• Since the 1970s, the Federal Reserve has acted as both a regulator and a market participant in the provision of automated clearinghouse services.
  • Twenty years of falling prices that don’t match any identified cost savings suggest the Federal Reserve is using its platform for non-market policy purposes that serve to undermine private providers and benefit bigger banks.
  • These lessons and potential conflict of interest issues must be taken into account as the Federal Reserve also considers entering the real-time payments space.


The Federal Reserve (the Fed) plans to provide real-time payment services, but the move wouldn’t be the first time the Fed has entered a market as both a regulator and a participant. In the early 1970s, the Fed began providing an automated clearing house (ACH) service.

An ACH is an electronic network for financial transactions that acts as a computerized clearinghouse and settlement service, processing electronic payments made by financial institutions. It is this network that underlies electronic banking as we understand it today. Administered since 1985 by the NACHA (formerly the North American Automated Clearing House Association), it conducts more than $ 41 trillion and 24 billion electronic financial transactions each year.

Originally established in the late 1960s by California banks with the Calwestern Automated Clearing House Association, since ACH’s history began, there has been close interaction between private industry and the Fed. The advances of ACH were inextricably linked with the development of computers, and in the 1960s private computing was not well developed; as a result, the industry relied on the Fed’s computer processing capacity. In 1977, there were four ACH suppliers in the United States; the Federal Reserve and three private providers. In the end, only one private provider survived, The Clearing House with its ACH service, the Electronic Payments Network (EPN) and the Fed, a duopoly that remains in place today.

Concerns about the Fed’s involvement

The fact that the Fed is both a market player and a regulator is an obvious conflict of interest. This combination is also a very unique construct in American economic life; although there are other instances where the private sector is regulated or supervised by a direct competitor, this is clearly unusual and undesirable. The Fed, as a government entity, is not subject to the Sherman Anti-Trust Act or other laws designed to prevent monopoly business practices, an exemption that does not apply to its competition in the industry. private.

In addition, intervening in the market without demonstrating market failure or that private industry is not providing the required services violates the Fed’s mandate under the 1980 Monetary Control Act. Such intervention affects the market at large: government agencies entering public procurement reduce competition, stopping or slowing innovation. The provision of these services by the Fed (whether ACH or real-time payments) can be expected to take years to develop and cost taxpayers hundreds of millions of dollars.

These concerns, however, are not the focus of this analysis. Instead, it’s best to focus on perhaps the most egregious demonstration of the Fed’s conflict of interest: how it prices its services.

The private sector adjustment factor

Since the 1980 Monetary Control Act, the Fed has been required to charge for the services it provides to financial institutions, including ACH (although this requirement also covers real-time payments). The law introduced the Private Sector Adjustment Factor (PSAF), the method by which the Fed calculates the direct and indirect costs of providing a service as if it were provided by private industry. Using the OFFS, the Fed determines the fee schedule for the associated services annually.

Although the Fed publishes infrequent updates to the PSAF methodology, the actual calculation is not made public and, therefore, the accuracy and appropriateness of the calculation cannot be validated. The Fed does, however, publish an annual return on equity (ROE). This calculation is a percentage of total spending over revenue, which is what the Fed would “claw back” if it were a private provider (ie profits). The most recent figures are available below.

Millions of dollars

Year Income Total expenditure Net income (ROE) Targeted ROE Recovery rate after ROE (%)
A B TAXI) D E (A / (B + D))
2017 (actual) 441.6 419.4 22.2 4.6 104.1
2018 (estimate) 441.7 432.0 9.7 5.2 101.0
2019 (budget) 440.2 430.8 9.4 5.4 100.9

At first glance, the outlook looks bright. A recovery rate so close to 100 percent indicates that the fees charged are appropriate, as the Fed barely makes a profit. This optimism, however, must be tempered with an understanding that the results say nothing about the assumptions or methodology behind the OFFS itself. If the Fed does not accurately assess the cost of providing its services through the OFFS, the fees charged by the Fed could be artificially low. In this case, the Fed would capitalize on economies of scale and the explicit support of taxpayers to provide services at a price that no private competitor could hope to match. It is certainly curious that the Fed has not performed an audit of its payment systems cost accounting processes since 1984; although an audit was discussed in 2016, if it was conducted, no results were made public.

The Fed’s ACH fee schedule itself is also publicly available, and throughout its history there has been a marked reduction in prices. Private industry has also had to reduce its prices to be competitive. This trend continued for 20 years, and it appears that the Fed is disadvantaging both small financial institutions and systematically undermining private industry in pricing.

Federal Reserve price trends

Aside from the opacity around the Fed’s cost recovery practices, we have some insight into the central bank’s public pricing of its ACH product. These data clearly show that the Fed is reducing ACH transaction fees for large financial institutions operating on its network and billing smaller financial institutions (the vast majority of community banks and credit unions in the country where the Fed has a quasi- monopoly) higher costs per transaction. We see this differential treatment in practice by looking at the Fed’s publicly available pricing schedule for ACH, from which a telling pattern can be easily observed that the Fed favors larger financial institutions and disadvantages smaller (and potentially its competitors too).

The Fed’s pricing appears to represent price discrimination designed to attract large customers to its ACH system and move them away from the private sector competitor. The impact of the Fed’s imposition of volume-based pricing in the ACH, which has been in place for over a decade, continues today. Looking at the latest data available from the Fed, financial institutions receiving less than 10,500 items per month or sending less than 6,000 items per month end up paying “1 per item received or sent,” while the Fed charges them a distance. largest financial institutions. less. Specifically, financial institutions that send at least 1.25 million ACH items per month and receive at least 15 million items per month are only charged a fraction of a penny per transaction: 0.22-0 , 23 ¢ to send and only 0.14-0.15 ¢ to receive, almost an order of magnitude lower than that charged at most financial institutions.

According to NACHA’s 2018 annual list of the top 50 ACH initiators, only 17 of the largest U.S. financial institutions are eligible for this discount level. In summary, the Fed’s pricing policies in ACH mean that more than half of the smallest community banks and credit unions pay at least 1 cent per ACH item, and the largest financial institutions pay 75 to 80% less per item. article.

If the Fed chooses to enter the real-time payments market, it is to be expected that the Fed will once again engage in discriminatory pricing of real-time payments, which, through the history of the Fed in ACH, does not appear on the basis of cost differences, and that resulted in price inequality between larger and smaller financial institutions.


At one level, this apparent price war is not a negative outcome for consumers. Increased competition lowers prices and increases the quality of the services provided. Consumers have undoubtedly benefited from it.

The problem is, it is grossly inappropriate for the Fed to act as a private competitor. The Fed’s shift to volume discounts that only large banks can achieve has resulted in benefits for large financial institutions and their customers that have not benefited small financial institutions and their customers. Providing a service that is also provided by private entities goes against the Fed’s mandate. Additionally, the Fed is a government agency that operates outside of normal cost constraints. This allows the Fed to provide fee schedules that do not appear to be based on market or cost realities, but rather to take advantage of the Fed’s taxpayer support to provide services at increasingly unaffordable prices. provide in private. This development goes against the whole spirit of PSAF.

The lessons learned from the Fed’s provision of ACH services should be seen as the discussions of the Fed re-entering the private market as a real-time payment service provider.

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