Delusions of the Fed, and Other Payments Pipedreams

It is clear that we are at an inflection point for digital payments. There is the potential for the means of paying for things to change forever, where cash becomes passe and digital transactions assume a role in perhaps a quarter of all retail transactions.

How to get there is less clear.

Last week, the Federal Reserve Banks of Boston and Atlanta published a report on mobile payments that aimed to present a vision for realizing a future with mobile payments at its core. I argue that the report shows just how delusional is the Federal Reserve, and indicates – clearly, I might add – that digital payments is not just farther off on the horizon, but potentially an impossibility. (I know, I’m throwing the gauntlet down here, but you’re welcome to read more polite blogs.)

The Fed banks present three scenarios for a “mobile payments ecosystem”: a) operator-centric; b) bank-centric; and c) collaborative. These scenarios should not surprise any Bank Innovation reader. The short explanation of each is a) one where the mobile network operators “own the relationship for payments made using the mobile phone;” b) one where the banks own the consumer relationship and use existing payment networks – credit, debit or ACH – to process payments; or c) one where “an entity … would manage or work with all the parties in the mobile payment ecosystem to facilitate an efficient, holistic environment and provide oversight, business rules and standards for multiple service providers.”

How did the Fed come to these scenarios? Fifteen months of meetings of the Mobile Payments Industry Workgroup, a group the Fed formulated.

The first two scenarios are impossible, and it seems to me that the Fed knows it. (Otherwise, the Fed would be truly delusional.)

“The US mobile payments, particularly in the last year, has begun to move down what appears to be an obstacle-filled path, absent any shared vision regarding key principles for success.”

And while the Fed says “all parties recognize, at some level, however, that they share some common goals,” the Fed also is honest enough to acknowledge that these various parties are not going to come to a consensus on their own. And the Fed also knows what is required to make such a consensus: in the Fed’s words, “a central coordinating entity” that can “develop and approve cross-industry standards to make certain the new, mobile digital payment system for the 21st century is even more reliable, ubiquitous, and robust than the one it will be replacing.”

That entity would be government. While the Fed points out that “in other countries where mobile has emerged more rapidly, a central body from government, or one sponsored collectively by key private sector stakeholders, has helped organize and direct collaborative solutions,” yet nowhere in the report does the Fed say it will step up and be that body. The Fed thinks that its “administrative and thought leadership” will help “maintain a level of momentum” toward the creation of industry standards. Whom is the Fed kidding? Even the vaunted collaborations which have sparked since the MPIW started its meetings – and which the Fed lauds – are competing with each other. And they will continue to do so, particularly since the stakes are so high. Just look at the news yesterday from some of the teams fighting for share.

The Fed needs to come to terms with the fact that it, and it alone, will need to spearhead this mobile payments effort. Further, I would argue that the Fed will have to “own” at least some portion of mobile payments. There are just too many hands reaching into the kitty to guarantee equitable treatment and results, particularly for consumers. That crash you just heard was the gauntlet hitting the Fed’s front door.