If the Fed delays real-time payments, it will cost you time and money
While most Americans may not believe it, Europe has managed to best the United States when it comes to allowing the private sector to take over services previously provided by the government.
For example, post offices in the European Union are now privatized, and most airports in Europe are run by a private concessionaire. Many of Europe’s highways are funded not by taxes but by the drivers themselves, via tolls, and many EU governments have created personal retirement accounts for their citizens to supplement or partially replace their own Social Security system.
Europe also has beaten the United States in implementing a real-time payments system. While we are finally getting around to rolling out our own system, there is a very real possibility that the Federal Reserve may choose to enter the market and delay adoption of real-time payments by four to five years, at least.
This development is troubling because the Fed’s entry almost invariably would result in a costlier, bifurcated system that fails to achieve its intended purpose, which is to allow people to have access instantaneously to funds they receive via checks or electronic transfers.
There are lots of gains to be had from a system where people can access money they receive immediately. For starters, it allows millions of low-income people living from paycheck to paycheck to eschew costly payday loans or other short-term credit facilities and just get their money same-day. For middle-class households it means they can get away with less money in their checking accounts and put more money into funds that earn a higher return. And for everyone it makes it easier to make and keep to a budget.
However, some people are keen on having the Federal Reserve maintain a presence in the market and compete against the private sector. Last week, Sen. Elizabeth Warren (D-Mass.) introduced a bill that would mandate that the Federal Reserve implement a real-time payment system as soon as possible.
The problem with this sentiment is that the Fed’s entry into the system actually would hinder the expansion of real-time payment processing.
The Clearing House, a banking association and payments company owned by the largest commercial banks, began introducing its own system (called Real-Time Payments System, or RTP) to do this in 2017. Now, about half of all deposits have access to real-time payment processing. It was on pace to reach the entire market by the end of next year when the Fed announced late last year that it, too, was considering entering the market, which slowed adoption to a halt. Banks want to see how the market will shake out before making a commitment.
The problem the Fed begets is that the investment required for banks to offer real-time payment processing is substantial — the system can cost as much as $20 million for a bank to set up — and the two systems almost assuredly would not be interoperable. That would mean that the Fed’s entry would leave us with a bifurcated market, with some banks on the Clearing House system and others on the Fed’s system, and transactions between banks on different systems would be as slow as they are for most of us today.
There would be no predictability as to which transactions would take place in real time and which would be delayed, and most of the benefits would not be realized. What’s more, there is no reason to think the Fed would provide the service more efficiently or be less expensive — the notion that a quasi-governmental entity will enter the market and be able to outperform the private sector is risible, and the law is clear that the Fed cannot cross-subsidize any of its activities, so if it hews to the letter of the law it likely would have trouble even meeting the price of the Clearing House.
Having a financial system that can process payments almost immediately eventually will prove to be a boon for the economy, but having the Fed as the second entrant into the market will not only fail to improve that market in the slightest but also likely delay the pace at which banks adopt the service, as well as leave us with a bifurcated market that permanently limits the reach of real-time payments.
If the private sector can accomplish a task, it behooves the government to stay out of the way. The fact that Sen. Warren and others are agitating for a government option for real-time payments is merely an example of wishful thinking obscuring reality.
Ike Brannon is a senior fellow at the Jack Kemp Foundation, a nonprofit charitable organization committed to advancing growth, freedom, democracy and hope. He is a director of the nonprofit Organ Reform Group and Network, which seeks to find ways to increase people’s access to organs for transplants. Follow him on Twitter @coachbuckethead.