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

Key Takeaways

• The Fed’s development of new payment systems has been significantly delayed.
• Payment system improvements by the Fed are often reactive rather than proactive.
• Current payment systems operate like batch processes, which are outdated.
• Access to funds after a paycheck is issued should be immediate.
• Uncertainty in fund availability creates challenges for financial management.
• Many people using check cashing services actually have bank accounts.
• Immediate cash access is a primary reason for using check cashers.
• The Federal Reserve is criticized for not addressing delayed payments effectively.
• Real-time payments do not require blockchain technology.
• The Federal Reserve has been neglecting its regulatory duties.
• The inefficiency of the Fed’s payment system has broader implications for financial technology.
• Delays in payment systems impact individuals living paycheck to paycheck.
• The Fed’s actions during crises highlight a lack of proactive measures.

Guest intro

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 assistant secretary for economic policy at the US Treasury Department, where he played a leading role in crafting and securing passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Prior to his Treasury tenure, Klein served as chief economist of 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.

The Fed’s delayed payment system development

• The Fed’s development of new payment rails took much longer than necessary.

  — Aaron Klein

• The Fed undertook a four to five-year process to build their new payment rails called FedNow.
• This delay is seen as a critical inefficiency in modernizing payment systems.
• Other countries have developed payment systems more efficiently.
• The timeline for the Fed’s payment system development is criticized.

• What George and I were arguing was that the Fed was undertaking a four to five year process to build their new payment rails called FedNow which happened much later than it should have.

  — Aaron Klein

• The delayed development has implications for financial technology and regulation.
• Understanding the timeline helps in comparing with other countries’ payment system advancements.

Insufficient improvements in the Fed’s payment system

• The Fed’s payment system improvements are motivated by crisis management.

• The Fed didn’t largely it has done absolutely nothing… frankly I think some of those motivations were not about improving the payment system to help people but were really about shortcomings found in the SVB crisis.

  — Aaron Klein

• The Fed’s approach is seen as reactive rather than proactive.
• Historical inefficiencies in the payment system persist.
• The SVB crisis highlighted the Fed’s reactive stance.
• The lack of proactive measures in payment system improvements is criticized.
• The Fed’s actions during crises are not seen as genuine enhancements.
• The Fed’s approach to payment system improvements lacks foresight.

Outdated batch processing in payment systems

• The existing payment system operates like a batch process.

• The Fed’s existing payment rails or ACH networks is like your laundry machine… that’s how our payment system has worked for a very long time real time payments where I pay you as I go it’s like washing your clothes one by one as they get cleaned.

  — Aaron Klein

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

Immediate access to funds after paycheck issuance

• There should be no delays in accessing funds after a paycheck is issued.

• There’s no reason why you can’t have that money immediately… the real world consequence is I gotta have a gift for my kid on the morning of the twenty fifth.

  — Aaron Klein

• Delays in accessing funds affect individuals’ financial management.
• The banking system’s processing times are criticized.
• Immediate access to funds is essential for financial stability.
• The impact of delays is significant for those living paycheck to paycheck.
• The banking process should allow for immediate fund availability.
• Timely access to funds is crucial for personal financial planning.

Challenges of fund availability uncertainty

• The uncertainty of fund availability creates financial management challenges.

• I don’t know the exact moment my paycheck comes in… this uncertainty means I don’t know if my paycheck is gonna come in on Monday or Tuesday.

  — Aaron Klein

• Payment processing uncertainty affects personal finance.
• Real-world financial consequences arise from processing delays.
• Immediate fund availability would alleviate financial stress.
• The need for more immediate access to funds is emphasized.
• Understanding payment processing implications is important.
• The uncertainty in fund availability impacts financial planning.

Use of check cashers despite having bank accounts

• Seventy percent of check cashers’ users have bank accounts.

• My research showed using the FDIC’s data that seventy percent of people who go to check cashers have a bank account now David why would you go to a check cashier if you had a bank account because you don’t have enough money in your bank account right.

  — Aaron Klein

• The reliance on check cashing services highlights banking system issues.
• Immediate cash access is a primary reason for using check cashers.
• The delays in bank processing times influence financial decisions.
• Check cashing services provide immediate financial relief.
• The financial behaviors of individuals using check cashers are significant.
• Understanding financial accessibility issues is crucial.

Critique of the Federal Reserve’s priorities

• The Federal Reserve is not addressing delayed payments effectively.

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

  — Aaron Klein

• The Fed’s priorities are critiqued 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 questioned.
• The critique emphasizes the need for better financial accessibility.
• The Fed’s inaction has direct implications for consumers.
• The Federal Reserve’s priorities are seen as misaligned with consumer needs.

Real-time payments and blockchain technology

• Real-time payments are not uniquely enabled by blockchain.

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

  — Aaron Klein

• The necessity of blockchain for real-time payments is challenged.
• 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 blockchain necessity.
• Understanding real-time payment systems in various countries is crucial.
• The statement challenges common perceptions about blockchain.

Federal Reserve’s regulatory responsibilities

• The Federal Reserve is neglecting its regulatory responsibilities.

• The Federal Reserve who’s supposed to regulate our payment system has ignored the law the expedited funds availability act.

  — Aaron Klein

• The Fed’s inaction is a significant critique.
• The neglect has implications for consumers and the financial system.
• The Federal Reserve’s role in regulating payment systems is emphasized.
• The critique highlights the need for regulatory enforcement.
• The Fed’s regulatory duties are crucial for financial stability.
• Understanding the Fed’s role in payment systems is important.