The Fed's public option for faster payments does more harm than good
The Federal Reserve recently announced that the central bank would develop and operate a government-run Real-Time Payments (RTP) network called FedNow.
While the Fed has rightly recognized the benefits of instantaneous payments and deposits, their approach to achieving such an outcome is fundamentally flawed. To ensure the U.S. becomes a leader in real time payments, the government should foster, not stifle, free market innovation.
There's universal agreement among policymakers, economists and stakeholders that real-time payments would bring significant benefits to consumers and businesses. Having immediate access to a deposit would mean a family or small business could pay their expenses right away without having to wait for their payment to clear. For millions of people living paycheck to paycheck, this technology is a saving grace. And because of costly investments by the private sector into a complex system, RTP access has become a reality for Americans across the income scale.
Today, the market is providing a diverse and rapidly-evolving set of RTP services for both consumers and banks. The Clearing House’s (TCH) system currently serves roughly 50% of all checking account volume in the U.S., a figure expected to reach two-thirds by the end of 2019, and near ubiquity by 2020. Also, by the end of 2019, approximately 90% of financial institutions will be able to connect to TCH’s RTP services. From PayPal’s latest real-time payments offering, to Mastercard Send, Visa Direct, and Zelle, there are no shortages of existing faster payment options in the market.
Innovation led by private market actors is working well, and delivering the most efficient outcomes for consumers and small businesses alike.
Despite these positive developments, the Fed still wants to launch its competing system. NTU, along with dozens of other free-market organizations, vehemently oppose the central bank’s foray into the RTP system, and will reiterate those views once the public comment period over FedNow begins. In fact, just recently, numerous Ph.D economists signed an NTU-led letter urging Chairman Powell to reconsider his course of action. In laying out their justification of their position, the economists note:
“As economists who have expertise in the effects of government regulation of, and intervention in, the private marketplace, we have strong concerns about the Fed competing with the private sector while concurrently regulating it. Generally, central banks and governments should not interfere in the payments market by operating their own services. Over the long term, government competition with the private sector will distort the market, stifle innovation, and ultimately harm services to banks and consumers."
To ease fears among those in the banking industry, the Fed has promised that their system would function interoperably, but thus far, the Fed has not given any guidance on how they would achieve such a goal. In the likely scenario that the Fed does not have a system that is interoperable, financial institutions would need to manage multiple systems, which would be expensive and inefficient."
These economists are on the mark regarding the Fed’s unusual action as both a regulator and competitor in the RTP space. It’s highly irregular for a central bank to provide competing payment services with the private sector.
The Fed estimates it will take about four years to establish its duplicative RTP system, but based on government’s record with on-time delivery, it’s likely be behind schedule and go over its budget. Even if the system does come online it will likely have little additional marginal effect on payment systems that true private-sector entities would otherwise achieve on their own during that time. Furthermore, these misprioritized expenditures would ultimately be a loss to taxpayers—an especially important consideration as the Fed returns to more normalized monetary policy and, in turn, smaller overall payments to the Treasury.
To that end, it’s likely a competing government-run scheme will have a chilling effect on innovation in the entire system. Added uncertainty to the RTP system will slow investment and hamper other private market competitors from entering the market—both of which will harm the ability for more financial institutions from linking onto the RTP network.
Were the Fed to develop its own payments platform, it would be expensive, duplicative, inefficient and curtail development of real-time services. Without clearly demonstrating the market failure stemming from the private sector network, moving forward with their own system is unwarranted and damaging to the entire RTP system. Sensible policymakers and economists agree: "FedNow" should be "FedNever."