The Fed's Michael Barr on Real-Time Payments and the Basel Endgame

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:15)

So you are about to listen to a very special episode. This is a live conversation that we recorded with Michael Barr, the Fed's vice chair for supervision at the Clearing House annual conference in New York on November 17th.

What should we talk about? There's nothing going on. It's not like there's been any development in payments or bank regulation. It's kind of boring.

Michael Barr (0:38)

Yeah, I don't know.

Tracy Alloway (0:39)

No, okay. There is a lot to talk about, so I should get started right away.

Why don't we start with payments? We are at the Clearing House conference, so that's probably a good place to start. You know, you launched FedNow, the new real-time payments clearing system a few months ago in the summer. How's that going? What's the take-up been like, and what have you learned since launching that?

Michael Barr (1:01)

Well, I think it's going well. I think the important thing to remember about take-up is that it's gonna take a long time. When we've seen any payments innovation in our economy, it takes a long time for people to get used to the idea, to develop it, to figure out how they're gonna use it. But right now, what we've done is built the rails. And those rails can be used by the banking sector to provide new services to their customers, to households and businesses.

Take-up really requires banks to decide that their customers really want the service, and then they can innovate on top of it, and that's what we're looking forward to over time.

Joe Weisenthal (1:38)

Do you have any way of gauging, setting aside that it's going to take a while, it's like what constitutes a benchmark that we should watch for? Okay, this is taking up, again, setting aside that we, maybe decades, but what should we be looking out for to see? Is this going well?

Michael Barr (1:56)

Again, I think the right way to think about this is over the very long term.

If you think about any payments innovation, whether it's the development of banknotes or the rise of checks in the 1700s or really any kind of innovation we've seen in payments, they take a very long time to build a network.

Once that network gets built and you have scale, then it really takes off and everybody assumes it's been that way forever. So we're really at the very early stages of this.

Tracy Alloway (2:25)

So speaking of development, I am not a payments expert. I used to know more about the space when I was a banking correspondent, but that was like more than 10 years ago at this point. But I do remember 10 years ago, The Clearing House also developed its own real-time payment system.

Is it weird that we've ended up with two, basically a publicly owned one and a sort of privately owned?

Michael Barr (2:50)

We actually have a very long history in this country of having both public rails and private rails. That's the way most of our payments technology has evolved over time. Most of our payment systems today have both public aspects and private aspects. We really think of these things as complimentary. We work really closely together.

David and Mark were taking selfies yesterday. These are close collaborations.

Tracy Alloway (3:17)

Glad we could be here to facilitate it. But just on this note, could you get a situation where, for instance, a lot of the higher volume payments from the big banks are traveling along the Clearing House pipes whereas a lot of the smaller payments from smaller banks are going along the public rails? Basically a fracturing or a fragmentation of the system.

Michael Barr (3:37)

I don't think that, if we ended up that way, I don't think that would be a fracturing. We have lots of systems now where larger volume payments travel one route and smaller volume payments travel the other.

That could end up being the efficient way to do it.

It would be fine if it ended up that way. It also would be fine if there were a mix of transactions on both kinds of rails. They really are complementary. I think that if you move forward many years, we would expect that banks would have access to both kinds of rails.

They could choose which rail to send an individual payment on. That would be great.

Joe Weisenthal (4:12)

Why are they complementary? Because if they do roughly the same thing, and I would intuit that most payment systems essentially benefit from network effects and the bigger one makes it more valuable to use that one, why wouldn't we assume that it's just going to be one wins and one loses?