How Will FedNow Evolve?

FedNow, the Federal Reserve’s real-time payments platform, was supposed to start up toward the end of last month. It’s been eagerly awaited by the U.S. payments industry and will add to the rarefied ranks of instant-payments services for businesses and consumers. But what can we expect when the rollout’s hullaballoo dies down?

In July, a regional Federal Reserve Bank official outlined a roadmap for the new network. For one thing, FedNow, which has been under development for four years, will almost certainly siphon volume from long-established payments networks, according to Loretta J. Mester, president and chief executive of the Federal Reserve Bank of Cleveland.

“A longer-run issue has to do with the payment rails themselves. It seems likely that over time those payments that are time-sensitive will shift from the traditional payment rails of check, ACH, and wire to the instant payment rails of FedNow and RTP,” Mester said in a speech entitled “An Update on the Federal Reserve’s Instant Payments Service: FedNow.” at the National Bureau of Economic Research’s Summer Institute 2023 in Cambridge, Mass.

“RTP” is a reference to the national Real Time Payments platform that The Clearing House Payments Co. has been operating since 2017. The system represents a private-sector alternative to FedNow.

Mester conceded existing payments systems could play a role as alternatives to the Fed network when needed. “In thinking about the evolution of the [established] payment rails, it may seem more efficient to have fewer rails for smaller-transaction payments, but those efficiencies need to be balanced with ensuring that the payment system has sufficient redundancy to remain resilient,” she said.

One popular consumer application for FedNow could be peer-to-peer payments, Mester said. This is a service that has already attracted major payments players like PayPal, Venmo, and Early Warnings Services LLC’s Zelle network. “Financial institutions would like to be able to use FedNow to offer person-to-person … payment services whereby customers can originate a payment using an alias such as an email address or phone number,” she noted.

FedNow at the start will not have the directory function needed for a P2P service, but there are alternative approaches, Mester said. “Instead, a bank could use a private-sector directory to access routing information in order to transmit alias-based payments on FedNow,” she noted. “The Fed is looking at various approaches to provide alias-based payments as a way to enhance the FedNow Service in the future.”

In the end, FedNow will have a number of criteria it will have to live up to, Mester said. These include all-the-time availability, routing and settlement efficiency, and resilience against cyberattacks. Soon, we’ll see how well FedNow meets that tall order.

—John Stewart, Editor,  john@digitaltransactions.net