ATR recently joined a coalition letter led by the National Taxpayers Union to oppose the Federal Reserve considered proposal to operate a real-time payments system. The Fed’s system would directly compete with the private sector, putting nearly all customers at risk of delayed financial transactions by forcing financial institutions to choose between doing business with an existing private structure or waiting until their regulator builds a clearing system in the next five years.
In the past few years we have seen how technology has played an important role in facilitating faster payments between individuals compared to the long-established model of using checks to pay for goods and services. Aaron Klein from the Brookings Institution helps illustrate the delay in this outdated check cashing system:
If your payday was Friday, March 1 and you deposited your paycheck, it may not clear until sometime on Tuesday, March 5th. What do you do if the rent, childcare, and other fixed expenses are due the same day you get paid? Unless your paycheck is available the instant you deposit it (and that is not the case with direct deposit) you are stuck with a gap.
With technology advancement becoming cheaper and more widely available, customers can access the money immediately once it is received. Take Zelle for example, a person-to-person real-time payments system created by financial institutions for their customers to access funds sent to their bank accounts near-instantaneously. In other words, if David owes Ethan his portion for the lunch bill and both of them use Zelle, Ethan can pay David back immediately and those funds are available just about as fast as receiving a text message and opening it to read.
In 2014, The Clearing House Payments Company (an institution that provides much of the technological “plumbing” or “infrastructure” for conducting financial transactions) began the process of creating the real-time payments system in use today. The system would go live in November 2017, after large financial institutions put up the funding to build the system and has actively been attracting banks of all sizes to join the network. This benefits customers across multiple financial institutions who can send and receive payments to use near-instantaneously. The goal of The Clearing House and banks joining the system is to have all deposit holding banks using the service by the end of 2020, making the system “ubiquitous.”
A year after The Clearing House’s real-time payments system went live, the Federal Reserve published a request for comments to review and consider feedback of how the current privately created system is operating and if there was a need for the Federal Reserve to enter the market and create its own version. As George Selgin of the Cato Institute correctly points out, there would be several chilling effects the Federal Reserve would have in the marketplace should it move ahead with its own network:
No less importantly, unlike private sector providers the Fed does not have to convince shareholders that it can recover the costs involved in any new payments venture it undertakes. Thanks to its unique powers, the possibility that the Fed might compete head on with the private RTP network is likely to have an exceptionally chilling effect on RTP’s ability to attract new members, and to do so even despite RTPs first-mover advantage, and also despite any real efficiency advantages it might enjoy. Banks faced with substantial network-interface investment costs will hesitate to join RTP until they are certain of the Fed’s intention. Even if the Fed does not ultimately enter the market, this hesitation will itself be costly, because it will delay the achievement of a ubiquitous system. The likelihood that the Fed will take several years to establish its own RTGS system will compound this delay. The case of rival private-sector entrants differs, both because such entrants are only likely to contemplate entering the market if their stakeholders believe them to be capable of operating more efficiently than established rivals, or of offering services that are clearly superior to theirs, and because they must in fact offer superior or less expensive services to gain market share.
For these reasons, Americans for Tax Reform opposes any entrance of the Federal Reserve into the real-time payments market and is proud to join the coalition of organizations who share this view.
Click here to view National Taxpayer Union’s coalition letter.