One of the frequent topics of discussion at this week’s Payments 2019 conference in muggy Orland FL, was whether or not the Federal Reserve should take on the role of a faster payment provider or not and when that decision might be announced. There was some news that the Fed would share their intentions sometime this year. For those who are waiting for the Fed’s decision before they commit resources of any magnitude to a faster payments strategy, this wasn’t particularly precise news.
Researchers from George Mason University debated the issue of the Fed’s role in payments and took opposing views reflecting those commonly discussed by industry participants. One researcher who felt the Fed had no business taking a larger role cited a conflict of interest positon:
There’s an inherent conflict of interest that occurs when an agency serves as both a regulator and competitor. Unfortunately, that describes the present state of the Federal Reserve. But rather than reform the agency to eliminate sources of conflict, the Fed is proposing to expand its market activities by launching a real-time payments system to compete against the private sector.
Also on the “no” side of the argument is the idea that the Fed’s involvement will only create a delay in the eventual rollout of real-time payments as those who prefer a public sector solution will delay their activities while the Fed takes years to build a solution:
The belief that the Fed’s operation of a real-time payment system will enhance competition ignores the past. Instead, it’s likely that the Fed entering the market will discourage others from doing so, which could slow down or stop innovation. Few businesses want to go toe-to-toe with a competitor like the Fed that has the full financial and legal backing of the U.S. government or can write regulations creating demand for its own product.
The “yes” side of the debate is focused on the point that the market needs competition and more real time payment suppliers:
Georgetown University’s Jim Angel argued in support of the Fed directly providing faster payment services. A common argument for that position is that it would prevent a monopoly situation, as there’s only one current, private real-time payments provider. This argument rests on fears that no other player will enter the space given the network effects and regulatory burden that come with being a payments service provider to banks, along with a suspicion that TCH could abuse its power. A lack of trust expressed by small banks against TCH could also be a barrier to achieving “ubiquity.”
Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group
