The Federal Reserve is planning to use blockchain technology to develop a real-time payments and settlement service. The new initiative is called FedNow. It will support payment transfers for up to $25,000 and is scheduled for launch by 2024.
“FedNow will permit banks of every size in every community across the country to provide real-time payments to their customers,” said Federal Reserve Board Governor Lael Brainard. FedNow is an alternative to the real-time interbank system that was announced by some of the largest banks in the US in 2017.
The current landscape for real-time payment clearing system in the US is fragmented. Large banks are already members of the Clearing House, a consortium of some of the biggest banks in the US such as Bank of America. Then there are apps like Venmo, which accomplish real-time payment transfers between individuals. The apps mostly service big banks, however, on their backend and require memberships on their platform. The Fed’s current initiative is aimed at bringing small banks into the real-time payments fold.
The federal agency clarified that it had no intention to stifle private real-time systems. But its aim was to continue working with the private sector and introduce healthy competition. The Kansas City Fed President said it would examine whether the Fed’s system and private initiatives in real-time payments clearing could be made interoperable.
A Welcome Reception
Business and banker associations have welcomed FedNow. The Retail Industry Leaders Association pointed to the drawbacks of the current system, which forces businesses to rely on credit due to payment delays. They are also forced to pass on charges for transfers to customers, thereby inflating the overall product cost. The American Bankers Association also released a statement supporting the announcement.
“We believe every bank in the country and their customers will benefit from a seamless and ubiquitous system,” American Bankers Association CEO Rob Nichols stated. “We hope today’s decision by the Federal Reserve to create its own real-time payments network will speed that transition.”
The Fed has been studying real-time payments for a while. In 2015, it established a task force to examine the issue more closely. It began to solicit for public comments on October 2018 for the creation of its own real-time payments network. According to the Fed Governor, about 90% of the feedback it received had been supportive of the creation of the FedNow network.