As we detailed in our in-depth report yesterday, the Fed is four-square for its own instant-payment system, dubbed FedNow even though the final implementation schedule suggests it might better be called FedLate.  The Fed added stimulus-payment snafus to the updated public-good rationale for a Fed-owned and operated faster-payment system, but the details of both its roll-out and all its critical, unfinished pieces suggest that the 2023 or 2024 launch date by which it still swears could well slip into the still-more distant future, leaving many folks still looking for their unemployment insurance.  Even so, the new Fed policy continues to brush aside concerns that its heavy footprint slows payment-system innovation, asserting with the straightest face a central bank can muster that it doesn’t compete with any undue advantage against the private sector.  It may well be that a Fed system preserves and protects the public good and that it’s better late than never.  However, a read of the Fed’s notice leaves one thoroughly unconvinced.

The Fed’s all-is-fair rationale rests on several thin reeds.  First, it notes that the Fed started talking about offering faster-payment services in 2013 and only one competitor – The Clearing House (TCH) – has since entered the field.  This, the Fed asserts, shows that the faster-payment market will not be competitive unless the central bank throws its hat into the ring.

It would, though, take either the built-in advantages of very big banks that bolstered TCH’s bid or tremendous temerity to take on the Fed.  Even from the start, the central bank said that it would ultimately price faster-payment services based on a schedule assuming ten years of up-front, unrecouped investment and “mature” usage levels.  In short, capital expenditures will not be recovered for at least a decade, if then.  Who else could raise private-sector capital from investors with the patience of saints?  The Fed seems to assume there are crowds ready to witness a business proposition along these lines, but most payment-service providers have yet to find them.

The detailed competitive analysis is the last section in the Fed’s service notice so you may be forgiven for having missed it.  This section walks through comments complaining about a possible central-bank edge over private firms, asserting that the Fed’s full backing from a sovereign state and its ability to print all the money it needs under stress has no competitive value.  It may well be that the public-good proposition of payment-system infallibility warrants the government’s role, but the Fed doesn’t tread on this controversial ground, preferring to pretend that it’s just one of the payment-system guys.  Of course it’s not.

There is, though, one hint of a public-good rationale in the final notice:  the Fed says it lacks “plenary power” over the payment system and thus must control it to ensure its stability.  This is technically true, but only Jesuitically speaking.  It is the Financial System Oversight Council – not the Fed – that designates financial-market utilities (FMUs) in the payment, settlement, and clearing sectors.  However, the Fed has a not-insignificant say in who is designated an FMU and regulates any of them – TCH for example – offering payment services.  Should other competitors dare to challenge the Fed, the FMU moniker could quickly be applied and plenary power would follow in short order.  Conversations have in fact already begun about whether payment processors either on a specific or activity-or-practice basis are FMUs and thus should be subject to the Fed.  A faster-payment provider could easily join them and be as fully regulated as any central bank plenary power might permit.

What’s unsaid in the Fed’s competitiveness assessment and the few hints it provides about public good is what appears to be the Fed’s fundamental premise:  that the world can await FedNow because the U.S. is destined always to have an interbank payment system over which the Fed can reign semi supreme.  This might have been true in 2013, but it’s far, far less likely to be true in 2023.  The Fed is sanguine that its sovereign might will dictate the shape of things to come, resting on this not only to justify its leisurely FedNow roll-out, but also the tortoise-paced consideration of central-bank digital currency announced on Thursday. However, the Fed should not confuse its unchallengeable might as a central bank with its vulnerable position as a payment-system provider.

Forces of innovation are loose in the land, forces with enormous war chests and little respect for legacy systems and the central banks that run them.  A Fed dubious about its plenary power now will really have none at all if the vacuum it creates pushes payment services outside the interbank system.