There will be a lot of attention paid to the Federal Reserve this week, as Chairman Janet Yellen is expected to announce a rise in interest rates on Wednesday. The Fed claims to be open and transparent, yet all the speculation surrounding the announcement suggests the opposite. Indeed, it is astonishing how the financial system of what is supposed to be a functioning market democracy depends so much on the pronouncements of one individual.
The Fed isn’t just about interest rates, though. So this week in particular is a good time to look at some other areas where the Fed has accrued more power than it should. I’ll look at the Consumer Financial Protection Bureau tomorrow, but for now let’s look at an example of the Fed deciding to do something because it wants to, even in the absence of statutory power – forcing payment networks into a one-size-fits-all model.
My colleague John Berlau spent some time at the Money 20/20 conference recently (probably the most important conference for the future of commerce that you’ve never heard of). There was a Fed Financial Services booth there. They were promoting the idea of a consolidated real-time electronic payment network.
Payment networks (think Visa, MasterCard, or a bunch of other lesser known ones like Accel that you’ll find on the back of your payment card) form a vital function in commerce; not only do they enable payments between bank accounts, they let the payee know the payer or the network itself is good for the money. They grew up by themselves, without any government sponsorship or mandate. The Fed now wants one system as opposed to the competing networks that exist today.
The Fed was asking what seems a simple question, until you think about it: wouldn’t it be better to have a single electronic payment network, rather than have networks compete behind the scenes for trade from retailers and banks? The Fed being the single all-knowing oracle of finance (complete with its Pythian priestess), could it not simplify everything and thereby free consumers from the cost burden of paying for messy, confusing competition?
To be fair, the Fed has stepped back a little from its previous stance, which was that it should run a faster payments network, putting it directly in competition with networks it regulates. However, it has asked all parties interested in setting up a faster payments system to share their technology with it. That’s not a good sign for a competitive market.
We should also bear in mind the UK’s experience. The government there asked the industry to set up a faster payments service. When it did, it introduced an intrusive new Payments Service Regulator to oversee the industry.
The trouble is that when central banks are given power, they use it. We see that in the cycle of central bank regulation of interchange fees, for instance, from Australia to the US to Europe and now back to Australia again. The supposed consumer benefits rarely appear and the consumer at the margin suffers from the costs of increased regulation.
For decades, the Fed was content in its role as a clearing house for paper checks. Now that technology is drifting into obsolescence, thanks to the innovation of newer, faster payment systems (the innovation the Fed insists is not occurring).
So the Fed is looking to assert itself in the emerging new world of financial technology (“fintech” to the insiders). The best way to gain that power is to coerce banks into building a Fed-designed, Fed-directed payment network that affords it the luxury of granting permission for innovation, and regulating the entities that depend on its network to survive.
Such powers need not be explicit or direct – or even, heaven forfend, authorized by Congress. As my colleague Wayne Crews has pointed out, the vast array of powers the Fed presently has — “regulatory Dark Matter” – allows it merely to coerce by binding guidance, rather than formally ordering the result it wants.
The Fed has no statutory authority to establish the payment network it covets, but that appears to be no obstacle. The Fed’s ambition to build a network of its own design should stand as a warning to the emerging FinTech industry: The Fed sees your innovations as a threat to its relevance and authority.