At the conference earlier this week at which I discussed Libra’s prospects, the moderator asked the audience if it thought Libra was a viable venture. Almost no one raised a hand, signaling at the least that Libra’s political woes make it the poster child for how not to handle a product launch. However, Libra already has had one impact with far-reaching, lasting impact: it has led many policy-makers to classify the U.S. payment system as a public good. This does not bode well for private-sector providers, no matter how regulated.
Next up, the Federal Reserve Bank sought by progressives who not only want banks out of the payment system, but also out of the retail financial system? Odds here now seem small, but what happens when Amazon launches its own banking venture?
What does it really mean for payment, settlement, and clearing to be considered a public good? This bit of economist speak has lately been picked up by progressives to signify a private-sector asset or function with such overwhelming impact on collective well-being that it warrants public ownership. This isn’t new. Not only are many assets – air, water, electricity – considered public goods, but U.S. policy has already predicated a public-good purpose for the payment system.
In 1980, Congress allowed the central bank to own and operate key facets of the system as long as it adjusted pricing to avoid competition with the private sector. In practice, the Fed has calculated its pricing to ensure that it always beats the competition in what it deems core payment functions. By its largesse, a few parts of the payment system remain in private hands. However, the 2010 Dodd-Frank Act expanded Fed authority by establishing the construct of financial-market utilities (FMUs) for payment, settlement, and clearing firms. The Fed’s main payment rival, The Clearing House (TCH), was moved from Fed regulation to still tougher Fed requirements following FMU designation.
The FMU framework is akin in many ways to public-utility regulation for water, gas, and electricity. Little-noticed in the FMU standards is authority for the Fed even to control the pricing of a payment-system provider. This is analogous to broader public-utility rules under which governmental bodies dictate a return rate along with pricing and resilience standards to contain – they hope – private profit incentives within a public-good perimeter.
This, though, may not be good enough protection of public well-being to comfort the Fed, let alone Democrats demanding that big banks join Libra on the outskirts of a public-good payment system. In its faster-payment consultation, the Federal Reserve raised the prospect that it would become the owner and operator of the new U.S. faster payment system. Were it to do so, it would preempt the FMU construct by taking on the role that a privately-owned FMU, The Clearing House, now has with regards to its faster-payment competing approach. The Fed could not directly put TCH out of business if it takes on an owner/operator role in the payment system, but inter-operability and risk-aversion concerns would surely give the privately-held FMU a run for its money. Over time, it seems likely that the Fed would control the U.S. faster payment system in concert with whatever remains of all the slower bits it now also controls.
Theoretically, the current private approach to faster payments under FMU regulation should satisfy public-good concerns – after all, utility regulation has been seen as sufficient for almost a century to handle private incentives in companies offering core-infrastructure services. Actually, political demands dictate that any payment system operated by any group of big banks has become as abhorrent to Democrats as Facebook’s proposal to create a crypto-payment system not only out of whole cloth, but also outside any current payment-system regulation. Republicans are in favor of a private faster-payment option, but it remains to be seen if any will expend political capital to preserve it if the Fed listens not only to Democrats, but also to its own institutional interests.
For banks, this is a case of political contagion risk – before Libra, the role of the Fed in faster payments was contentious, but not elevated to the level seen in the House hearing with Chairman Powell on Wednesday or Thursday’s Senate Banking session. This is unfair, but it is what it is. As the Fed moves lugubriously forward with whatever plans it has for whatever faster payment system the U.S. will get whenever we get it, the odds are far more in its favor than ever before that the central bank will see itself and be seen by many as the savior of the public’s payment-system interest.