FedNow went live – or at least got out of bed – on Thursday. This is about ten years after the Board first acknowledged that faster payments would be better payments. Maybe late is better than never given the importance of instant payments, but FedNow’s anti-climactic launch raises three fundamental questions: FedWhy? FedWhen? And, FedBetter?
Let me turn first to FedWhy. The U.S. central bank thinks one of its fundamental civic obligations is controlling the payment system, a conclusion reached more as a result of envy – every other big central bank gets to play with its payment system – than by the private sector’s failure to ensure safe, sound, and speedy payments. Congress knew this in 1980 and the Fed’s payment authority is thus conditional, not that you would know this by looking at the Fed’s various payment offerings and most especially FedNow.
Congress hesitantly allowed the Fed to offer payment services largely because the Fed asked for payment powers. Statutory approval was grudging, demanding that the Fed provide payment services only after meeting certain conditions, including calculating a “private-sector adjustment factor” or PSAF to ensure that the central bank didn’t crowd out private payment systems.
However, every calculation of every PSAF ever since 1980 has been a masterful sleight-of-hand that allows the central bank to dominate payments. Nothing about FedNow – whose costs have largely been a closely-guarded secret – suggests its PSAF is anything other than another rationale for the Fed to control payments.
That might be fine if the Fed actually was able to offer what has long been the payment system’s most important missing ingredient: speed. In 2013, it was not at all clear that the private sector would take this on even as smaller banks had legitimate fears that, if it did, they would be sidelined because only the biggest banks would have access to real-time payments (RTP). In 2017, The Clearing House launched its RTP system, opening it also to small banks. Small banks distrust it, but the result of their demands for a central-bank system is that small banks that eschew RTP are still frozen out of functional instant payments because FedNow is actually only FedPretty-Soon and, even where it works, it isn’t interoperable with RTP.
Importantly, the FedWhy questions isn’t about the need for instant payments. A nation in which 58 percent of households live paycheck to paycheck is a nation barely scraping by, paying billions in a wide array of banking and check-cashing fees along with taking out costly payday loans. These wouldn’t end with instant payments – too many households are too close to the edge – but they would go way down and that’s all to the good.
Which brings one to the FedWhen question. By virtue of its zeal to dominate payments, the Fed’s system has slowed other options and, where these exist, limited their reach. In its own announcement, the Fed notes that only 35 banks have signed up along with all of the key payment-system providers. Treasury is now also online and that’s important given the critical nature of government benefits to all but the wealthiest households, but this is still a lackluster total for what by all the powers granted to the central bank should have been a boffo box-office opening day.
Finally, one has to ask why there isn’t FedBetter. In 2020, the Fed said it would look into why a critical payment link – Fedwire – wasn’t even close to 24/7/365. It decided then to take FedNow live, but the most important backbone of national payments – the interbank system – is still working only what were once disparagingly called bankers’ hours.
That this matters a lot was evident three years after the Fed promised to think about Fedwire when Silicon Valley Bank and, the next day, Signature failed in part because desperate efforts to get Fedwire to work after-hours were for naught. In essence, the Fed – which prides itself on being an astute systemic regulator – exposed the banking system to what it concluded was systemic risk in the course of a weekend not only because its supervision was so faulty, but also because urgently-needed funds couldn’t traverse the wires because the Fed’s wire-keepers were heedless of systemic risk and went home. Unlike real-time payments, no private party can operate Fedwire yet the Fed, perhaps assured of omnipotence and unduly secure in its systemic omniscience has allowed this critical bit of infrastructure to have operational risks it would – or at least should – never permit any entity deemed a systemically-important financial market utility.
So, now we have FedNow instant payments that are often still anything but instant atop Fedwire which only works sometimes and a financial system in which households urgently need their money as quickly as possible and financial institutions are subject to implosion when their funds are away for the weekend. Not much to say for over a decade’s worth of work “modernizing” the U.S. payment system.