The Federal Reserve announced earlier this week that it expects its FedNow service, a new online system that will enable instant digital money transactions between people and businesses, to come online sometime between May and July 2023. The release could mark an important moment within the financial sector – it could hypothetically drastically undercut the need for third-party digital payment systems and usual transaction fees. It could potentially either pave the way for a central bank digital currency (CBDC) or circumvent the need for one entirely.
“The benefits of instant payments are becoming increasingly important to consumers and businesses, and the ability to offer this service will be critical for financial institutions to remain competitive,” said Ken Montgomery, first vice president of the Federal Reserve Bank of Boston and head of FedNow service program. in this week’s statement.
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There are already numerous digital transaction systems available to consumers from banks and third-party companies, but none of us have direct access to central bank money like these intermediaries. Using a system like FedNow creates this direct access and makes these transactions almost instantaneous. In addition, the existing fees for many current services could be eliminated. This would not necessarily negate the need for private banking institutions, but rather provide an alternative for people who are put off by minimum balance requirements and annual fees.
Proponents also cite its potential to reduce many people’s long-standing reliance on predatory payday loans and allow government to make direct payments to citizens in times of economic or environmental crises. For example, last year the Fed could have sent instant COVID-19 stimulus payments to millions of Americans instead of sending physical checks or delaying the process by going through private banks. The same types of instant payments could also prove vital after environmental disasters like hurricanes and tornadoes.
[Related: Paying with your phone is safe and convenient. Here’s how to start.]
Of course, not everyone will be on board with a centralized digital payment system. Opponents have cited concerns ranging from privacy concerns to political and economic ideologies to actual access issues. Eventually, something like FedNow will require smart devices that millions of Americans don’t yet own. If all goes according to plan, consumers could see a very different financial landscape by this time next year.