The Federal Reserve is following a “public utility model” in creating the new, faster payments system FedNow, Federal Reserve Gov. Christopher Waller said at a conference this week.
The instant payment system is aimed at clearing and settling payments in seconds, as opposed to days. It will operate around the clock and on weekends, too. It will compete with a similar private real-time payment system, RTP Network, that launched in 2017.
FedNow will differentiate itself from the bank-owned RTP system, which is operated by The Clearing House, by reaching more broadly across the country to small towns and banks, Waller said. It’s expected to launch next year by July, according to the central bank.
“I view what we’re doing in this space as more of a public utility model,” Waller said Tuesday at the Money20/20 conference in Las Vegas, comparing it to the U.S. providing electricity or internet service to rural areas. “It’s going to reach parts of the financial system that the large RTP Network system isn’t going to reach, but provide the same level of service for customers.”
Waller was nominated to the Fed by former President Donald Trump in 2020 and won Senate confirmation on what was essentially a party-line vote that December, just before President Joe Biden arrived in the White House. Waller was formerly a St. Louis Fed research official and, before that, he was chair of the economics department at the University of Notre Dame.
In another analogy, Waller compared the coming FedNow system to an interstate highway that he expects will provide the infrastructure on which private industry will add services that are “on-ramps” and “off-ramps.” Businesses will be able to use FedNow only through banks that invest in new technology to connect to it.
Fintechs have been pushing the Fed to let them have access to master accounts, too, so they could have direct access to FedNow services, but Waller said they’ll have to take that up with Congress. He advised fintechs, in the meantime, to work with a bank.
“If you’re unhappy with that, go talk to Congress or run for Congress,” Waller said in the conversation with Ginny Chappell, an executive vice president at Moov Financial, on stage at the conference. “Until legislation changes, fintechs and other payments [firms] are going to have to work with a bank to get access to the Fed. That’s just the way it has to work, until Congress says otherwise. It’s out of my hands.”
One FedNow use case Waller extolled was in making it possible to pay wages instantly, eliminating the need for workers to wait for a certain day when their paycheck clears.
“If you get your paycheck in your account on Friday, you don’t have to wait to get [access to the funds] tomorrow morning when you buy groceries,” he said. “These are simple things, but they’re important things to the typical American household.”
He noted that even the popular peer-to-peer Zelle payment system backed by a handful of big banks isn’t truly an instant payment system because it doesn’t provide settlement of the payments in real time.
Waller reiterated his position that he’s a “skeptic” when it comes to creating a central bank digital currency (CBDC), another payments move being contemplated by the Fed. That’s mainly because he doesn’t see it providing any services that aren’t already handled by the private sector.
“I’m not a big fan of this, to be honest,” Waller said. “What do we need this for? What is it that requires the Fed to now enter into the retail banking space?”
He also doesn’t see consumer adoption of China’s CBDC as any threat to the supremacy of the U.S. dollar as the world’s reserve currency.
On the topic of digital assets, Waller said he does see a place for stablecoins, digital currencies that are pegged to the U.S. dollar. He called them an “old idea,” but said some of the modern-day stablecoins are better than others, distinguishing those fully backed by dollars from those backed by assets. He said the latter can be subject to “runs” by investors. In those cases, heavy demand to liquidate a currency can create volatility. That has previously been an issue in decentralized finance, also known as DeFi.
“The problem is, and we saw this this summer in the DeFi world, there can be runs on those stablecoins,” he said.
But overall, he supports the new digital instrument.
“It’s already here — it’s not going away,” he said. “I’m fine with it, but it has to be done in a way that meets the regulatory framework and it’s safe for consumers.”
He also said there’s room for improvement when it comes to cross-border payments, but noted the need for policing against tax evasion, money laundering and terrorist financing.
“Cross-border payments take a lot of time, they’re costly,” he said, blaming regulators for delays to guard against the illicit activity. “Making cross-border payments faster, efficient and cheaper, there’s a lot of opportunity there.”