The Fed Shouldn't Be Competing With the Banks It Regulates
Usually when folks in Washington talk about the Federal Reserve, the focus is on interest rates, the risk of inflation, and the state of the American economy. The Fed plays an important role in the U.S. economy and as a key regulator of financial markets, but no one thinks about the Fed when talk turns to innovation or financial technology.
Until now. And not in a positive way. But first, a little background.
When Americans think about managing their personal finances today, it’s all about speed and ease of use. Consumers can click and swipe payments on their banking app. They can pay their rent or loan friends money on Venmo. But for many Americans, it still takes a couple of days to access funds from a check that hasn’t cleared or for their bank account to reflect a fund transfer. The process U.S. banks, credit unions and other financial institutions use to clear payments and fund transfers in many cases is the same one that has been used for almost half a century.
The Federal Reserve is part of this process and probably had plenty of opportunities over the years to try to update it. But it was a private entity, The Clearing House, a banking association that has operated payments systems for financial institutions in the U.S. for more than 150 years, that invested and innovated to bring real-time payments – something many of us take for granted when we use a payment app on our phone – to the financial system.
In 2017 it launched its Real-Time Payments (RTP) network, which allowed banks to connect and clear payments between them almost instantaneously. It’s a network that any sized bank, credit union or community bank can connect to; the transaction fee is flat and the same for all financial institutions regardless of their size or the number of payments they clear. Today, The Clearing House estimates that its RTP network is connected to more than 50 percent of all U.S. bank accounts, and that by 2020 the network will be accessible to just about every other account.
That ubiquity was a goal that policy makers in Washington – including the Fed – set for such a system years ago, and The Clearing House invested in developing the technologies to make it happen.
But now, the Federal Reserve – seeking to find a way to keep its bloated and outdated bureaucracies relevant – is considering potentially investing hundreds of millions of taxpayer dollars in its own real-time payments system: in essence, creating a second, redundant system that will take years to deploy all while saddling taxpayers with the cost of it.
If you don’t see the folly of a government entity investing your tax dollars to develop a system that already exists and functions well, there are a couple of other reasons to be concerned about the Fed’s thinking.
First, the Federal Reserve is one of the key regulators of the U.S. banking system. It doesn’t make much sense for a regulator to enter into a line of business and compete against the very institutions it oversees. It would be like the U.S. Food and Drug Administration – which must approve all new drugs brought to market – announcing that it's launching its own line of pharmaceuticals. A Federal Reserve real-time payments system would create uncertainty among institutions it regulates, wondering whether to use a system already in place or to wait to connect to its regulator’s system; to say there would be conflicts of interest is a mild understatement.
Second, we know that government bureaucracies simply don’t innovate well. Remember the Obamacare online system? Or the “virtual fence” along the U.S. Mexico border? Or the IRS’scomputer network? We’ve seen this situation play out many, many times before, and it never ends well for the American taxpayer.
In this case, it doesn’t have to play out that way. The Federal Reserve Board of Governors, led by its chairman, Jerome Powell, has yet to approve the proposal for a rival payments system. Powell is testifying this week on Capitol Hill and members of the House and Senate committees that oversee financial services should make it clear to the chairman that the Fed should remain focused on ensuring our economy remains healthy and growing, and leave the innovation to the private sector businesses that contribute to that growth.