If you are like me, you don’t think too much about how your payments are
processed. You write a check, swipe a credit card, or use your PayPal
account on a website and assume your transaction is complete. The reality
is that there is a complex infrastructure for processing payments that
has steadily evolved from hand-processed physical checks to electronic
methods. But as Thomas Wade points out in his new insight,
for all the advances to date, the only really “instant” payment method is
good, old-fashioned cash.
There are, however, cutting edge advances in electronic payment
processing — so-called “real-time payments” (RTPs). As Wade notes,
"The United States is considerably behind other developed nations regarding
real-time payments, including the United
Kingdom and Mexico where the government has provided
real-time payment processing for retail consumers. Until recently the
U.S. approach has been to allow for private industry to create solutions
meeting consumers’ needs. With the
support of the Federal Reserve (the Fed), in 2017 The
Clearing House (TCH) rolled out its real-time payment service. The TCH
service now supports over half of all U.S. accounts and is expected to
have total coverage by 2020. Although the most important actor in this
space, it is not the only private provider of real-time (or nearly
real-time) payment services, which include offerings from PayPal,
Venmo, Zelle, and Mastercard.”
The interesting development is that the Fed itself is also
considering building a RTP network, having asked for comments on the
idea in October of last year. The comments should be simple: This is a
terrible idea.
To begin, the Fed does not have a mandate to
undertake such a venture. The 1980 Monetary
Control Act allows the Fed to offer services if "the
service is one that other providers alone cannot be expected to provide
with reasonable effectiveness, scope, and equity.” There is exactly zero
evidence that this is the case.
Moreover, the Fed system would be costly — a cost ultimately borne
by the taxpayers — and would take years to develop, perhaps three to
five years. During that period,
other private entities might be reluctant to enter the RTP
business because of the uncertain future playing field. It is one thing
to compete against the current incumbents; it is entirely another to
compete with the Fed. And this last point is probably the
key. It is a clear conflict of interest for the Fed to
be simultaneously a competitor in the RTP services industry and
the regulator of its competitors.
RTPs are the future in the United States — a future that is
best left to the private sector to build and innovate.
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