Having the Fed compete in real-time payment services makes no sense

Capitalism can be messy. The incessant competition to create the next New Thing — and reap the profits such an entity can generate — often results in a flood of investment going to a few key sectors, much of which ultimately results in failure. For example, I suspect that no one is reading these words from a Microsoft or Amazon smartphone.

Intense competition and concomitant investment in a sector can present problems beyond mere waste when it occurs in an area where there may be something akin to a natural monopoly. Having multiple web browsers for consumers to choose means programmers need to optimize the display so that it works for Safari, Chrome, et. al. Having everyone use the same browser is much more convenient. In this case the market — and consumers — may be better off in the long run if we arrive with one firm having an effective monopoly.


Of course, the messiness in these markets ultimately served to create benefits for consumers, since the intense competition forced Google to constantly improve its web browser in an effort to capture the market and best its competitors. This market dominance serves to generate beaucoup revenue for Google, making the competition worthwhile for it.

While capitalism can often result in excessive investment flowing to new markets, a few centuries of economic history provide abundant evidence that the private market ultimately does a much better job than the government at efficiently allocating investment and creating innovations in the economy.

This history makes the Federal Reserve's recently-announced foray into the market for providing real-time payment services a bit perplexing. That there is a need for real-time payments is not in question. Other nations have established this service and now the private sector in the United States is stepping up to the plate. What the Fed is proposing is moving trillions of dollars annually via its own service and competing directly with existing private market players, which is analogous to a public option in the health care marketplace created by the Affordable Care Act. Its presence in this market distorts the market and holds the potential for creating what essentially would be a government monopoly.  

In the past few years, a number of firms in the financial services sector have developed tools that allow for real-time compensation. For example, Mastercard and Visa have rolled out real-time-payments systems, and a network of banks recently introduced its own system called Zelle. In 2017, The Clearing House also launched a real-time payments system.

There are also numerous startups in the FinTech world exploring a way to enter this space, hoping to take advantage of blockchain and other technological innovations to offer a vastly better product than the incumbents.

The competition between these entities in this market is fierce and is poised to increase, with each entrant striving to improve its product to gain market share.

While there is no disputing that the Fed would have the knowledge and resources to credibly compete in this market, the question is why it would feel compelled to do so. Although the Fed is independent of the federal government’s bureaucratic apparatus, it remains essentially a government entity, operating in the same plodding, ponderous way of nearly all other government bureaucracies.

There is no reason to think that it would produce a product superior to that of any of its private competitors: it has some data that no private companies do, but does not appear to have special expertise that necessarily would improve the performance of the market by its entrance.

However, since the Fed does not need to make a profit, and can produce all the money it would need to subsidize such a service simply by pressing a button on a printing press, it is likely that it could defeat its competitors if it felt compelled to do so.

But this would not be to the benefit of those who desire such a service. A market dominated by one actor — and a government bureaucracy, at that — would be all-but-doomed to deliver less, and at a higher cost, than in a market with a number of private-sector competitors.

There is no market failure for real-time payment services, which has moved trillions of dollars in just a few seconds for customers. Contrary to the Fed’s assertions, there are numerous competitors in the market and the Fed can provide no compelling reason for it to enter into an already robust marketplace.

The Fed is a regulator to banks and financial institutions. Now, it seeks to be a direct competitor as well. It is time for it to pull the plug on this misadventure in payments monopoly.

Ike Brannon is a senior fellow at the Jack Kemp Foundation, a nonprofit charitable organization committed to advancing growth, freedom, democracy and hope.