The debut of the FedNow instant payment service in the summer of 2023 raised afresh the issue of the appropriate role of the government in the U.S. payments system, particularly given the competing, private sector Real-Time Payment Network from The Clearing House.
For Federal Reserve Board Governor Christopher Waller, allowing the government to play a bigger role in payments would be a mistake.
“A better approach is one in which the private sector continues to have a significant footprint, with the role of government limited,” says Waller, who chairs the Fed’s payments committee. Waller, appointed to the Fed in late 2020 by then-President Donald Trump, was cited earlier this year by Bloomberg as a potential nominee for Fed chairman if Trump pushed out current Chairman Jerome Powell. (Powell has publicly stated that he plans to resist any such efforts, and Bloomberg pointed out that Waller is known as a staunch backer of Fed independence.)
Innovation Fares Better in Private-Sector Hands
Waller, commenting in mid-November at the annual meeting of The Clearing House in a speech and a fireside chat, has multiple reasons for preferring shared roles in payments, with an accent on private providers.
One is the need for innovation — and the need to abandon innovation that doesn’t pan out. Waller believes that “the private sector, through competition, is typically best situated to sort out good ideas from bad ideas, rather than central banks or other public-sector institutions choosing winners and losers.”
He adds that the potential value of new payments tech can sometimes be “murky” and that private-sector competition helps to find out what new tech is truly good for. A facet of that process is the potential for failure and loss of investments that the private sector balances against the potential for success.
In addition, says Waller, “rarely can the government match the ability of the private sector to efficiently allocate resources and explore how well new technologies can address actual shortcomings in the current payment system.”
Yet Waller does see significant reasons for keeping the Fed involved in payments. One is resilience. The Fed provides redundancy in multiple payment channels, which helps ensure that if the private-sector services encounter problems, there will be an alternative to keep things going. The Fed also serves some fundamental roles, such as settling interbank obligations using balances at the central bank, he points out.
Ideally, the Fed should support private-sector initiative while defending the system against dangers to financial stability, according to Waller.
“I’ve tried to stress that a large part of safety in the payment system is resiliency and redundancy. Nobody wants to get on a plane with one engine. You want two engines on a plane for a reason.”
— Christopher Waller, Federal Reserve Board Governor
Having “two engines” in various aspects of U.S. payments — FedNow and RTP, FedACH and ACH, and Fedwire and CHIPS (Clearing House Interbank Payments System) — helps make sure that “if something goes wrong, the payment system doesn’t go down.”
Waller says that, in contrast, Pix in Brazil and UPI (Unified Payment Interface) in India, both instant payment systems, have no redundancy. “If their systems go down, there is no alternative, no switch you can flip,” says Waller.
Read more: Will Nonbank Intermediaries Tip the Balance Towards Instant Payments?
Forces of Competition: the Fed Itself
While Waller likes the idea of redundancy and resiliency, he has concerns about trends he has seen in other countries for government-run payments to compete aggressively with private payment providers.
“I have a very distinct American capitalist view that it’s not the government’s job to go out and compete with the private sector,” says Waller.
To illustrate this point, he pointed to electric vehicles, a darling of the Biden administration.
“No matter how much you may think that EVs are a wonderful product, the U.S. government doesn’t make them. We let the private sector do that. We may subsidize that, but we don’t directly compete with private firms,” says Waller. “That is not necessarily the attitude in other countries and it’s certainly not in payments.”
Waller says that he can’t understand why governments feel the need to compete directly with private payment companies, often with the goal of driving down costs. He says this contributes to tensions in discussions he’s had about payments with other central bankers.
Waller points out that since passage of the Monetary Control Act of 1980 the Fed has been required to recover its costs of providing payments, and not to subsidize its efforts with government funds.
“I agree with that principle,” says Waller. “It’s not my job to provide services on the taxpayer’s dime — even if it’s the taxpayers receiving the benefits.”
Read more: How U.S. Instant Payments Can Catch Up to the Rest of the World
Forces for Competition: Nonbank Payment Providers
By background Waller has been an academic and a Fed staffer and then a board member, never a private-sector banker. However, he views nonbank payment competition through a lens favorable to fair competition — a level playing field. Banks come under heavy supervision and regulation and provide a wide range of products and services, he says.
However, Waller has concerns about the fintech and nonbank payment provider models. He says they tend to “take one thread of banks’ business, pull it out and say they can do it better and more efficiently.”
Further, says Waller, the nonbanks say that, “Because we’re not doing everything a bank does, we don’t need the regulation you put on a bank.”
Waller disagrees, saying that his attitude is “same risk, same regulation. You need to make sure the regulatory framework is consistent, no matter who’s doing the activity.”
Read more: Could Walmart Move Accelerate Instant Payments, Cutting Out Mastercard and Visa?
Waller Doesn’t Get CBDCs, Sees Value in Stablecoins, Likes Crypto’s Tools
Campaign trail overtures to crypto from the Trump team have continued post-election. Waller’s views on crypto differs significantly depending on which facet of it you pick.
On central bank digital currencies (CBDC), he’s completely cold, even disparaging.
Waller sees CBDCs as akin to infomercials. “Look at this, it mashes! It slices! It dices! Look at all the wonderful things it can do!” says Waller, imitating TV hucksters. “But the whole point of an infomercial is to get you to avoid asking a simple question: Do I really need this?”
For some time, in speeches and other venues, Waller has been asking what problems CBDCs solve and he says he has yet to get a compelling answer. Further, he says, he believes some of the central banks that have gone further down the CBDC road than the Fed are now having second thoughts because of his jawboning.
“They’re starting to walk back,” says Waller, though he adds, “This doesn’t mean they’ve stopped.” He says the Fed continues to look at the concept, but he insists that if you can’t explain the point, “then why are you wasting your time on this?”
On the other hand, while he doesn’t favor government-issued crypto, Waller sees some positives for stablecoins.
“There’s always a demand for a safe liquid asset, something with stable value that you can move in and out of,” says Waller. “There wasn’t such an instrument in the crypto world. So they created one [the stablecoin]. That’s what I love about markets.” He calls the dollar-denominated stablecoin “a synthetic dollar.”
This said, the instruments carry risks. Two years ago, when crypto crashed, the dollar peg of some stablecoins broke, as holders began a run on the coins. Stablecoin legislation pending in the current Congress does not address this risk, according to Waller.
If that risk does get addressed, which he says entails some regulation, then some benefits could be realized. One is the comparative ease of tracking ownership and usage of stablecoins via their blockchain foundations. He says this makes stablecoins more trackable for such purposes as anti-terrorist financing than actual digital dollars.
Waller sees a payment-oriented stablecoin as a possibility that would open new sets of payment rails.
“But we do want to have legislation to make sure that they’re pretty much run-proof,” he adds.
What appeals most to Waller about cryptocurrency techniques are the tools. Beyond the blockchain, concepts like tokenization and smart contracts appeal to him.
“I don’t care if you’re trading Dogecoin,” says Waller. “I’m more interested in the technology and how that technology gets transferred over to traditional forms of financed and banking to make them more efficient, easier, faster.”