FedNow payments system would be a real-time disaster
I've spent my adult life doing three things: hunting down terrorists, making whiskey and fighting against the government's ability to weaponize regulations against businesses and entrepreneurs.
I'm an Air Force veteran, distillery owner and the former chief executive of a company supporting the U.S. Department of Defense in various sectors, including technology development in the data science business space. This experience has taught me that when the government tries to compete with the private sector, you can be sure its version will be more costly, more burdensome and less responsive. This is the advice I offer to the Federal Reserve as it explores building a faster payments system:
I caution the Fed against spending hundreds of millions of dollars to develop its own version of a faster payments system, which would be a real-time disaster.
Our retail economy is built upon the payments system, often described as the "circulatory system of the financial sector," moving funds securely and expediently from one place to another in our economy.
Much as an active circulatory system is necessary for a healthy body, it is critical for American businesses and consumers to have access to a fast and reliable payments network. This payments network enables Americans to receive a timely paycheck, pay their bills and exchange goods or services with a guarantee of payment, all the while protecting us from fraud or theft.
Because of the relationship between the payments network and the overall well-being of the financial system, the Federal Reserve is the predominant regulator in this space.
A system for the instant transfer of funds is a recent collective innovation by the private sector, known as the Real-Time Payments network. RTP has the potential to connect all market participants and streamline business processes across industry sectors, simultaneously eliminating bank transfer or money transmitting app delays. For example, real-time payments could reduce or even eliminate the time to access funds sent to you from a loved one — this is a good thing!
Recently the Federal Reserve announced that it will move forward in creating its own faster payments platform, despite many uncertainties. This is something I would advise against. If the Fed continues on this path, I ask for increased transparency on why and how this government intervention is necessary.
The continued development of this innovative technology should be done in a responsible way. Right now, the private sector has the capability to connect banks and credit unions of all sizes on the RTP network.
The Fed developing a faster payments network as a competitor to the private sector raises two major concerns.
First, if the Fed develops a competing system the result could be market confusion. Meaning, many business entities will be hesitant to join the existing network, making it ineffective.
Many community financial institutions have already made the decision to join the RTP network, but others are hesitant to sign on until they know how the Fed’s platform will operate.
Second, the Fed creates a conflict of interest as it both supervises and regulates the private sector RTP system. There would be no mechanism for the regulated private entities to legally challenge the Fed’s decision. And there is virtually no transparency or accountability from the Fed — not to me, not to Congress and certainly not to the American people.
When Fed Chairman Jerome Powell testified in Congress in July, I asked him some pointed technical questions about interoperability of competing systems. Powell agreed that there are serious concerns about technical development and policy.
Earlier this year, the Fed experienced an outage on one of its payment platforms for member banks and we still don’t know if the Fed is susceptible to cyberattacks, or if the Fed system was simply not up to snuff. A government agency should not be competing directly with the industry it regulates. A changing regulatory landscape is anathema to business planning, growth and fairness.
More concerning is a regulatory agency proceeding with a lack of transparency on the development of a tool that competes with the private sector; and the cost to the taxpayer for this new tool. The Fed has not addressed potential weaknesses and gaps in interoperability, resiliency and cybersecurity.
Finally, but perhaps most important, we are left with unknown and unanswered questions on the part of the Fed as to how exactly this new system will work.
That is why I introduced legislation to require the Federal Reserve, before proceeding further with its own faster payments system, to publicly disclose how its platform will provide a clear public benefit; how much it will cost; and how the Fed intends to recuperate said costs. The Fed must also provide a justification for competing with private-sector companies who invested, innovated and entered the payments market. This is common-sense legislation that I hope all of my colleagues and businesses would support.
RTP is a groundbreaking new technology that could transform the financial industry and improve the financial health of millions of Americans, especially those living paycheck to paycheck. If we want to improve the viability of the payments system and ensure equitable and fair access for consumers, it is imperative that our laws and policies foster responsible innovation coupled with proper oversight of the regulators.
My bill is a necessary step to ensure the Fed acts with transparency. It is Congress’ duty to provide oversight of major government actions in the payments arena.
I cannot guarantee that any existing systems will be the perfect solution for facilitating real-time payments in the United States. But if history is any indicator, no one should be encouraging the Fed to both regulate and compete against private industry, and certainly not until we have all the answers.