US Fed to launch FedNow instant payment service amid fears it could end CBDC interest

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The United States Federal Reserve will launch its instant payment service, FedNow, in July amid concerns that it could prematurely end the country’s interest in a digital dollar.

@federalreserve @frbservices announce July launch for the FedNow Service: https://t.co/a7kPqxkS7Q

— Federal Reserve (@federalreserve) March 15, 2023

FedNow has been in the works since 2019 and is touted to be the fastest way to make payments by financial institutions in the U.S. around the clock, every day of the year. Banks, payment services, and individual users will receive and have instant access to payments made through the service.

“We couldn’t be more excited about the forthcoming FedNow launch, which will enable every participating financial institution, the smallest to the largest and from all corners of the country, to offer a modern instant payment solution,” commented Ken Montgomery, the first Vice President of the Federal Reserve Bank of Boston.

Montgomery, the FedNow program executive, called on all American financial institutions to “move full steam ahead with preparations to join the FedNow Service.”

The Fed will begin certifications of early adopters in a few weeks through a customer testing and certification program. According to the central bank, the service has already received the interest of several financial institutions, some of the largest payment processors, and the U.S. Treasury.

FedNow will address a challenge that has plagued the financial industry worldwide for several decades: facilitating instant payments. Various players have come up with their own solutions, such as VISA (NASDAQ: V) and Mastercard (NASDAQ: MA), which have Direct and Send, respectively, to enable real-time payments.

In the U.S., The Clearing House, a collective of banks and payment processors, runs real-time payments, which strives to deliver instant payments.

One of the emerging solutions to this challenge has been central bank digital currencies (CBDCs), whose biggest value proposition has been real-time payments. In the U.S., Fed chair Jerome Powell has dismissed the need for a digital dollar, and FedNow is his response to the call for a CBDC.

The jury is still out on whether FedNow will be a forerunner for the digital dollar or impede the CBDC’s progress in the world’s largest economy. For now, what’s clear is that it will change the payments landscape in the U.S.

“We reiterate our view that FedNow will represent a material change in how consumers use electronic money. It provides for instant settlement, which eliminates clearing risk. And it will be less expensive than debit interchange,” said Jaret Seiberg, an analyst at T.D. Ameritrade’s investment division Cowen Inc, in a Wednesday note to clients.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

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