A core feature of a republic has always been an impartial regulatory body, but can regulators be impartial when competing in the market they regulate? Such questions have tainted the perception of the Federal Reserve, which, after launching FedNow, is in direct competition with private banking.
Private banking today features many financial tools to make payments, including debit, credit, and wire transfers. A relatively new payment method has been added to this arsenal, Real-Time Payments (RTP), which can transfer funds between banks near-instantaneously. RTP was first established in 2017 and managed by The Clearing House (TCH), owned by a collection of private banks. Though highly impressive, without rewards or merchant infrastructure, many consumers stick to using more traditional financial tools like credit cards. However, RTP is still there in case the option becomes more desirable.
After the creation of RTP, there were regulatory measures the Fed could have taken to incentivize development and adoption. A Wharton study by Aaron Klein explains this by reviewing several reforms that would have improved RTP and promoted adoption, all of which the Fed declined to do.
Instead, the Fed constructed its own real-time payment system called FedNow, which is virtually indistinguishable in terms of performance from RTP. The only advantages that FedNow has over RTP come from structural advantages bestowed through the law to the Federal Reserve. One such advantage is better liquidity management since banks can transfer funds to their Fed accounts directly from FedNow. Because FedNow was not made interoperable with RTP, transfers like this require extra steps and are thus less efficient and could increase costs for borrowing customers.
The Fed’s refusal to alter regulations that would have benefited RTP adoptions and the creation of their tax-funded RTP clone have raised suspicion regarding the Fed’s goals and whether competing with the private sector presents a perverse incentive to overregulate.
These suspicions have not been helped by a recent notice of proposed rulemaking (NPRM) issued by the Fed proposing to lower the interchange fee cap on debit cards from roughly 22 cents per transaction to over 15 cents. Debit card issuers charge these fees to merchants on transactions and historically funded rewards programs for customers until previous caps were made under the Durbin Amendment. If law, such a change would further reduce banking profits on transactions, harming innovation and any remaining customer kickbacks.
Alternatives become more attractive, with debit cards becoming less tenable for banks working on tighter profit margins. Because the Fed ultimately sets the rates, they influence the demand for specific financial tools. In combination with the Fed’s refusal to update regulations that would have improved RTP, actions like lower caps on interchange fees come off as suspiciously self-interested in the creators of FedNow.
FedNow didn’t solve any problem in the market that RTP wasn’t already solving. Fed actions, that stunted RTP adoption and the imposition of interchange fee caps, have all come at the banking sector’s expense and benefited FedNow. Suppose we believe it’s important to have impartial regulators. In that case, we should pay close attention to actions coming out of the Fed and consider removing incentives it may have to step outside their mandate to the public interest.
Isaac Schick is a policy analyst at the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.