Introduction: What Role Should the Federal Reserve Play in Developing a Faster Payments System?

This is the introduction to a multi-part debate series on The Bridge. The debate consisted of two rounds of email exchanges between three participants. Round one was published Thursday, April 25 and round two was published Friday, April 26. This introduction and the debate series are lightly-edited to preserve the original spirit of the email conversation that took place.

In the United States, it can take several days for transfers between bank accounts to complete. This means that someone who gets paid on a Monday may not get the money until Wednesday or Thursday. This stands in contrast to newer, but more limited, payments services like PayPal and Square, which can make money available to the recipient instantly—provided the sender and recipient are both on the company’s network. It also stands in contrast to the situation in numerous jurisdictions including the European Union, the UK, and Mexico, where the Central Bank has developed a mechanism to allow banks to handle retail (i.e. relatively small) transactions in real time.

However, that doesn’t mean there aren’t developments in the “faster payments” space in the United States. The Clearing House, a consortium of large banks, has begun to deploy a faster payments system. More controversially, and the reason we are discussing this issue, is that the Federal Reserve has solicited comment on whether it should offer its own real-time retail payments service for banks and credit unions. The Fed is considering whether entering the faster payments space as a provider would help consumers and create a more robust and safe payments system.

The Fed is also considering whether it could meet its statutory requirement to recoup potential costs, including implied costs, as if it were a private actor. The Fed is supposed to consider prudential concerns, including the expectations that “(i) the Federal Reserve will achieve full cost recovery over the long run, (ii) the service will yield a clear public benefit, and (iii) the service is one that other providers alone cannot be expected to provide with reasonable effectiveness, scope, and equity.”

Unsurprisingly, the idea of the Fed entering the faster payment market as a participant is controversial. Currently, the Fed operates several existing payments systems that both compete and inter-operate with some private sector options (which is controversial in itself), but there is a real question whether it entering this new space is necessary or desirable. For example, at least some of the firms that currently offer faster payments services oppose the idea of the Fed entering, citing concerns about competitive fairness, delay, and waste of resources.

Conversely, some smaller banks and credit unions have written in support, citing the foundational role the Fed can play and concerns that they would be forced to buy services from larger financial firms. Other commenters, ranging from consumer advocates to Amazon to the National Association of Truckstop Owners, also weighed in.

Three of the most thoughtful comments were made by Professor James J. Angel of Georgetown University’s McDonough School of Business (who supports the Fed providing faster payments services), George Selgin of the Cato Institute (who opposes the Fed entering the space as a provider) and Aaron Klein of the Brookings Institution (who believes the Fed should use its authority to mandate faster payments but not necessarily serve as a provider itself).

We joined together to debate whether the Fed should become a faster payments provider, what the risks and benefits of Fed entry are, and what else the Fed should do (or refrain from doing) to help foster an efficient and resilient payments system.

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