As the Federal Reserve slowly debates whether to enter the real-time payments space, one question needs to be asked: What damage would occur to the U.S. banking landscape if the Fed decides to move forward?
This is not an irrational concern, writes Brian Domitrovic, an economics history professor at Sam Houston State University, and co-author with Lawrence Kudlow of “JFK and the Reagan Revolution: A Secret History of American Prosperity.” Domitrovic doesn’t have high hopes for a Fed system, especially when compared to the RTP network from The Clearing House.
So what could go wrong? … [A] system run by the Federal Reserve would likely be unable to interoperate with the private sector system, which would have the effect of bifurcating the market. Think two mobile networks where users can only talk to the people who subscribed to their network. This has been the case in Europe where the private and public real-time payments systems are not able to interoperate together.
With two real-time payment systems in place, financial institutions would be required to connect to both. This would increase costs, degrade the broad reach and functionality required by such networks, and place the private system at an unnatural competitive disadvantage. ... None of this has anything to do with its main responsibilities of holding bank reserves or conducting monetary policy.
This isn’t the first time The Fed has failed at the time of great national need. Domitrovic recalls when a fairly new Fed “oversaw the shuttering of thousands of banks and the wiping out of the financial resources of millions of Americans” during the Great Depression. When such inherent government power makes mistakes, the effects are felt both far and wide, warns Dom.
Further, some banks might feel pressured to use the Fed faster payment system over the TCH offering. Along with chilling competition, this could “force stakeholders” into a cronyist relationship with the government, and depress innovation.” This “mission creep” could have a lasting impact on the banking services landscape.
Today’s real-time payments revolution is already underway, says Domitrovic. “The Federal Reserve should let the private sector proceed on its perfectly healthy course of modernizing the United States payments system and not make such a gratuitous push for a major role of its own.”
Read Domitrovic’s entire op ed at The Hill.