Federal Reserve

Will the Fed Edge Out the Competition With Real-Time Payments?

The Federal Reserve's impact on the real-time payments market all hinges on its willingness to play by the rules.


Imagine what it must be like for private companies that have invested in a new technology and suddenly find out they have to compete with a tax-supported government agency—the very one that also regulates the industry. That's what happened when the Federal Reserve entered the real-time payments market. What this development means for the private companies and the consumers they serve in this market is unclear. The outcome will depend on the Fed's willingness to play by the rules.

The Fed plans to develop what it's calling the FedNow Service, which is expected to launch sometime in the next five years. FedNow is meant to be a real-time gross settlement service that would compete against private-sector options like The Clearing House (TCH) payment platform, which is run by a consortium of large banks. Real-time payments would significantly speed up the current slow speed of many payments. That's more convenient for American businesses and consumers, and it reduces the burden on lower-income Americans.

The Fed announcement was a surprise since the agency said earlier that it would intervene in this market if and only if private-sector payment-service providers couldn't provide a payment-processing system with reasonable effectiveness, scope and equity. The private providers actually did their part to meet the government's requirements. Yet the government is entering the market nonetheless.

In theory, more competitors with equal legal privileges and obligations should benefit consumers and businesses. At issue is whether this rather unleveled competition from the Fed encourages or discourages the continued expansion of real-time payments and the long-term viability of the market.

For instance, one likely consequence of the uncertainty created by the Fed's entrance into the market is that current private efforts to expand real-time payments are delayed as banks may wait to see how the market shakes out. At a Senate hearing in September, the Fed's Esther George did little to address this concern. When asked by Sen. Mike Crapo, (R–Idaho) about fears of unfair competition, George dismissed the question with only a vague reference to "the Federal Reserve's history in operating payments services across a variety of rails."

Under questioning from Sen. Pat Toomey, (R–Pa.) she also admitted that the Fed will not commit to a flat-fee structure. In contrast, TCH pledged to maintain a flat-fee structure to protect access for all Americans, regardless of where they're located or the size of their banks, so long as a competing government service doesn't enter the market. This condition is perfectly reasonable because they know from experience that the Fed is willing to use volume-based discounts to entice the business of large banks away from competitors.

Another witness at the Senate's hearing, George Selgin of the Cato Institute, testified to the likely negative consequences of the Fed's entrance into the real-time payment market. He warned that the Fed's new focus on FedNow may delay upgrading its existing monopoly on final-settlement services. This delay would slow the introduction of an around-the-clock, 365-days-per-year operation and thus fail to reduce delays on existing payment networks, including those for private, real-time payment services.

More disturbing is the idea that delays could actually be a way to gain a competitive advantage over other payment networks. Selgin explains, "Why is the Fed dragging its feet on an almost universally favored reform that could alone suffice to eliminate most of the more notorious payment delays in this country? The Fed's actions seem at odds with its overarching public mission. But they are what one would expect from a firm endeavoring to compete successfully with rival payment service providers." He adds, "The Fed's hesitation to make 24x7x365 Fed settlements available to private payment service providers may likewise reflect its own desire to give FedNow 'a leg up' on other payment networks."

Despite these concerns, at this point it seems that the Federal Reserve will blaze ahead with FedNow. In that context, it is essential that Congress or the administration ensures that, in competing with private-sector payment service providers, the Fed plays by the rules and contributes to, rather than hinders, the acceleration of U.S. payments. We would expect this much from the private sector. Sticking to the rules is even more important for a government entity with incredible powers.

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  1. The feds want to horn in on providing this service, so that they can wrap their tentacles yet more firmly on spying on each and every little penny that moves from here to there. EVERY penny that moves ANYWHERE… It MUST be TAXED!!!

    (Oh, but do trust them to keep all of your data private!)

  2. Oh goody!
    Now our money will move at the speed of the USPS, and the efficiency of the VA.

  3. Imagine what it must be like for private companies that have invested in a new technology and suddenly find out they have to compete with a tax-supported government agency—the very one that also regulates the industry.

    This is just about the most dishonest sentence I have ever seen here. The Federal Reserve Banks are owned by the banks themselves. The ‘taxpayer support’ mostly comes from an entirely cronyist backstop given TO banks BY the govt – the FDIC guarantee and the monopoly granted to the banks to create and distribute ‘dollars’ (the currency in theory ‘owned’ by the US govt). Yes – with that monopoly grant also comes the whole ‘dual-mandate’ stuff with a govt-appointed Board of Governors and a 7/12 (in theory govt-controlled; in practice bank-controlled) FOMC. But the notion that taxpayers are actually controlling anything here is belied by the FACT that it is the BANKS that were bailed out by taxpayers in the last (and every previous) financial crisis. Structurally, the Fed is more like a bankers trade association that has a monopoly over a Constitutional responsibility of govt and in exchange has to follow some rules.

    Settlements shit is way too in the weeds for me but it ain’t new. TCH looks like nothing more than the kings of the open-market operations deciding to consolidate what FedWire used to do. And prob doing a better job – but at the direct expense of the smaller non-king banks (who are I assume the actual movers behind the Fed updating FedWire with FedNow) and esp of potential new non-bank competition (blockchain, some fintech, etc).

    AFAICS this all means that the dual-mandate and open-market monopoly for the Fed needs to end. Let it become what it naturally is – the 10c whore/lobbyist for the fractional-reserve banking model. Get rid of the FDIC risk for taxpayers and open the open-market to actual competition via a giro-based PO Bank with exclusively T-notes as assets. That puts constitutional govt property (the dollar) back in govt control of its distribution – and opens actual competition where small frac-reserve banks can have a settlement choice and where blockchain alternatives don’t need banking system.

    Convince me this article ain’t just some BS cover where deRugy is just being a whore for big banks and where the REAL competition is not FedNow but blockchain.

    1. Bueller?

    2. The Fed’s “independence” is meaningless. The POTUS appoints the chair (after the chair is confirmed by the Senate). Also, Congress can strip their charter with a simple vote.

      The rest of what you have to say is pretty spot on, but be honest here.

      1. I don’t see your point. Yes – the Fed has the dual mandate. It is also the mechanism by which the banking system has a monopoly over the creation of ‘US dollars’ which is constitutionally an obligation of govt. Settlement system existed before the Fed came into existence. And its control then by JP Morgan (since he then also possessed the open-market monopoly re distributing T-bonds which were gold-backed so he ‘settled’ the actual physical gold market here then as well) is why the Fed came into existence in the first place.

        If your objection is that central banks or that govt money shouldn’t exist in Libertopia, so what. We’re not in Libertopia.

        Here on Earth, by this guy’s research (and there’s tons more links if you want to duckduckgo ‘central bank independence by country’), the Fed is tied (with Switzerland) for second most independent behind the ECB (which is in first only because it has one monetary objective rather than multiple). And BTW – the Euro settlements system (TARGET 2) is owned by the ECB not a subgroup of banks – and is mandatory for all euro settlements.

        1. As an aside – from that link – the only four central banks that don’t have an explicit government override for monetary policy are the ECB, US, Switzerland, and Denmark.

          So yeah – by every real-world measure, the Fed is independent.

  4. “The Federal Reserve’s impact on the real-time payments market all hinges on its willingness to play by the rules.”

    The state is a coercive monopoly that obtains its resources from theft / taxation.
    Any idea that it can play by the rules is a farce.

  5. I think they will definitely win over real time payments. payslipview .

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