More Evidence That the Federal Reserve Is Superfluous
While the Federal Reserve is most notable for its role in monetary policy, the autonomous Fed plays an active role in regulating banking institutions. When not beefing up its balance sheet through quantitative easing, the Fed is quietly seeking to expand its scope of operations, especially in the area of electronic payments networks. Despite a vibrant and competitive private market, the Fed initiated efforts to increase its presence in the electronic payments sector with the publication of the "Payment System Improvement-Public Consultation Paper" in September 2013.
Electronic payments networks allow banking institutions to settle accounts through appropriate credits and debits that facilitate transactions in the marketplace. The Automated Clearing House (ACH) network emerged to replace paper checks in a variety of transactions, from direct deposits of paychecks to recurring payments such as mortgages and utility bills. It is now capable of handling one-time transactions as well. In 2013 the ACH cleared $38.7 trillion in transactions. The Reserve Banks and the Electronic Payments Network are the two national ACH operators.
Beyond the automated clearinghouses, private payments networks exist, typically to clear debit and credit card transactions. Competing networks exist, consumers and retailers are free to use whichever cards they like, and the market continues to grow at a substantial pace. Visa, MasterCard, American Express and other card networks compete vigorously among themselves and with PIN-debit networks (STAR, Interlink, NYCE, AFFN, PULSE, and so forth) and online payment networks such as PayPal and Google Wallet. Moreover, Bitcoin and other virtual currencies are increasing in popularity and becoming an accepted means of payment.
In reevaluating the Reserve Banks EPN and ACH, the Fed has made it clear that it is casting a wider net, with the potential of new regulation for all electronic payments networks: "the Federal Reserve Banks' vision encompasses the broader payments industry, meaning all organizations involved in delivering payment services to end users, including depository institutions and their trade associations, nonbank service providers, payment processing companies, and payment consultants."
The one issue that the Fed has focused on is the limited ability to conduct electronic transactions in real time. But with the billions of transactions cleared over electronic payments networks, the current market appears to be satisfying customer demand, and if there is a desire for real-time transactions it is not obvious that it requires government intervention rather than market innovation.
Nonetheless, the Fed seems to pushing for more regulation. A recent research summary from the Fed noted, "To meet the needs of targeted use cases, the options assessment suggests that building new infrastructure is the optimal solution." Just what that solution entails at this point is unclear, but it should become evident in September when the Fed will publish its "Payment System Improvement Roadmap."
The public consultation was issued to identify "gaps and opportunities" to improve the current system. Yet there is little evidence of a market failure that needs to be solved. Payments systems expedite commerce while expanding the relevant size of the market for all participants. Sound policy should promote such innovations and expansions, not restrict them through a new layer of regulation and government oversight. With little empirical or theoretical evidence to support a "new infrastructure" for electronic payments, the Fed's pursuit of new regulations is questionable.
The alternative is to rely on the dynamics of the market, which coordinates the activities of individuals throughout the economy, alerting producers to "opportunities and gaps" while helping consumers express their demand for various goods and services. This dynamic coordination occurs spontaneously, without the oversight of a central authority, allowing participants to take advantage of local knowledge and adapt to new exigencies while finding new and more efficient ways to do things. Entrepreneurs in the marketplace, risking their own resources, are far more likely to arrive at the optimal solution than a committee of federal bureaucrats conducting studies in the bowels of the Fed.