COMMENTARY: Here’s Why the Fed Should Stay Out of Real-Time Payments (Part I)

The Fed has amassed enormous—in practice, unaccountable—power, and taken roles natural to government and to the private sector. It’s the central bank, paramount financial-system regulator, and a payments operator. It shouldn’t, however, undertake activities better and naturally performed in the private sphere. 

The latest example: On its own prerogative, the Fed announced Aug. 5 it was introducing “FedNow,” a real-time interbank payments system, expanding its role in processing that the private sector is well-equipped to handle.  Critically, Congress didn’t instruct it to do so. Moreover, the Fed’s entry will deter private-sector competition.  

With its Faster Payments Task Force, which met from 2015 to 2017 and comprised 400-plus largely private-sector members, the Fed believed it saw a U.S. banking industry behind other countries in faster payments. So it socialized the idea the central bank can and should ride to the rescue. Its 92-page justification for FedNow touted the FPTF’s request that the Fed provide faster payments. But the FPTF didn’t have the authority to instruct the Fed to act. The Fed is a creature of Congress, not a free agent. If Congress wanted it to take an increased payments operating role, it could so legislate. 

The Fed developed its own, facially reasonable criteria for developing a new payments service, holding that the service must recover costs, “yield a clear public benefit,” and be one that “other providers alone cannot be expected to provide with reasonable effectiveness, scope, and equity.” By the Fed’s own criteria, FedNow doesn’t pass muster. Even if it did, that would only be sufficient for determining what the central bank wants to do, not what it should or is permitted to do.

Viewing it as more efficient, many countries have only a single interbank payment-processing utility. The United States, however, has long recognized and preferred, in most spheres, the ingenuity and self-correcting power of competitive free markets over centrally engineered and managed utilities. The Fed, rightly on this score, notes that having a single provider and concomitant lack of competition would be undesirable.  

The market is primed to be competitive. Large banks’ cooperative, the Clearing House, launched a real-time payments system in 2017. In addition to TCH, Visa, Mastercard, and processors Fidelity National Information Services (FIS) and Fiserv, leveraging their card-delivery systems, provide real-time payments, and have ample wherewithal to do more. Mastercard is the United Kingdom’s sole real-time payments processor. TCH uses that technology. 

While misguided, the Fed’s initiative could garner support on Capitol Hill from those who understand robust competition ensures maximum value and innovation, and worry TCH might monopolize the market. It could also draw backing from those on the Left who are keen for government to take an ever greater role in the economy. Politics makes for strange bedfellows. TCH’s large-bank shareholders, moreover, aren’t politically sympathetic on either side of the aisle. 

Many businesses are only too happy for government to intervene or participate directly in the market, if they calculate they can profit, generally at the expense of other private-sector actors.

—Eric Grover, principal at Intrepid Ventures, Minden, Nev.