US preps FedNow for instant payments, but sparks skepticism

The Federal Reserve is getting ready to launch FedNow, a real-time payments system that promises to transform financial transactions in the US.

Slated for a phased rollout beginning in late July, FedNow has been hailed as a breakthrough for the federal government and a potential game changer for the financial industry.

But it’s also catching criticism. Some are skeptical about the government running a payments system while others are worried that real-time payments could open the door to fraud.

What is FedNow?

The FedNow Service is a digital payments system developed by the Federal Reserve to help financial institutions transfer money for their customers in real time, 24×7 any day of the year.

The Federal Reserve describes it as an instant-payments system, in which an end user receives funds in near real time, at any time, with immediate interbank settlement of the payment.

Compared to other payment systems like automated clearinghouse services (ACH), it’s designed to provide customers with access to funds in seconds instead of having to wait a few business days. Wire transfers, which carry fees, also aren’t as fast.

FedNow will initially launch with core clearing and settlement capabilities with future releases adding more functionality. The goal is to allow banks and credit unions to innovate with services for account-to-account transfers and bill pay.

Banks and credit unions can opt to adopt the full set of FedNow capabilities or sign on as a receive-only participant.

In June, the Fed announced that 57  “early adopters” have been certified, including 41 financial institutions ready to send and receive FedNow transactions. The list includes JPMorgan Chase, U.S. Bank, and Wells Fargo.

“With the FedNow Service, the Federal Reserve is creating a leading-edge payments system that is resilient, adaptive and accessible,” Tom Barkin, president of the Federal Reserve Bank of Richmond and FedNow’s executive sponsor, said in announcing the launch plan.

FedNow: Opportunities & benefits

As envisioned by government officials and industry experts, FedNow could help consumers and businesses in a variety of ways. Some examples:

• Homeowner making a mortgage payment
• Tax refunds and social security benefits payment from the US Department of Treasury
• Consumers making emergency or last-minute payments, avoids late fees
• Small merchants increasing cash on hand
• Contractors making payments to suppliers in advance of shipment
• A utility company can send customers a request for payment and receive funds immediately once the customer authorizes  payment.

“Widely available instant payments would be the foundation for the next generation of payment services, catalyzing innovations that generate new economic activity,” the Fed said in an FAQ about the new service.

Some financial experts say FedNow will be particularly beneficial to smaller banks and credit unions by helping them compete in the fast-growing payments ecosystem.

Financial institutions that may have been hesitant to use a real-time payment system are more apt to trust FedNow since it’s backed by the Federal Reserve bank system, a Gartner analyst told Computerworld.

Fed officials say the new payments system would run alongside private money transfer services like Zelle, Venmo, and PayPay. Zelle operates within the Clearing House’s RTP network, a private service used by financial institutions.

US payment system prompts concerns & questions

While the Fed talks up the benefits of FedNow, the arrival of a real-time payment network backed by the US central bank system has generated controversy.

Norbert Michel, VP and a director at the Cato Institute, criticized the Fed’s move as unfair competition and a potential quagmire.

“In general, the government should not provide a good or service unless there is some sort of market failure. And there is clearly no market failure in the payments industry,” he wrote in a Forbes article.

A top concern is that FedNow could eventually replace cash and/or give the government too much control. The Fed has said its payments program isn’t related to digital currency and won’t eliminate any form of payment, including cash.

But if you spend anytime on social media like TikTok, you’re probably seen videos warning consumers about the program.

https://www.tiktok.com/@voilame_4/video/7223037590218280235

And there are many who worry that fraud could skyrocket with FedNow. For example, while the program could speed home buying, title professionals fear it could exacerbate a problem in an industry already plagued by growing wire fraud.

For its part, the Fed says it’s well-positioned to develop industry standards for disputing fraudulent money transfers, and believes FedNow can boost resiliency of the US payment system.

But it also acknowledges that faster payments increase the challenge of battling fraud and plans to offer fraud management capabilities and cybersecurity features such as multi-factor authentication. It also advises financial institutions to step up safeguards.