FedNow instant payments. Digital Currency. You may have heard these terms making headlines lately, but what does it mean and are they related?
Tim Mills, Regions’ Emerging and Digital Payments Group manager, was recently joined by Dan Grattan and Jeff Swartz from the bank’s Governmental Affairs team to break down these terms and what they mean for consumers and businesses.
FedNow
FedNow is the new instant payment, a bank-to-bank network being set up by the Federal Reserve. It will operate similarly to ACH, or Automated Clearing House, payments, but instead of it taking days to process payments, it will allow payments to be both sent and received in a matter of seconds.
Swartz points out this instant payment type is not new and already exists in the market through Real-Time Payments, or RTP, operated by the Clearing House. So why did the Federal Reserve set up its own network? According to Swartz, the Federal Reserve’s own faster payments taskforce (which includes industry and consumer advocates, as well as public stakeholders) published a report several years ago that recommended the Federal Reserve develop a settlement service available 24/7/365 to support instant payments.
Additionally, by establishing this second instant payment network to operate alongside RTP, the Federal Reserve hopes to promote competition, drive innovation and lower costs.
See FAQ’s on FedNow.
CBDC
Central Bank Digital Currency, or CBDC is another hot topic in the payments space. Essentially, Mills explained, CBDC is a digital version of a nation’s currency. There are about 60 or so countries across the globe that have either already implemented a Central Bank Digital Currency or are exploring the possibility of CBDC which here in the U.S. would be the equivalent of a digital dollar.
The U.S. is still in the early stages of exploring that possibility. Grattan clarifies that The White House’s Office of Science and Technology policy team issued a report providing a technical evaluation of a U. S. digital currency which pointed to some of the potential benefits – like low-cost payments, potentially greater access to the banking system and keeping the U.S. the central player in the world financial system. However, it also recognized potential major pitfalls, such as data security.
Learn more about CBDC from the Federal Reserve.
Currently, the U.S. has not moved forward with a decision of whether or not to issue a digital currency and it would require an act of congress as it would be a new form of currency.
It’s important to note that there is no direct relationship between the FedNow instant payments system and the separate consideration of a potential Central Bank Digital Currency.
In fact, the Federal Reserve has addressed this concern in a recent FAQ.