FedNow's rollout might get complicated by misinformation

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A curious thing happened late last week: FedNow was trending on Twitter, and for all the wrong reasons. 

I don't want to be too specific in outlining the accusations and aspersions about FedNow that were floating around out there. Part of that is because wrong information doesn't need to be amplified, and part of it is because dunking on Twitter eggs is no fun. But suffice it to say that there was a great deal of confusion and conflation between the imminent debut of the Fed's faster payments network and its mulling the creation of a central bank digital currency.

As dedicated readers of American Banker will know, the Federal Reserve announced several years ago that it would be launching a faster payments settlement network called FedNow, and that network is slated to go live this July, according to the Fed. 

That decision to develop a Fed-run payments network — which will compete head-to-head with Real Time Payments, a network debuted by The Clearing House in 2017 — was not without controversy. But ultimately many in the banking industry — particularly smaller banks — did not want to live in a world where the prevailing payments network was controlled, even if indirectly, by the largest banks, even if that meant that the alternative was controlled by the Fed.

But that debate is over, and the proponents of FedNow won — it is happening, and it is happening soon. The world we are about to live in is one with many payment settlement options: the standard automated clearing house networks run by TCH and the Fed; TCH's RTP network; and FedNow. All of these networks do the same thing: take funds from one account and put them in another. Where the action is right now is in banks deciding when and whether to join one or both faster payments networks.

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Compare that state of play to the one surrounding central bank digital currency, or CBDC. Whereas FedNow is happening — and soon — a CBDC is in a pre-conceptual stage of development. The most succinct, if not best, way to describe a CBDC is that it would be like a Fed-issued bitcoin that uses blockchain technology to facilitate payments that could be settled quickly and whose transactions could be tracked efficiently. Such a system would have advantages for the speed of payments and the ability of regulators to root out money laundering and sanctions evasion, but it also would raise the problem of bank disintermediation and the potential for transaction surveillance. 

So there are very real reasons to be both excited for and wary of a CBDC coming to fruition in the United States, and there are real reasons to have reservations about the wisdom of having the Fed develop its own payments network. But those are very separate and distinct things, and one is not a stepping stone towards the other.

The problem with having the misinformation Eye of Sauron cast its gaze upon FedNow is that, as I said a moment ago, banks are in the process of deciding whether and when to join that network. There is no real way to know with certainty whether the musings of Twitter personalities are a viable proxy for attitudes of ordinary bank customers. But if that misinformed conflation between FedNow and a CBDC takes root in the minds of bank customers, it could turn a routine business decision about whether to join FedNow into a political decision with no right answer. 

Again, my intention here is neither to amplify misinformation nor shame well-meaning consumers who may be confusing one thing with another. It is to raise the possibility that the long road to a faster payments reality — one that could have considerable benefits for millions of people — may end up being even longer because ordinary people decide they don't want it and you can't make them want it. And if enough banks don't join FedNow, that would limit how beneficial the network will be to the very people it was designed to help.

We experienced this very phenomenon recently with the development of COVID-19 vaccines. Scientists all over the world worked together to develop effective vaccines in record time for an illness that claimed millions of lives. But at the very moment when the benefits of that effort could be reaped, misinformation slowed implementation to a crawl. I don't know if that's going to happen with FedNow, and I hope it doesn't. But banks and regulators would be well-advised not to underestimate the power of misinformation.