With the Federal Reserve’s rollout of the FedNow real-time payments service expected by the end of the month, a regional Federal Reserve Bank official on Wednesday outlined a roadmap for the new network that includes network interoperability, the possible addition of peer-to-peer payments, and, overall, the prospect of fewer payment systems overall.
FedNow, which has been under development since the nation’s top banking regulator announced its intention in 2019 to build an instant-payments system, could siphon volume from long-established payments networks, said 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.
“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.
While predicting that volume, particularly “time-sensitive” payments, will shift 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.
Mester’s remarks came during a presentation 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.
One popular consumer application for FedNow could be peer-to-peer payments, Mester said. This is a service that has already drawn 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.
While she added that FedNow at the start will not have a directory function needed to undergird a P2P service, there are alternative approaches, she said. “Instead, a bank could use a private-sector directory to access routing information in order to transmit alias-based payments on FedNow,” Mester 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, particularly in serving consumer-payments needs, Mester said. “The public needs to be confident that the system will be … available whenever the customer needs it … efficient at routing and settling payments … resilient against cyberattacks and fraudulent actors … and reliable without the public having to know the intricacies of the infrastructure behind it.”