FedNow, the instant payments service launched by the Federal Reserve in July, aims to help individuals and businesses with cash flow and expense reconciliation. But there is concern that a reliance on only the private sector could get in the way of wider adoption.

“My vision for payments in the medium term is that nothing changes,” said Aaron Klein, a senior fellow at the Brookings Institution, speaking at the Philadelphia Federal Reserve fintech conference last week.  “Look at the tepid signup for FedNow. Look at the volume on the real-time payments network … I can't walk into my bank and say ‘Use FedNow or use RTP,’” noting that the options consumers and businesses have for instant payments often come with hefty fees.

The problem, Klein said, is that the push for instant payments is dependent entirely on the private sector, a claim confirmed by Michael Barr, the Federal Reserve’s vice chair for supervision, who also spoke at the conference. 

Barr characterized FedNow as a type of core payments infrastructure that is complementary to existing private-sector instant payment offerings. He noted, in his remarks, that private-sector actions will ensure the wider availability of FedNow. 

“Innovation by private depository institutions will determine whether these services reach a broad range of households and businesses,” Barr said. “While current volumes on FedNow are small, I expect that participation will grow over time and be a significant addition to, and advance on, the existing payments infrastructure.” Small businesses and low- to moderate-income households would benefit from the service, he added.

Klein, building on earlier commentary in which he questioned regulators’ commitment to wider availability of faster payments, suggested the push should come from regulators who could require financial institutions to offer faster payments.

“If you saw a regulatory action that required faster funds availability, you would then see the type of changes that have occurred all around the rest of the world where there's huge demand” for faster payments, he said, suggesting the U.S. is behind other countries in which quick electronic payments are more widely adopted. These markets include India, Brazil and Thailand.

With the advent of real-time system enabled via FedNow, businesses will be able to transact near-immediate payments that flow 24 hours a day, seven days a week, building on the private sector-led real-time payments network (RTP), which rolled out in 2017. FedNow could transform companies’ cash flow, with faster paychecks and easier expense reconciliation, some observers have said.

For individuals and businesses paying bills close to their due dates, slower payment systems amplify the risk of going into overdraft, which Consumer Financial Protection Bureau Director Rohit Chopra, speaking at the conference, called a “timing mismatch.” FedNow, he said, offers a check on private-sector dominance of payment infrastructure. 

Without regulatory action, however, Klein said the adoption of real-time payments infrastructure might continue to lag in the coming years. 

“What I'm afraid of is the lack of regulatory action,” he said. “The payment bottleneck is a real problem, and the question is how are we developing real solutions that will address these problems?”