By Jennifer Tescher Forbes
Libra, the new Facebook-led effort to create a real-time, blockchain-based payments system, has received a cool reception from pundits, politicians, and even some of its own partners since its unveiling last month. Now, the verdict that matters the most is in: Federal Reserve Chairman Jerome Powell told Congress that Libra “raises serious concerns” and “cannot go forward” without further study from a new task force and regulator support.
We all know that could take a while. So, in the meantime, here’s a suggestion: Powell should pull the trigger and instruct the Fed to deliver on faster payments.
The irony is, the lack of a ubiquitous real-time payments system in the United States is one of the factors driving the creation of alternative payment systems like Libra in the first place. While one of the main use cases for Libra is to ease cross-border remittances, our country’s slow payments infrastructure exacerbates the financial challenges of those living paycheck to paycheck. That’s a problem the Fed can solve now.
Most people reading this column are generally immune to worrying about when the check they deposit today will be available to spend. But with nearly half of workers earning $15/hour or less, and 39% of Americans challenged to come up with $400 in an emergency, the one- to three-day gap between payday and when the money is actually available creates stress, drives up fees, and leads to increased credit usage for day-to-day expenses.
Checks aren’t the only problematic form of payment. Debit cards, which are disproportionately used by lower-income households, create similar lags between purchase and settlement. Even electronic transfers from one bank to another can take days.
These cash flow gaps are one of the reasons more than a third of people say they can’t pay all their bills on time, an important indicator of financial health. A worker who is paid on a Thursday and has a bill due on a Friday runs the risk of incurring a late fee from the biller, or getting charged an overdraft fee from her bank, or both. If you’ve ever wondered why people would pay a fee to cash a check, this timing gap is one of the main culprits. Other people use credit cards to bridge the gap and, when the card is maxed out, some turn to payday loans.
The ultimate irony is that overdraft was originally created as a service to help customers avoid bounced checks due to timing gaps. Today, debit card transactions generate most of the overdrafts largely because of timing errors, generating as much as $8 billion a year in penalty fees. While it’s impossible to know just what share of check-cashing fees, payday loans and overdrafts are a direct result of our outdated payments system, Aaron Klein at the Brookings Institution estimates that eliminating just 10 percent of these fees would amount to $3.5 billion a year back in the pockets of working families.
The Federal Reserve understands this. It created the Faster Payments Task Force seven years ago to develop a plan for giving anyone with a bank account the ability to receive real-time payments by the year 2020. More than 300 task force members spent an estimated 120,000 hours participating in 252 meetings and teleconferences. Yet here we are, less than six months from the pronounced finish line, and it still takes longer for a check from California to clear in Florida than it does to send a payment between the United Kingdom and France. (Most of the rest of the world doesn’t even have checks anymore, but that’s another story.)
The UK adopted faster payments over a decade ago. Australia and Hong Kong brought real-time systems online last year. The U.S. banking sector is far bigger, and our regulatory system is more complex and fragmented, but the technology itself isn’t the holdup. The Clearing House, which is co-owned by the country’s biggest banks, launched Real-Time Payments in late 2017. TCH says that, today, the network is connected to half of all bank accounts, although for most of us, the only time we experience it is if we send money to a friend through the Zelle person-to-person digital payments service. Zelle is offered through Early Warning Services, also owned by a consortium of the largest U.S. banks.
And therein lies the problem: As long as the only real-time U.S. payments networks and products are owned by the country’s largest banks, those banks get to decide when and how to deploy them. The cash flow of the nation is simply too important to outsource.
The ability to move money safely, securely, cheaply and quickly is of vital national importance. It touches everyone and every part of our economy. It should be considered a critical component of our national infrastructure, just as cash is today, and deployed in the broad public interest.
That’s not to say it should be the only option. Private companies and organizations - be it TCH, Facebook, or others - should have every opportunity to compete. In fact, the Fed should be positively predisposed to private-sector payments innovation, even in the case of a blockchain-based system that bypasses banks entirely.
Given that there are currently no rules or roadmaps for regulating payments outside of banks, as Facebook is proposing, it is easy to understand why the Fed wants to take its time in understanding the ramifications. Faster payments, on the other hand, is no longer anything out of the ordinary.
Go slow on Libra, Chairman Powell. But please, speed things up on faster payments.