Aaron Klein: The Fed’s payments system is stuck in the past

Key Takeaways

• The Fed’s development of new payment systems has been significantly delayed.
• Improvements in the payment system by the Fed are often functional rather than functional.
• Current payment systems operate as batch processes, which are outdated.
• Getting the money after the check is issued should be fast.
• Uncertainty about fund availability creates financial management challenges.
• Most people who use check cashing services actually have bank accounts.
• Getting cash quickly is the main reason to use check cashers.
• The Federal Reserve has been criticized for effectively ignoring late payments.
• Real-time payments do not require blockchain technology.
• The Federal Reserve has been neglecting its regulatory duties.
• The dysfunction of the Fed’s payments system has broad implications for financial technology.
• Delays in payment arrangements affect people who are alive to pay the check.
• The Fed’s actions during the crisis highlight the lack of effective measures.

Guest introduction

Aaron Klein is a senior fellow in Economic Studies at the Brookings Institution, where he serves as policy director of the Center on Regulation and Markets, focusing on financial regulation, payments, and macroeconomics. From 2009 to 2012, he served as deputy secretary for economic policy at the US Department of the Treasury, where he played a leading role in drafting and securing the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Prior to his time as Treasury, Klein served as chief economist for the Senate Banking, Housing and Urban Affairs Committee, working on major financial legislation including the Emergency Economic Stabilization Act and the Housing and Economic Recovery Act.

Development of the Fed’s deferred payment system

• The Fed’s development of a new payment system took longer than needed.

  – Aaron Klein

• The Fed has undertaken a four to five year process to create their new payment system called FedNow.
• This delay is seen as a significant setback in modernizing payment systems.
• Other countries have developed payment systems that are more efficient.
• The timeline for the development of the Fed’s payment system is being criticized.

• What George and I argued against was that the Fed was doing a four to five year process of creating their new payment system called FedNow that was happening much later than it should have.

  – Aaron Klein

• Delayed development has implications for financial technology and regulation.
• Understanding the timeline helps in comparing the development of other countries’ payment systems.

Inadequate improvements in the Fed’s payment system

• The development of the Fed’s payment system is motivated by risk management.

• The Fed did absolutely nothing… frankly I think some of those reasons weren’t to improve the payment system to help people but were really about the shortcomings found in the SVB crisis.

  – Aaron Klein

• The Fed’s approach is seen as reactive rather than reactive.
• Historical inefficiencies in the payment system persist.
• The SVB crisis highlighted the Fed’s performance situation.
• The lack of effective measures in the development of the payment system is criticized.
• The Fed’s actions during the crisis are not seen as real stimulus.
• The Fed’s approach to payment system development lacks foresight.

Outdated batch processing in payment systems

• The existing payment system works as a batch process.

• The existing Fed payment channels or ACH networks are like your washing machine… that’s how our payment system has worked for the longest time.

  – Aaron Klein

• Real-time payment systems are more advanced than batch processing.
• The analogy shows the inefficiency of the current system.
• Modern payment systems offer real-time processing.
• Batch processing is outdated compared to real-time systems.
• Batch processing inefficiencies impact financial transactions.
• Understanding traditional versus modern payment systems is important.

Quick access to funds after a paycheck is issued

• There should be no delay in accessing the funds after the check is issued.

• There’s no reason why you can’t have that money immediately… the real world consequence is that I have to have my baby present on the morning of the 25th.

  – Aaron Klein

• Delays in accessing funds affect individual financial management.
• The processing times of the banking system are criticized.
• Quick access to funds is essential for financial stability.
• The impact of the delay is significant for those who live to pay.
• The banking process should allow quick availability of funds.
• Timely access to expenses is essential to personal financial planning.

Challenges of uncertainty of fund availability

• Uncertainty in fund availability creates financial management challenges.

• I don’t know when my paycheck is coming… this uncertainty means I don’t know if my paycheck will come in on Monday or Tuesday.

  – Aaron Klein

• The uncertainty of payment processing affects personal finances.
• Real-world financial consequences arise from processing delays.
• Availability of funds quickly will reduce financial stress.
• The need for quick access to funds is emphasized.
• Understanding the implications of payment processing is important.
• Uncertainty about the availability of funds affects financial planning.

Use of check issuers despite having bank accounts

• 70 percent of checking users have bank accounts.

• My research revealed that I use FDIC data that seventy percent of people who go to check cash out have a bank account now David why would you go to a cashier if you have a bank account because you don’t have enough money in your bank account.

  – Aaron Klein

• Reliance on check-cashing services highlights the problems of the banking system.
• Getting cash quickly is the main reason to use check cashers.
• Delays in bank processing times affect financial decisions.
• Check cashing services provide quick financial assistance.
• The financial behavior of people who use checks is important.
• Understanding financial accessibility issues is important.

A Critique of the Priorities of the Federal Reserve

• The Federal Reserve does not speak well of late payments.

• I don’t think a single employee at the Federal Reserve has ever worried about this with the authority to write the rules… they just refuse to admit their mistake.

  – Aaron Klein

• The Fed’s priorities are criticized for lacking consumer focus.
• The gap in the Fed’s understanding of consumer needs is highlighted.
• The Federal Reserve’s role in regulating banking practices is being questioned.
• Criticism emphasizes the need for better access to finance.
• The Fed’s inaction has direct consequences for consumers.
• The Federal Reserve’s priorities are seen as inconsistent with consumer needs.

Real-time payments and blockchain technology

• Real-time payments are not only powered by blockchain.

• There is nothing unique about a blockchain ledger or tokenized asset to do this.

  – Aaron Klein

• Blockchain demand for real-time payments is being challenged.
• The historical context of real-time payment systems is important.
• Blockchain is not required for real-time payment systems.
• The argument provides a factual basis against the need for blockchain.
• Understanding real-time payment systems in various countries is important.
• The statement challenges conventional wisdom about blockchain.

Regulatory responsibilities of the Federal Reserve

• The Federal Reserve is ignoring its regulatory responsibilities.

• The Federal Reserve that is supposed to control our payment system has ignored the fast money supply.

  – Aaron Klein

• The Fed’s inaction is an important criticism.
• Negligence affects consumers and the financial system.
• The role of the Federal Reserve in regulating the payment systems is emphasized.
• The critique highlights the need for enforcement.
• The Fed’s regulatory functions are critical to financial stability.
• Understanding the Fed’s role in the payment system is important.