Next on the Federal Reserve’s Agenda: Your Credit Card

Jul 31, 2014 by AFP

By Kuper Jones

If there is one thing the Obama Administration has done with unwavering consistency, it is acting outside of its authority. Recently, the Federal Reserve has expressed interest in entering the electronic payments industry. More specifically: processing credit and debit card transactions. The possibility of this happening is alarming as it would mean the federal government would be trying to compete in an industry they regulate. This could pose a serious threat to the free market and competition in the electronic payment industry.

The Fed Reserve’s interest in electronic payments stems from a public consultation paper they issued back in September. In the paper, the Fed expresses concern that the U.S. is falling behind other countries in payment efficiencies. While other countries have created new and often faster payment systems than those available in the U.S., it is not because their respective markets demanded it. The reality is that these systems have not generated a return on investment and were only created due to mounting pressure from their governments.

The Fed suggests that the electronic payments market is failing because there appears to be a lack of real time payments.  A payment is considered to be made in real time when there is an instant transfer of funds from the payer to payee. The Fed is using this claim to justify the creation of a whole new, government operated payment system that would directly compete with the current electronic payment system.

The possibility of the Fed entering this market as a competitor is alarming for a number of reasons. Firstly, the fact that the Fed creates and enforces the regulations in the very industry they wish to compete in poses a serious threat to would-be private sector competitors. It would be like allowing a referee to call and play in the same match.  Not only does this put the private sector at an inherent disadvantage, but also allows the Fed, who is notorious for lacking transparency, to run amuck in the electronic payments market.

The Fed’s reasoning for wanting to enter the electronic payments business –the alleged market failure –seems to carry no merit.  Currently, there is no real market demand for payments to be in real time. Despite this, the private sector still has options available to those seeking real time payment services. Worse, is that the Fed is declaring a market failure based on transaction speeds yet the Fed’s Automated Clearing House (ACH) system is the slowest in the country and operates on a loss. This raises serious questions about the Fed’s rationale and their ability to successfully implement a real time payment system.

The electronic payments industry has seen a lot of innovation in recent years, which makes it hard to believe that the Fed seems to believe the market is somehow failing. Credit and debit card processing companies have developed a universal system that accepts all cards regardless of consumers’ card branding. They’ve developed innovative technologies that allow consumers to make secure payments by simply waving their cards over scanners. Innovative ideas like Square and Google Wallet, which allow anyone with a smartphone or tablet to process electronic payments, have brought a whole new aspect to the market.

Given the Fed’s lack of transparency and claims purporting a market failure, it is imperative that Congress exercise oversight in this matter. Congress needs to hold hearings examining the merit and substance of the Fed’s claims.  Initiative must be taken before the Fed can take action otherwise this innovative industry will be distorted by this unchecked regulator.