The Federal Reserve has announced its commitment to developing its own round-the-clock real-time payments service. The FedNow Service promises to clear a transfer between U.S. banks in mere seconds — 24 hours a day, 7 days per week. At face value, this looks like a welcome development. Yet it still raises the question of whether this is a good idea for the Fed to carry out.
1. Is there a need for FedNow?
A real-time payment service is already provided by the private sector. The Clearing House has provided this service since November 2017 with increasing adoption in the market. Other firms, such as MasterCard, Visa, and PayPal, offer close substitutes. Banks are developing their own tools, such as Zelle, for retail users. And still other services are being developed using blockchain and cryptocurrency technologies. Moreover, since these solutions are being offered in a competitive market environment, we can be more confident that resources employed to provide these services will be used productively.
2. Does FedNow exceed the Federal Reserve’s mandate?
It is not clear that the mandate of the Fed includes developing a service that is already being provided by the market. To the extent that the Fed regulates private sector payment services, it should not compete with them. Further, the role of the Fed is to help the market develop by providing the proper environment, not to dictate how the market should develop. For instance, the Fed could promote the development of more real-time payment services by the market rather than providing its own.
3. What is the market-failure argument?
Market intervention is typically justified on the grounds of fixing some market failure. Yet it is not clear what the market failure would be in this case. The Fed is not attempting to do something unprovided by the market. Nor does the Fed appear to be delivering the service more quickly. The Fed estimates its service will go live in 2023 or 2024.
Instead of increasing its size and scope, the Federal Reserve should reconsider its priorities. There does not seem to be an urgent need for real-time payment technologies, which are already being offered and developed by the private sector. The role of public entities such as the Fed is not to compete with the market, but to provide and secure a good competitive environment for the market to develop.