Fed’s Waller says FedNow adoption ‘will grow over time’

WASHINGTON — Federal Reserve Gov. Christopher Waller said Friday that the Fed’s real-time payment settlement service FedNow has already grown from  a few dozen banks and credit unions as customers to “well over 100” today, and said internal estimates suggest that number could rise up to 350 by year’s end.

Speaking at a payments conference at the Brookings Institution Friday afternoon, Waller pushed back against the suggestion that banks’ uptake of the long-awaited Fed payments settlement service has been lower than expected or a sign of insufficient demand on the part of depository institutions or their customers. 

“We never expected that we would launch it and there would be 4,000 banks joining it. That was never the expectation or a reality,” Waller said. “We have a pipeline of banks that want to join. This will grow over time.”

Waller added that from the launch of FedNow in July, when the service had 51 depository institutions signed up, the number is “well over 100” today, and that the service is steadily expanding its reach.   

“There are various estimates that we’ll have 250 to 350 by the end of year, and just continue to grow as banks do it,” Waller said. “But banks have to see some value proposition to make the investment to join, and that depends on what the customers want.” 

The road to the launch of the FedNow payments service has been circuitous. The central bank began mulling whether to develop its own payment settlement service more than a decade ago and ultimately decided to develop the system in 2019.

FedNow competes with another private instant settlement service: Real Time Payments, or RTP, which is operated by The Clearing House, which is itself owned by the largest banks in the country. While RTP has been available to banks and other institutions since 2017, some smaller banks have been skeptical of using a platform owned by their larger competitors. The rollout of FedNow is seen by many as a necessary step to making instant payment settlement ubiquitous throughout the U.S. banking system.

Waller also reiterated his position that a central bank digital currency would offer little utility for the Fed, banks or consumers, saying that the existing system of intermediation by banks has been equally effective. Even though some other countries have moved forward with developing a CBDC, he said, there remains no clear use case that could justify having the Fed develop one for the United States.

“The basic question I asked is what a typical economist would ask, which is: ‘What is the major market failure in the payment system that requires a CBDC — and only a CBDC — to solve?'” Waller said. “I posed that question two years ago and I have not heard one satisfactory answer to that question yet. It makes me think that a CBDC is something you could do but there’s nothing that makes you need it.”

Waller accounted for the flurry of activity and discussion around developing a CBDC as investigative in nature, rather than reflective of a policy preference for the central bank to embark on a digital currency.

“We always have to be prepared for the fact that if Congress were to in fact tell us: ‘Do this,’ that we would have the technology and know-how to do it,” Waller said. “That’s most of what we do, is just explore how we would do this, how would we manage it, how would we do the record keeping — so it’s just trying to understand the technology so that if one day Congress said ‘You need to do it’, we could do it.”