Public-Private Competition in Payments: The Role of the Federal Reserve
23 Pages Posted: 26 Jun 2009
Date Written: June 23, 2009
This Essay argues for the introduction of public competition in the payment card clearance market as a method of addressing suboptimal competition in an industry with extremely high barriers to entry. The Federal Reserve competes with private parties for check, wire transfer, and ACH clearance, and, through competition, has forced par clearance to become the standard in these markets; only by historical accident is the Fed absent as a competitor for payment cards, which do not clear at par.
The Essay sets forth a framework for evaluating whether public competition should be introduced to a private market and argues that the Fed’s provision of a low-cost, par-clearing competitor would improve payment card clearing competition, discourage the consumer overleverage and cross-subsidization that result from the current discounted clearance system, and spur innovation.
Suggested Citation: Suggested Citation