On Wednesday, Jerome Powell, the Chairman of the Federal Reserve, is slated to testify before the Joint Economic Committee. Perhaps now, Members of Congress will finally receive answers to the hard questions that Powell’s subordinates have refused to give them for months.
Congress should push especially hard to receive answers on the Fed’s real-time payments plan, which presents what may be the biggest Fed power grab in over a generation.
The issue boils down to this: In August, the Federal Reserve said it would create a system that would facilitate immediate bank transfers. That means no more 24-hour turnaround times for consumers to receive the money they need, and no more holding patterns on the weekends. There’s nothing wrong about that, but the confusion in Congress stems from the fact that, years ago, the Fed, after studying this issue, asked the private sector to create these capabilities itself. It did, and has already connected roughly 60-percent of the population to immediate transfer services.
Now, however, the Fed is trying to make itself a competitor in the industry despite its earlier ask of the private sector to handle the job. If not handled the right way, the Fed’s “public option” can turn into a public monopoly, all while reducing the number of Americans connected in real-time and leaving the public’s sensitive financial data at risk.
In past months, both Republicans and Democrats – from Sen. Pat Toomey (R-PA) to Doug Jones (D-AL) – have expressed their concerns to Esther George, the president of the Fed Bank of Kansas City and the lead on the Fed’s real-time payments proposal. But she has refused to give direct answers to any of them, casting a giant question mark over what Fed involvement in real-time payments can mean for their constituents.
With Powell, the big boss, finally in town, there is no longer an excuse for the central bank to speak in such obscurity and broad platitudes. Congress created the Fed and still possesses oversight power over the central bank. To allow the Fed’s proposal to move forward, here are the three key issues that Congress receive clear, direct answers on to ensure protection of the public’s interests.
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Will the Fed’s System Protect the Private Sector?
The first question Congress needs to ask Powell is whether the Fed’s real-time payments system will be interoperable with the private sector. That is, will the Fed’s real-time payment service work with the preexisting, private real-time providers that respond to the Fed’s initial please for handling this issue, or will the Fed’s proposal effectively cannibalize the entire marketplace? Congress has a responsibility to make sure that the latter possibility never becomes a reality. Because, if it did, not only would wildly successful American enterprises be ruined, but consumer choice and connectivity would also suffer.
Will the Fed’s System Work for Everyone, or Just Wall Street?
Committee members should ask whether the Fed’s system will treat all banks the same. Current private sector real-time payment systems have pledged to provide flat pricing to all banks for their services, regardless of how big they are. However, it also announced that, to remain competitive, they would have to terminate this commitment should the Fed offer volume discounts for the big banks. If the Fed’s system does not follow these same principles, it would make real-time payments less accessible to the average Jane and Joe. Simply put, it would put consumers who use small institutions at a disadvantage while giving the central bank-run system an unfair competitive edge over its private-sector competitors.
There’s reason to believe that the Fed won’t remain neutral. As the operator of the country’s check clearing service, the Fed already has a history of providing significantly cheaper pricing to big banks. Moreover, when Sen. Toomey asked about this issue in September, the Fed’s representative stated that “we have not identified the pricing that will be associated with it,” while conveniently adding the subtle warning that “volume pricing is common in the marketplace.”
Supporters of the Fed’s proposal say that it will protect small banks; however, without the central bank actually committing to flat pricing, any argument in favor of the central bank intervening in the RTP arena loses its teeth entirely.Congress needs to finally get a clear-cut answer from the Fed on this question as soon as possible.
Will It Enrich Big Tech & Jeopardize Consumer Data?
Asking the Fed about implementing proper consumer protections needs to be a principal concern at the Senate hearing as well. Under the current real-time marketplace, Big Tech’s instantaneous transfer systems, like Google Pay and Amazon Pay, are required to operate through a chartered bank. That is because chartered banks have safety and soundness regimes that protect consumer information. The regulations on these banks extend far beyond the requirements expected of Google, Amazon, and companies of similar profile under the Gramm-Leach-Bliley Act.
Given that Facebook just faced yet another data breach last week, Congress must ensure that the Fed’s real-time system does not become a loophole for large corporations to skirt the law and get direct access to the Fed. Otherwise, a federally-run real-time system would only create the possibility and incentive for abuse and corruption.
Conclusion
Clearly, the Fed’s proposal could present serious ramifications for consumers everywhere and should not be taken lightly. That’s why it’s so important for Congress to get to the bottom of this issue and ensure that Powell finally answers the hard questions that matter to the people they represent.
Hopefully, Powell, who has been more substance-based than many of his predecessors, gives Congress the answers it needs. Should he provide the Bernanke-Yellen inconspicuousness of the past, though, Congress should use all of the oversight power it has to prevent its real-time payments plan from going into effect.
The American people have been sacked with bureaucratic unaccountability for far too long. It’s time to move forward, not backward.
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