George Selgin on the Past, Present, and Future of a Real-time Payments System

Episode Summary

Executive Summary: George Selgin argues that the U.S. payment system remains too slow, especially harming low-income households and merchants, and that the Fed made a strategic mistake by pursuing FedNow instead of first modernizing its own 24/7 settlement services. He contends the private sector’s RTP system already solved much of the real-time problem, while the Fed’s entry distorts competition and may disadvantage community banks through volume pricing and regulatory conflicts.

Main Topics: Why payment speed matters (Priority: 5/5): Selgin explains that slow clearing and settlement impose real costs on paycheck-to-paycheck households, merchants, and businesses, forcing use of payday lenders, check cashers, and overdrafts. U.S. lags in real-time payments (Priority: 5/5): He notes that many countries have much faster payment systems and that the U.S. is behind because of its fragmented banking structure and legacy infrastructure. Private-sector RTP solution and Fed’s shift (Priority: 5/5): The Clearing House’s RTP launched after the Fed’s 2014 task force and gained broad market coverage, but the Fed later reversed course and decided to build FedNow, chilling private adoption. Fed competition and conflicts of interest (Priority: 4/5): Selgin argues the Fed competes unfairly because it is also a regulator, can potentially cross-subsidize, and has not clearly committed to pricing discipline or interoperability. Missed opportunity: 24/7 Fed settlement services (Priority: 5/5): He says the Fed could have immediately improved legacy payment rails by extending Fedwire and NSS hours, which would have helped consumers sooner and increased competition against RTP. Pricing, volume discounts, and community banks (Priority: 4/5): Selgin warns that Fed competition will likely force volume discounts, undercutting RTP’s flat-fee model and potentially harming smaller banks despite their support for FedNow. Governance, politics, and perceptions (Priority: 3/5): He discusses how Kansas City Fed economists and bureaucratic incentives may have pushed the Fed toward FedNow, while public concern over big banks shaped the political debate.

Key Arguments: Slow payments are especially costly for low-income households living paycheck to paycheck, who face overdrafts and payday-lender dependence when funds do not clear quickly. The U.S. payment system is unusually fragmented, making nationwide fast-payment coordination harder than in countries with more concentrated banking sectors. The Clearing House’s RTP was a credible, market-based solution that had already launched by 2017 and achieved substantial adoption. The Fed’s decision to build FedNow created a chilling effect on RTP membership because banks may wait rather than pay to join two non-interoperable systems. Competition from the Fed is not ordinary competition because the Fed also regulates its rivals and may be able to cross-subsidize through opaque accounting. The Fed could have improved access and competition faster by extending hours for Fedwire and the National Settlement Service to 24/7/365. The Fed’s own response to comments showed a stark asymmetry: it approved pursuing FedNow, but deferred action on 24/7 settlement services despite universal support. RTP is structured as a utility-like system, fully prefunded, with no dividends and a long safety record, so criticisms about dangerous private control are overstated. If the Fed enters the market, volume discounts are likely, which may force RTP away from flat fees and alter costs for smaller banks.

Data Points: Fed task force launched: 2014 - The Fed convened a payments task force to explore faster retail payment solutions. RTP launch: 2017 - The Clearing House’s real-time payments system was up and running by 2017. Market coverage: About 50% of all bank deposits - RTP had signed up roughly half of U.S. bank deposits, mostly through large banks. Number of U.S. banks: Roughly 5,000 to 6,000 - Selgin cites the large number of banks as a coordination challenge for nationwide payment network adoption. Number of credit unions: Almost equal number to banks - He notes another similarly large set of institutions that complicate network coordination. TCH founding year: 1853 - The Clearing House is described as a long-standing payments organization based in New York. TCH investment in RTP: Something like a billion dollars - TCH spent heavily to build the RTP system. Fedwire hours: Closes at about 9 p.m. Eastern - Selgin says Fedwire does not operate 24 hours, limiting same-day settlement. ACH payment windows: Two windows per day - Payments sent in time for these windows can settle the same day; otherwise they are delayed. Requested operation schedule: 24/7/365 - The Fed was asked to consider round-the-clock settlement services. Outside audit gap: Since 1984 - Selgin says the Fed’s accounting procedures have not had an outside audit since 1984. Community bank advisory representation: Three members - He says RTP has community bank representation on its advisory board.

Pivotal Quotes: "there really is no good reason for it" — George Selgin: He is describing why the U.S. should not still have a slow payment system given the availability of faster systems abroad. "we're going to play. ... we're going to take over" — David Beckworth: Beckworth’s sports analogy captures the Fed’s shift from encouraging private-sector RTP to building FedNow itself. "Doctor, heal thyself" — George Selgin: Selgin argues the Fed should have first improved its own settlement infrastructure before entering the real-time payments market.

Implications: The debate suggests faster payments could have arrived sooner and more fairly if the Fed had modernized existing rails instead of competing directly with private solutions. Future policy will likely hinge on interoperability, pricing, and whether the Fed can avoid distorting competition.