Just before Thanksgiving, the Fed announced it still plans to launch its new real-time payments system in the middle of 2023. More surprisingly, it also plans to waive the fees to participate in the new system.
One report notes that the Fed plans to launch the new system, known as FedNow, after “years of work on the project.” But it doesn’t mention that for most of those years the Fed claimed it had no interest in launching its own instant payments network. Or that the private sector did most of the work.
Initially, the Fed assured everyone that it wanted private firms to build and run the system. It did so publicly in 2013, 2015, and again in 2017.
Yet, in 2019, after the private sector created one, the Fed announced that it would launch its own real-time settlement system.
Given the long-running love-hate relationship between the federal government and the banking sector, it’s difficult to feel sympathy for the banks. Small banks, unsurprisingly, are supporting FedNow. Regardless, the Fed clearly shafted the big banks, and things might not work out as well for the smaller banks as they’re hoping.
Some might be tempted to view the Fed’s latest move as good old-fashioned competition, but nobody can compete with the Fed. It’s the government agency responsible for supplying U.S. dollars. (My colleague George Selgin has multiple Twitter threads on the Fed’s statutory requirements for pricing its services and recovering its costs, and how historically difficult it has been to hold the Fed accountable to those requirements.)
This whole thing is an avoidable mess.
Set aside the below-cost/predatory pricing issue and whether the Fed disingenuously pushed the private sector into creating an instant-payments network. Also ignore whether the Fed truly recovers its costs, and whether the Fed itself is to blame for a host of a payments system problems throughout history. The basic question remains: Should the government be running payments systems?
In general, the government should not provide a good or service unless there is some sort of market failure. And there is clearly no market failure in the payments industry.
Payments services are not public goods, and the private sector has regularly provided such services. The Fed does not have to take over the payment system–or even part of it–to implement monetary policy or to regulate financial firms. It has no mandate to provide the technology for people to make commercial transactions, and it could easily change its policies to speed up settlement times on existing systems.
All these reasons have informed Congress’s efforts to limit the Fed’s ability to compete with the private sector, and rightfully so. There is little room for the private sector when a government entity, least of all the Federal Reserve, competes directly for customers. FedNow will surely keep private firms out of the industry.