Private Markets, Public Options, and the Payment System

Abstract

The speed at which money moves between people and businesses in the United States lags well behind international standards. Slow payment speeds lead to inefficiency across the economy, drive demand for high-cost credit products, and have hampered the federal response to 2020’s pandemic-driven economic crisis. To speed up the payment system, the Federal Reserve (“Fed”) has announced its intention to build “FedNow,” a publicly operated, real-time payment platform, which would compete with a privately run platform in the interbank payment market. Critics claim that the Fed’s plan represents a historically unprecedented—and possibly illegal—encroachment on turf that properly belongs to the private sector. Against the Fed’s critics, we argue that the FedNow plan holds the capacity to achieve three objectives at the heart of payment policy in the United States: to catalyze innovation, enhance access to developing payment networks, and shore up financial stability.

(A revised version of this paper is available on the Yale Journal of Regulation's website: https://digitalcommons.law.yale.edu/yjreg/vol37/iss2/1/)

Keywords: payment system, central banking, financial regulation, Federal Reserve, real-time payments, banking, public options, administrative law, regulation

JEL Classification: k00, k10, k2, k22, k23, g20, g21, g23, g28, n12