain access to FedNow, the Federal Reserve's instant payment service scheduled to launch this summer. This is an important development for community banks, with the service allowing local institutions to gain access to a new system with instant clearing and settlement and requests for payment.
These new features will offer community banks and their customers safe, secure, and efficient real-time payments while negating the need for a U.S. central bank digital currency.
The market for faster payments is rapidly growing, so the timing of FedNow is advantageous to community banks and the customers and communities they serve. In the five years since the launch of The Clearing House's RTP Network, volumes have steadily increased by more than 10% per quarter. The launch of FedNow will drive further adoption of instant payments by supporting universal access to meet market demand.
Then there are many consumer and business benefits that will be realized through the launch of FedNow. According to the Federal Reserve, 60% of businesses are looking for quicker access to funds and 57% want to be able to post immediately or automatically to customers' accounts. FedNow will help businesses — particularly small businesses — manage their cash flow and improve efficiencies. On-demand payments also will allow businesses to pay suppliers upon receipt of products or services, freeing up working capital.
For consumers, FedNow will speed up access to paychecks, improve the ability of individuals and families to pay their bills on time, and provide confidence that payments will post to the biller's account immediately. This will cut down on late fees and penalties while reducing consumer reliance on short-term, high-cost loans by nonbank lenders. Consumers also will be able to move money between accounts, load prepaid cards, and fund investment accounts and mobile wallets instantly — eliminating a lag that can be inconvenient and costly.
This immediate access to funds will promote the financial well-being for many. An estimated 64% of all consumers live paycheck to paycheck, including 51% of those earning more than $100,000 per year. With many workers not paid in real time — often receiving paychecks for work completed weeks earlier — FedNow will advance the shift to on-demand pay.
As a third-generation community banker, I know that the importance of having a tool like FedNow to help customers — especially those who are struggling to make ends meet — should not be overlooked.
Payment messages in the FedNow Service will use the widely accepted ISO 20022 standard, allowing for descriptive information to move with each payment. This will provide a common foundation for exchanging payment messages and support the exchange of data.
FedNow could also further transform consumer habits related to commercial transactions, as Venmo and Zelle have for peer-to-peer transactions. And by better connecting parties through faster payments, FedNow could spur the creation of innovative services designed to meet the needs of businesses and consumers.
Also important is FedNow's fraud-prevention tools, such as the ability to set lower transaction value limits and specify conditions under which transactions would be rejected. These and other safeguards will be particularly valuable with so many businesses still relying on paper checks, which are more prone to fraud than digital channels, as indicated by a rising wave of check fraud in 2022.
Finally, FedNow also would negate the need for a U.S. central bank digital currency by achieving the same policy goals without the risks a CBDC poses. As Fed Governor Michelle Bowman said last August, FedNow will help offset the justification for a CBDC by allowing consumers and businesses to make payments conveniently and with immediate availability of funds for receivers.
Among its risks, a U.S. CBDC would threaten to disintermediate community banks, a cause for concern among consumers. As financial intermediaries and the nation's leading small-business lenders, community banks' access to deposits and ability to lend funds to support economic growth would be dramatically affected by the creation of a competitively advantaged CBDC.
A CBDC could also threaten the health of the U.S. financial system more broadly by altering the roles and responsibilities of the private sector and the central bank and by destabilizing existing banking and payments systems that are the backbone of the U.S. economy and markets. A CBDC could also erode the Fed's ability to conduct monetary policy and interest rate control by altering the supply of reserves in the banking system and forcing the Fed to balloon its balance sheet.
FedNow will be an important step for community banks, consumers and the financial system. Speeding up payments and improving consumers' access to their own funds to promote financial inclusion is a win for all.
