By: George Selgin and Aaron Klein
America’s payment system seems more like it belongs to a developing nation than to one of the wealthiest countries on the planet.
U.S. banks can still
Payment delays are a
Poorer Americans have already
Yet the Fed itself deserves much of the blame for the slow pace of clearing U.S. payments. While other nations were modernizing their payment systems, the U.S. fell further and further behind.
For instance, the U.K. switched to instant
On the plus side, Fed officials finally made up their minds in August,
Those steps include improvements to the Fedwire and the National Settlement Service,
A recent change
Most payments today, including direct deposits and bill payments made on the automated clearing house network, rely on either Fedwire or the NSS for completion. According to Nacha, which manages the ACH network, that
But limited Fedwire and NSS hours currently allow for only two ACH “payment windows” on weekdays (the extended hours will allow for a third). This means that payments not ordered early enough can’t be settled until the following weekday. This is a problem for West Coast residents especially.
And because Fedwire and the NSS aren’t open on weekends and holidays, many ACH payments can take several days to complete. The small scale changes announced by the Fed do not fix this problem.
Nor will FedNow quickly render ACH payments redundant when it finally goes live in by 2024. Banks will still have to hook up to the new network. And even if many quickly do so, there’s no telling just how rapidly and to what extent ACH payments will give way to FedNow payments.
Much the same
Yet the last major improvement to U.S. check payments came in 2003, when Congress passed
But while Check 21 sped up check processing, many check payments are still ultimately settled using Fedwire and the NSS, so that check recipients can still wait days for their money.
Though it could make a huge difference, keeping Fedwire and NSS open longer is relatively easy. It’s also one of the few payment-system reforms that nearly all payments-industry stakeholders support.
For that reason, it was also
The Fed’s decision to postpone one of the few implementable policy recommendations of its own task force is at best perplexing. At worst, it raises the concern that the Fed may simply not want to improve the speed and efficiency of retail payment networks that it eventually plans to compete against.
What tenants would applaud a landlord who proposed to add a spectacular penthouse to their rickety old building? Let’s not applaud the Fed’s fast payment plan until it puts its existing house in order.
Aaron Klein is policy director of the Center on Regulation and Markets at Brookings Institution.