Why is the Fed Muscling in on PayPal’s Business?
The government agency is launching its own payment system, which will kill competition while hiking costs to taxpayers and consumers.
The Federal Reserve can at times be a conflicted organization. Ever since its mission was clarified in 1978 with the dual mandate of “maximum employment” on one hand and “stable prices and moderate long-term interest rates” on the other, the Fed has faced difficulty in balancing ends that can sometimes be in tension with each other.
But as a quasi-governmental institution dedicated to providing a hospitable climate for the economy to prosper, there’s one thing the Fed should never be conflicted about: competing directly with the private sector.
In August, the Fed announced plans to create FedNow, a real-time payments (RTP) system that would facilitate on-the-spot, instantaneous bank-to-bank transfers. This proposal came despite the private sector already meeting demand, having created an abundance of options for consumers and businesses. Between services such as The Clearing House, which is projected to reach more than half of U.S. financial institutions by the end of this year, and offerings from PayPal, Visa, MasterCard, Zelle, and others, there is no market failure here.
In 2015, the Fed called for improving the U.S. payments system, and the private sector, using capital and innovation, delivered. FedNow could disrupt these big developments to the detriment of consumers, businesses, and taxpayers.
The Fed’s proposal would likely cost close to $1 billion, if not more, and take between three to five years to implement. That is, frankly, a waste of both time and money. Given the private sector’s success here, a Fed-run RTP system would ultimately be a serious misappropriation of resources, and its opportunity cost would be dangerously high. The more time the Fed squanders on constructing RTP, the less it has to address other critical economic concerns.
Worse yet, by the time the Federal Reserve’s platform is even operational, private-sector innovation will likely have rendered it completely irrelevant.
Either way, if the Fed continues with its plan to create a real-time payment system, American taxpayers, not just consumers and businesses, will be left to suffer the consequences. That’s because every dollar the Fed spends unnecessarily could reduce the amount of “profit” it returns to the U.S. Treasury—a number that’s already declining as the central bank sheds more and more of its federal holdings from past “quantitative easing” exercises.
The Fed’s entrance into the RTP system would also mean unfair competition. Under current, private real-time payment systems, all customers and transactions—big or small—must be treated the same. But if history is any indication, the same won’t be said for a Fed-run system. After all, as the head of the ACH Network—which clears financial transactions in two to five days—the Federal Reserve already offers “volume discounts.” Should FedNow do the same, customers at banks doing lesser volumes could actually pay higher fees at community branches. Compounding the unfairness would be the Fed’s cozy role as both the provider of a service competing with the private sector and the regulator of those competing services. This is the very definition of a conflict of interest.
Given these concerns, there has been widespread opposition to the Fed’s entrance into RTP. Numerous organizations, including the National Taxpayers Union, have called upon Congress to give these Americans a voice in the Fed’s ill-advised venture. Many knowledgeable economists have also noted the dangers of the Fed’s approach to intruding upon the market instead of encouraging innovation.
And while Congress should apply appropriate levels of oversight to Fed activities, the Executive Branch may have a role as well.
The Office of Management and Budget (OMB) has launched numerous cost-benefit analyses of proposed regulations in the past, including those associated with the Dodd-Frank law, which would have tasked government agencies with hitherto unheard-of responsibilities. It is time to consider doing the same with the proposed plan for FedNow.
Although it is uncertain whether recent OMB communications clarifying its authority over review of agency rules apply to the nation’s central bank, exploring this route need not compromise the Fed’s independence. Indeed, a credible OMB assessment of FedNow’s fiscal impact could actually strengthen the Fed, by demonstrating to policymakers and the public the price tag for ventures that are far outside the central bank’s vital core mission.
Here’s hoping the Trump administration is willing to consider a constructive role in informing the debate over the FedNow proposal. Taxpayers, consumers, and businesses will be grateful.
Pete Sepp is the president of the National Taxpayers Union, a nonprofit dedicated to advocating on behalf of taxpayers at all levels of government.