Is the Federal Reserve after your debit and credit cards? In a move little noticed except by those in the payments industry, the Federal Reserve last fall issued a consultation document about “payment system improvement.”
This suggests a desire by the Fed to introduce a new payments system, ostensibly to allow faster payments and reduce transaction costs. The Fed worries that other countries have moved ahead of the U.S. in payments efficiency, but their suggestion might mean that the central bank will compete with the entities it regulates.
Currently, various payment systems are used to transfer money, and there’s plenty of innovation already. Card-payment systems such as Visa, MasterCard, and American Express are now ubiquitous. There are proprietary networks (check the back of your debit card to see the systems you can use) and an increasing number of smartphone payment apps. Virtually anyone can now take credit- and debit-card payments by getting a Square card reader. Meanwhile, there are the emerging cryptocurrencies such as Bitcoin, which are increasingly popular as de facto payment systems.
All this appears not to be enough to satisfy the Fed. It sees few payments occurring in real time (instant debit from the payer and instant credit to the payee) and seems to regard that as a market failure, even though real-time payment is necessary in very few cases, and where it is, the private market is providing solutions. (Ironically, the Fed’s own existing check system is the slowest payment system of all.)
The Fed appears to want to construct an entirely new clearing system out of whole cloth to facilitate faster payments. Other countries have created whole new, faster systems, but in most cases under government pressure, not to meet the market’s needs. And in no instance has the system shown a positive return on investment — a clear indication of lack of market failure in the status quo ante. The Fed does not believe that its new system will provide a positive ROI before 2025.
If the Fed creates this system, it will work in direct competition with other payment systems, including those mentioned above, that the Fed already regulates. Can you say “conflict of interest”? When the U.K. introduced its faster payment system, it was done by a consortium of banks rather than by the Bank of England.
The Fed’s proposal is disturbing also because of the bank’s notorious lack of transparency. We know that the ACH (Automated Clearing House) system operates at a loss, but it would be easy for the Fed to conceal the true cost of a new payment system for quite some time, giving it an unfair advantage over its commercial rivals.
Worst of all, this whole effort constitutes an egregious case of overreach, as the Fed may not even have the authority in the first place. It claims it’s acting by consensus of stakeholders (such as merchants), but consensus is not legal authority. Moreover, if there were a genuine consensus in the industry that such a system was needed, innovators would be competing — and collaborating — to provide it.
It’s time for Congress to impose oversight on this initiative. Lawmakers should hold hearings to determine exactly what the Federal Reserve is trying to achieve with this idea. They should ask Fed officials to justify their belief that there’s a market failure and to explain on what authority they are proceeding.
Moreover, they should thoroughly investigate the Fed’s existing business models and examine any new business plan with a fine-tooth comb. The Fed’s desire to move into this new business area provides another opportunity for lawmakers to move forward with something long needed: a full audit of the country’s central bank.
As I have suggested earlier, one of this administration’s stealth plans is to nationalize the financial industry. Providing an alternative to commercial payment systems is part and parcel of such a move. Maybe if the Fed has its way, you will soon be paying for groceries with your Obamacard.