The U.S. is taking the slow road to faster payments.
The U.S. Federal Reserve Board announced on August 5 plans for the central bank to develop a 24/7 real-time payments and settlement service, called FedNow. Says Board governor Lael Brainard: “FedNow will permit banks of every size in every community across the country to provide real-time payments to their customers.”
To you and me, Now means…right now! But to the Fed, ‘now’ means ‘now wait’. The service be ready in five years: FedNow is slated to go live in 2024.
Faster payment systems are now a reality in Australia, Hong Kong, the U.K. and Mexico. Both traditional banks and electronic payment and digital money operators allow their users to make instant money transfers or payments to merchants. They just need recipient phone numbers, email addresses or QR codes with the user’s tokenized identifier.
How very 1970s
In the U.S., in contrast, payments are slow and expensive. The Fed was a fintech pioneer when in 1974 it introduced electronic processing of payments within its various branches, the first alternative to sifting through paper checks. Ah, the glory days.
One reason the Fed has taken so long to come around to the need for instant payments is that the powerful banking lobby has opposed this, arguing instead that big players like J.P. Morgan, Bank of America and Citi are better positioned to handle innovation, thank you very much.
Banks got together in 2017 and launched their own platform, Clearing House, which now covers about half of U.S. deposits. But Clearing House is not open to non-bank tech platforms, and the vast majority of America’s smaller banks, which number over 10,000, have not seen the benefit to joining the big players’ system.
Big banks’ playpen
There is nothing wrong with Clearing House per se, but it’s only for big banks’ favored corporate relationships, and clearly does not serve many American businesses or individuals. Nor has it done much to address the underlying problems of high fees and mediocre service in the U.S. industry.
Nor does it create competition to the credit-card culture that dominates America (Financial Times), as there’s no space for an AliPay-type of participant. The lack of a mandatory infrastructure for instant payments that is compatible across platforms is inhibiting innovation in the U.S..
The lack of instant payments also stunts the possibility of encouraging consumers (who are already heavily in debt) to use debit cards rather than credit cards. People in electronic-money environments, such as Lyft and Uber drivers, now receive instant payouts onto prepaid debit cards or into digital wallets. That’s not the case for the traditional labor market.
So FedNow is welcome, but the Fed has been getting mostly complaints since the announcement.
One is that FedNow would create a two-tier system in competition with Clearing House (American Banker); the Fed hasn’t addressed the issue of compatibility. Logically, it should build FedNow to be compatible with Clearing House as well as banks’ internal systems. Even then, however, it may need to coerce the big banks behind Clearing House to accept open-banking principles and link up the two systems by API.
A related complaint is that the Fed is interfering in the private sector. Those big banks collectively poured $1 billion into Clearing House. FedNow would also compete against credit-card networks. And some big traditional employers like WalMart are introducing instant salaries for employees (PYMNTS.com). So is FedNow necessary, and what will it cost?
A good answer to these is that member banks have been slow to go live on Clearing House; it clearly does not meet the needs of the entire population. But now, with the central bank wading into the fray, banks still on the sidelines may not join Clearing House at all, which means they won’t embrace faster payments for several more years. Corporations will be even more reluctant to sign up to Clearing House.
But the loudest concerns are that, by coming at faster payments so late in the game, the Fed is ignoring developments in blockchain-based finance (CoinTelegraph). It’s going to build tech that should have been implemented in the 2010s in time to ensure the U.S. misses out on the tech that will underpin the 2020s and beyond.
Five years is a long time in today’s payments world. But for crypto proponents, that’s not even the point anymore. They view FedNow as a slight, deliberately ignoring the blockchain movement in favor of extending yesterday’s infrastructure.
The arguments from bitcoin backers are similar to those of the big banks: FedNow would crowd out private alternatives and leave consumers only with a government-run option for real-time payments. It’s all a plot, you see, to ensure Fed gnomes continue to control the world’s money and keeps bitcoin and other digital assets out of the game (Bitcoin.com).
Get on with it
DigFin thinks the Fed should get on with it, with a view to integrating FedNow with other systems, rather than gobble them up or drive them out of business. As for crypto, it is hardly matured as a widely accepted means of payment, and anyway, which crypto? Which protocol? For the Fed to delay on faster payments to wait for the blockchain world to come up with a suitable standard would be negligent.
The Fed’s mandate should be to haul American payments, kicking and screaming, into the faster-payments world. This isn’t going to stifle competition; competition has already been pretty effectively muffled by the incumbents, while the fast-innovating world of blockchain has yet to develop the kinds of standards, interoperability and tested robustness that is required to assume responsibility for America’s payment infrastructure.