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The Fed is Throwing the Real-Time Payments Debate into Disarray

The Federal Reserve’s contemplation of entering the real-time payments space is not efficient, hampers innovation, and will not inspire trust in the U.S. banking system.


Just ask J.W. Verret, an associate professor at George Mason University Antonin Scalia Law School and manager of Veritas Financial Analytics LLC. As the former chief economist and senior counsel to the House Financial Services Committee, he shared some thoughts on why a Fed real-time payments system is more than a little fraught.


First, some factoids from Verret:

  • Congress authorized the Fed to establish a national check clearing system in 1913.
  • Private-sector operators run far more efficiently than the Fed, operating check, ACH and wire clearing at 16-29% of the cost of the comparable payment system services provided by the Fed.

  • A U.S. Fed-run system would be a “an outlier” compared to other central banks in industrialized countries – only Germany and Belgium run check and retail electronic payment clearing systems.

  • The Fed’s Fedwire system obtains preferential treatment from the federal government, as the U.S. Treasury predominantly uses reserve bank payments services to make and receive government payments.

Verret goes on to demonstrate that a Fed-run system hides long-term costs:


The Federal Reserve has little incentive to innovate, as its managers are not residual beneficiaries of future profits. [Its] presence in payments crowds out private-sector competitors from making the initial investments needed to test out more efficient and effective systems. Further, one can easily make the case that, due to these variables, the Fed’s role in payments over the previous decades has stifled innovation in payments — something that we as a country are only now remedying through private-sector initiatives.


Finally, the Fed is stalling industry-wide innovation as banks play a waiting game:


The Fed is already delaying the arrival of real-time payments in the U.S., as some institutions are waiting for a decision from the Fed on whether it will launch a real-time payments system of its own. Far more seriously, the Fed risks impeding innovations across the U.S. payments system, thereby further exacerbating the conflicts of interest that it has created over time.



Read Verret’s entire op-ed on American Banker.

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