FRB Governor Lael Brainard Highlights Benefits And Risks In The Evolving Digital Payment Market

Federal Reserve Board ("FRB") Governor Lael Brainard highlighted market benefits and risks as technology firms lead the digital transformation of payments.

Governor Brainard said customers can expect to see an increase in competition, improved product offerings and lower transaction costs. She also noted that the transformation expands financial inclusion and makes financial services more accessible and consumer-friendly. However, she cautioned that the integration of payments with consumer services creates risks. These involve (i) data security risks on payment methods, (ii) the potential for improper use of consumers' financial data, and (iii) unauthorized disclosure to third parties.

"Real-Time" Retail Payments

Governor Brainard affirmed the FRB's commitment to "closing the gap" between transaction capabilities in the digital economy and the underlying payment and settlement capabilities. She stated that it is crucial to invest in a real-time retail payments infrastructure that ensures the same speed, efficiency and security as traditional deposit account providers. In particular, she touched on the FedNow Service, which was announced by the FRB in 2019 to upgrade the U.S. payment system and provide payment-by-payment interbank settlements in real time (see previous coverage). Governor Brainard explained that with FedNow, consumers and businesses will be able to settle retail transactions in real time and have greater flexibility in managing their money.

Digital Transformation of Payments

Governor Brainard explained that the payment evolution extends to mediums of exchange for central bank money, commercial bank money and certain types of nonbank private money. Governor Brainard attributed the widespread use of commercial bank money (i.e., money held in deposits at commercial banks) to its heavy regulation and supervision by federal banking regulators. She...