Why the Fed needs to lead on payments
The US is often so big and lumbering that it lags well behind the rest of the world in terms of adopting new technology. Cellphones were one such; chip-and-pin technology on debit and credit cards is another. And more generally, as a comprehensive new Chicago Fed paper from Bruce Summers and Kirstin Wells shows, the US is and will for the foreseeable future lag most of the rest of the planet when it comes to immediate funds transfer, or IFT.
This is the problem that resulted in the founding of PayPal: the banks were so bad at doing anything about allowing people to send money to each other that they allowed PayPal to rise out of nowhere. And now there are roughly a gazillion startups like Dwolla and Square which also want in on the act. Even though the banks, if they just got their act together and put a basic and universal mechanism together, could put everybody else out of business pretty much overnight.
So, what are the chances of that happening? Slim to none, say Summers and Wells:
Within the last few years, IFT has become a fully functional nationwide means of payment in a number of countries, including four that we have examined in detail in this article. International experience with IFT shows that technology is a necessary but not sufficient condition for innovation in payments and that enabling real-time and universal access to deposit accounts at banks is the key to meeting the public’s needs for more certain, faster, and universal payment services. Perhaps the most critical enabling factor is strong sponsorship by a national body with the responsibility and motivation to stimulate continuous improvement in the national payment system. This body might be a consortium of private banks collaborating through a national payment association, a public authority such as the central bank, or a public–private partnership. It is not clear that such sponsorship can be readily found in the U.S., at least not at the present time, because there is no national body that takes responsibility for the development of the national payment system. As a consequence, IFT and other national payment innovations are likely to progress in a halting and incomplete manner and at a pace that lags innovation that is observable in other countries, such as those examined in this article.
What Summers and Wells don’t say, perhaps because they work for the Federal Reserve, is that it’s downright idiotic that the Fed doesn’t step up to the plate and take on its natural role as guardian of the national payment system. Why doesn’t it? I’m not sure, but I suspect it’s something to do with the fact that the Fed doesn’t really exist as a unified body: there’s just a network of regional federal reserve banks, with a board of governors in Washington.
Still, it’s about time that someone — if not the Chicago Fed, then either the New York Fed or the people in Washington — should take this issue seriously and start dragging America’s thousands of banks into the 21st Century. Because they’re not going to organize themselves. And that just means that the US is going to become more and more behind the times, in a world where everybody else is increasingly capable of transferring money immediately and securely to pretty much anybody they like.