Amid payments innovations, Fed's Barr says old systems need love too

Bloomberg News

The Federal Reserve's top regulator says faster payments networks and digital currencies — both public and private — are critical topics for research, but that research should not come at the expense of legacy systems. 

Fed Vice Chair for Supervision Michael Barr delivered the opening remarks on Friday morning at the Federal Reserve Board's Economics of Payments Conference in Washington, D.C. During the brief speech, he warned researchers not to become singularly focused on high-tech innovations.

"Traditional payment methods are still the backbone of the U.S. payments system, despite the surge in interest in emerging payment technologies. It is important to advance research in both new and older payment methods," Barr said. "Questions on the use of cash and the dynamics among the players in the debit card industry remain worthy of investigation."

His comments came just days after the Fed proposed reducing its cap on debit interchange fees by nearly 30%. Barr introduced the potential rule change during a public meeting on Wednesday, arguing that the current cap — which has been unchanged since 2011 — does not reflect the lower processing costs incurred by card issuers. 

The proposal has drawn sharp criticism from banks and their allies, who argue that the lower cap would force banks to make up lost revenue by raising costs on other products and pulling back on perks, such as cash-back rewards. 

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In his remarks, Barr said he welcomes feedback from payments experts, researchers and the broader public during the ongoing 90-day comment period.

"Public input is a key element of the rulemaking process for the Federal Reserve, and I look forward to reviewing the comments that we will receive on the proposed revisions," he said. "I also appreciate the opportunity for Federal Reserve staff to engage with the broader scholarly community on this and other topics, as research is an important component for our consideration of regulatory actions."

During his speech, Barr emphasized the need for payments innovation to "promote broad access and financial inclusion," noting that the cost of payments services can be prohibitive and serve as a barrier to low- and moderate-income households and small businesses.

Barr also highlighted the multiple roles the Fed plays in the payments system, "including as a supervisor of banks and financial market utilities and as an operator of some key components of payments infrastructure" — noting the July launch of FedNow, the central bank's instant payments clearing service.

Barr also recounted his stances on emerging topics in the payments space. He noted his view that digital assets known as stablecoins, which peg their value to a separately issued currency such as the U.S. dollar, are a form of private money and need to be regulated as such.

"The Federal Reserve has a strong interest in ensuring that any stablecoin offerings operate within an appropriate federal prudential oversight framework, so they do not threaten financial stability or payments system integrity," he said, adding that regulators have issued guidance on how they should engage with such products.

Barr also discussed the Fed's ongoing research into central bank digital currencies, or CBDCs, which has included exploring how the technology might support a future payments rail. He added that the research applies to digital-ledger technology more broadly.

The exploration of a CBDC is merely preliminary, as the Fed has made no decision about the potential adoption of a digital dollar, he said.

"As Chair Powell has emphasized, [the Fed] would only proceed with clear support from the executive branch and authorizing legislation from Congress," Barr said.