Mester says Fed working with private sector to develop faster payment system

FILE PHOTO - Cleveland Federal Reserve Bank President Loretta Mester speaks in London, Britain, July 2, 2019. REUTERS/Marc Jones

SARASOTA, Fla. (Reuters) - The Federal Reserve is exploring collaborations with the private sector and other groups as it works to develop a faster payments system, Cleveland Fed President Loretta Mester said Friday.

The landscape for digital currency is fast changing, creating new risks and challenges for the U.S. central bank, which is trying to speed up payments while also guarding the financial system against cyber attacks and other threats, Mester said at a financial literacy conference in Sarasota, Florida. The speech did not touch on interest rates or the current economic outlook.

“The emergence and widespread adoption of new technologies have shaped the public’s expectations for faster, more efficient, secure, and broadly accessible payment services,” Mester said.

The policymaker said there is still not a set timeline for the launch of the faster payments service it is developing, known as FedNow, and that it could be ready in 2023 or 2024. She said it will be important for the service to work across multiple systems for commercial banks, and that different models are being tested.

“The project is complex, and we want to get it right,” she said.

Community activists and Congressional Democrats have criticized the Fed for its slow progress in developing a faster payments system, arguing that the current system is costly for Americans living paycheck-to-paycheck who need to wait for more than a day for some transfers to settle.

FedNow will allow consumers to make payments securely and at any time, giving people “access to funds within seconds,” Mester said. That quicker access may help people avoid late fees and other costs, she said.

Mester also mentioned that the Fed is studying the potential costs and benefits of a digital currency issued by a central bank. But there are still questions about how privacy would be protected and whether the Fed has the legal authority to issue a digital currency, Mester said.

Fed Chair Jerome Powell also expressed some skepticism about the need for a digital currency issued by the U.S. central bank during Congressional testimony this week. Powell said there is no urgency to establish such a currency because use of cash in the U.S. economy is still growing, unlike some other countries where cash is declining.

Reporting by Jonnelle Marte; Editing by Chizu Nomiyama