Structural conflicts in central banking: Regulator or operator of a payment system?

Editor's note:

This paper was originally published by the Wharton Initiative on Financial Policy and Regulation at the University of Pennsylvania in October 2023.


Central banks can operate national payment systems, either as monopolies or in competition with private systems. Central banks can be the payment system regulator. This paper analyzes the multiple and sometimes conflicting roles facing central banks and payment systems. The paper explores different objectives central banks are tasked with (or task themselves with), looking at whether these objectives are in agreement or in conflict with each other and with other mandates the central bank faces. A primary focus of the paper is to examine the impact of different roles of the central bank in the payment system with corresponding innovation, or lack thereof, in that nation’s payment system. The paper examines why America’s payment system became a global laggard in adopting better payment technology. Structural conflicts between the Federal Reserve’s role as regulator of America’s payment systems and operator of its own system, regulator of bank’s safety and soundness, and prioritization of objectives played various roles in America’s failure to modernize its payment system.


America has the world’s largest economy, yet its payment system is increasingly outdated and slow compared to other major economies. Federal Reserve (Fed) Chairman Jay Powell acknowledged in his July 31, 2019 press conference: “the United States is far behind other countries in terms of having real-time payments available to the general public” as the Fed was in the midst of a multi-decade process of trying to catch up to the rest of the world. The Fed finally launched its updated payment system, FedNow, in late July 2023, with little fanfare and fewer than 1 percent of banks signed up to use it. Why has America lagged?

This paper analyzes four countries’ payment systems and the role the central bank played in each. Three of the countries, China, Brazil, and the United Kingdom, adopted real-time payment systems, while the United States did not. The central hypothesis of the paper is that structural conflicts of interest in the Federal Reserve’s mandates, coupled with a lack of prioritization of the importance of faster payments is the most likely explanation for America’s failure. If accurate, then a failure to align these incentivizes will continue to plague America and the simple creation of FedNow will prove inefficetive at modernizing the payment system.

The Fed’s conflict of interest stems from its dual role as the regulator of payment systems while simultaneously expecting it to operate its own large payment system. This dual responsibility creates an inherent tension in which the central bank will not establish regulations for the payment system that its own operational arm cannot comply with. Even when Congress gave the Fed the regulatory responsibility to ensure a modern payment system, the Fed prioritized its role as operator. The Fed foreclosed itself from requiring faster payments and allowing the private sector to solve the problem. Even when the private sector built such a system, the Fed not only failed to act through regulation, it responded by announcing a decision to build its own real-time payment system. The launch of FedNow provides another test of this hypothesis as to whether the Fed will use its regulatory authority only after it has created an operational system that can comport with new rules.

The result of America’s delay in expediting its payment system is difficult to measure in the macro-context. However, the distributional consequences are clear. Lower income Americans suffer greatly from the existing payment system and stand the most to gain from faster payments. The faster payment lever was one of the few levers available to the Federal Reserve to reduce income inequality, yet it was never pulled. As a result lower income Americans lost potentially hundreds of billions of dollars over more than a decade in overdraft and late fees, interest costs, payday loans, and check cashing fees. In fact, many of the high cost financial services that flourish in the United States but are largely absent elsewhere are made more profitable by slow payments.

The paper is organized as follows: It begins with a brief foundational section defining payment systems and the central bank’s role. The paper then turns to several international examples where real-time payments have been established and examines how that happened and what role their central banks played. The paper concludes with an analysis of why other nations have been able to make this leap while America has not and what role the Federal Reserve’s structural conflict as operator and regulator has played.

Read the full paper originally published by the Wharton Initiative on Financial Policy and Regulation at the University of Pennsylvania in October 2023.


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