Criticism of FedNow's adoption rate disputed by Waller, a Federal Reserve official

The Federal Reserve's real-time payment settlement service, FedNow, has experienced steady growth since its launch in July, with the number of banks and credit unions joining the network increasing from an initial group of 50 to over 100. Approximately 1,400 financial institutions, mainly small to mid-sized banks and credit unions, are considering or have joined FedNow by mid-2025, reflecting its appeal to community banks and credit unions aiming for real-time payment capabilities.

However, not everyone is convinced of the need for this expansion. Jerome Powell's successor, Lael Brainard's pick for Vice Chair, Waller, has expressed reservations about the Fed's involvement in consumer-facing services, such as central bank digital currencies (CBDCs). Waller questions the Fed's rationale for becoming retail-account providers and argues that a direct retail CBDC account would necessitate master accounts beyond banks, requiring legal changes.

Waller has not heard a satisfactory answer to the question of what major market failure in the payment system requires a CBDC and only a CBDC to solve. He believes that the Fed's role has traditionally been in the background, ensuring everything gets clear, and that a potential U.S. CBDC would operate through bank accounts, not direct accounts with the Fed.

Aaron Klein, a senior fellow at the Brookings Institution, characterized the FedNow signup rate as "tepid" in a previous conference. Despite this, Waller maintains that the uptake of FedNow remains robust.

The Fed has focused on efficient backend payment functionalities for over a century while banks engage customers. In this context, CBDCs would allow users to have a CBDC account via their commercial bank app, along with standard accounts. Banks would hold CBDC stock and request transfers between banks to facilitate payments.

The Federal Reserve is keen on researching the technology, record-keeping, and management of how CBDCs work, so they are ready if legally required. Waller argues that the Fed wants to explore CBDCs in preparation for a potential congressional mandate, but is not convinced of the necessity of CBDCs.

As the debate surrounding CBDCs and FedNow continues, it is clear that both have the potential to revolutionise the payments landscape. However, it remains to be seen whether the Fed will take on a more consumer-facing role and how this will impact the traditional banking system.