By Zachary Warmbrodt & Victoria Guida for Politico
Federal Reserve Chairman Jerome Powell has informed lawmakers that the central bank is "seriously considering" moving forward with the development of a faster payments system that would compete with a network built by the nation's largest financial institutions.
In a letter to senators that was obtained by POLITICO, Powell gave his most forceful defense yet of the Fed potentially establishing a new real-time payments system, which would help consumers and businesses make transactions in a speedier fashion.
He said the Fed was "uniquely placed" to overcome the difficulty of establishing nationwide access because of its existing payment infrastructure and relationships with more than 10,000 banks.
Powell's comments will likely escalate tensions with big banks that have invested more than $1 billion in launching their own faster payments network under the Clearing House Payments Co.
The banks have been preparing to fight back, and some lawmakers have joined their cause in raising doubts about whether the Fed should move ahead. Meanwhile, the Fed is facing pressure from Sens. Elizabeth Warren (D-Mass.), Chris Van Hollen (D-Md.) and other lawmakers to go forward with its own system.
At a press conference on the Fed's latest interest rate decision Wednesday, Powell said public comments were "overwhelmingly favorable" to the idea of the central bank building its own system, adding that it "wouldn't be unusual" for the Fed to operate alongside the private sector in payments.
"We’ve not made a decision on this, but it’s something we’re looking at carefully, and it’s something I do expect we’ll make a decision on soon," he said.
In his July 26 letter, Powell said the Fed had identified "significant challenges" that private-sector services will likely face in offering equitable access for faster payments to thousands of banks across the country.
"We expect that a single private-sector provider of such services is unlikely to connect to the thousands of small and midsize banks necessary to yield nationwide reach, even in the long term," he said.
Powell said a Fed real-time payments network would promote the safety and soundness of the U.S. payments system and bolster its ability to provide stability to the economy in times of crisis.
A lack of competition for faster payments will likely create "undesirable outcomes" in terms of pricing and service quality and also create a "single point of failure."
The Fed, Powell said, would be committed to exploring interoperability with the private banks' system as a way of achieving nationwide coverage.
If the Fed proceeds, Powell said the next steps would include the release of a formal request for comments on the potential new service.