The fast approaching FedNow instant payments system serves two goals.

For one, it gives the Federal Reserve some of the powers of a CBDC system, without the name “CBDC,” or the legislative process needed to officially issue and control CBDCs.

Second, it will greatly expand digital payments by consumers, businesses, and of course, between and among banks.

Every FedNow transaction will happen via FedNow accounts directly controlled and overseen by the Federal Reserve.

That’s game, set and match as far as that entity having insight into every transaction occurring via the FedNow system.

With no intermediaries or middle players to have to glean or gather information from, period, it may effectively provide snooping CBDC “functionality.”

Real-Time Payments Aren’t New, But The Elephant In The Room Is

Mastercard, Visa, and the Clearing House bank group (via its RTP service), have all offered real-time payment services for years.

The Federal Reserve is now in the real time payments business, complete with accounts that banks will maintain on behalf of themselves, and clients including businesses and consumers.

FedNow essentially keeps banks as gate-keeping middleplayers, while introducing desired aspects of CBDC control and data gathering ability.

Concerning whether competition between FedNow and other offerings might lower transaction fees, an interesting analysis at RedCompass Labs payments consulting firm says it might. (“FedNow vs RTP: Can two real-time payments systems coexist in the US market?” 23 Mar 2023.)

But that analysis says the Federal Reserve, via its relatively privileged position, might also introduce abuses to favor its system. 

RedCompass Labs pointed to the history of competing real-time payment systems in Europe operated by the ECB, and by a group of commercial banks, as a case from which lessons could be drawn.

The ECB has used its privileged position to impose unfair penalties on systems competing with it.

Concerning whether FedNow will pose any existential threat to competitors like VISA or Mastercard, a 16 March Morningstar article said:

“Bernstein analyst Harshita Rawat noted earlier this year that she was “watching” the risk presented to Visa and Mastercard by the impending launch of FedNow, though she viewed the threat as being on more of a ‘decade+ time horizon’ than anything more immediate.” 

(“Fed says its instant-payments service FedNow will launch in July” 16 Mar 2023)

The same article quoted VISA CFO Vasant Prabhu’s comments regarding FedNow at a recent Morgan Stanley investor conference:

“Nobody really is a competitor. Anything that makes payments more ubiquitous, anything that causes consumers to adopt digital forms of payment, anything that makes merchants accept digital forms of payment is a good thing because it expands the market.”

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