Fed must remain lead player in real-time payments

The heightened debate over what role, if any, the Federal Reserve should have in the future payments and settlement systems is vitally critical to the emergence of real-time payments.

The discussion is notably reminiscent of the debate held more than 100 years ago in the aftermath of the financial panic of 1907 that triggered the creation of the Federal Reserve System.

Similar to then, the Fed’s involvement should be seen as not only necessary, but vital to ensuring an open and ubiquitous payments system. Such a system should allow all eligible financial institutions — regardless of size, influence or location — to have equal access and pricing, not subject to the dictates and whims of a handful of Wall Street megabanks.

The financial panic of 1907 eventually led to the creation of the Federal Reserve System. During this time, Congress created the National Monetary Commission to investigate the causes of the panic and to make recommendations to mitigate such occurrences in the future.

A key finding of the Commission revealed that the nation's financial system, and its thousands of local banks, were almost entirely dependent on a handful of Wall Street banking oligarchs. The most prominent of which was J.P. Morgan himself who, with a handful of other financial titans, decided which institutions would be propped up and which would be left to the mercies of a panicked general public.

At the time, the National Monetary Commission recommended that Congress establish the U.S. Central Bank, an independent entity that would serve all financial institutions equally without bias as to size, location, political or economic influence. In other words, the Fed would act as an honest broker to oversee, regulate and facilitate the nation's monetary transactions and liquidity needs.

The Federal Reserve has successfully served as the honest broker over the U.S. payments systems for over 100 years. For most of that time, it has provided a service alternative for local financial institutions wary of doing business with competing institutions.

During the past century, every eligible financial institution, regardless of size, has had equal access to the nation's payments and settlement systems at par through their local district Federal Reserve banks. But thanks to a furious lobbying efforts backed by Wall Street banks, the Federal Reserve board may soon be convinced to abandon over 100 years of stewardship and participation in our nation’s payments and settlement systems.

This cannot happen again. A handful of Wall Street financial firms must not be able to dictate to thousands of community-based financial institutions the terms and conditions by which they can access and participate in the payments system. The obligation of the Fed board in the digital world of payments is no different today than its obligation was when it was first created to facilitate paper payments more than 100 years ago.

The nation’s banking and financial system is unique in the world. To ensure that all financial institutions are allowed equal, open and unbiased access to the evolving payments systems, the central bank must continue to oversee, regulate and participate in the U.S. payments and settlement system.

Thousands of local financial institutions are imploring the Federal board not to go back to the days when financial oligarchs and Wall Street firms determined the fates of banks, largely based on political connections and social standing. Let’s not repeat the mistakes of the past.