It's OK for the Federal Government to Provide More Competition in the Arena of Payment Systems
There are many dangers with having the government compete in markets. The biggest is that political forces will end up leading the government to subsidize the product or service it is providing. Subsidies can be quite costly, not only because society might then overconsume the good or service, but because getting the tax revenue to pay for the subsidies creates tax distortions.
If government subsidies are the big danger, then areas where welfare can be substantially increased with a small total cost to the government are places where the benefit/cost ratio of the government competing in a market are especially good. Areas in which price is far above marginal cost are places where the social welfare benefit is high compared to the cost. in this cost assessment, most of the “cost of customer acquisition” should be disregarded. What the government does tends to be reasonably well publicized by free media, and the government can be patient with word of mouth telling about low prices. So the cost of customer acquisition is likely to be lower for the government than for private firms. It is the cost of actually providing the good or service that the government should be focused on.
In my view, electronic payments are an area in which the true marginal cost at scale is quite small, while network externalities make for oligopolies with substantial fees. So this is an area ripe for the government competing. It is probably better for the government to not get involved with guaranteeing against fraud in accepting payments. Some form of digital cash with free or nearly free transfers seems fairly simple. (A property of cash is that if you pay it, no one will compensate you if someone accepted it fraudulently, unless you are able to find and sue the fraudster.) In any case, if the government provided free or almost free electronic transfers of funds, fintech (financial technology) firms could provide add-on services.
Such government competition in payments is not a pipe dream. Brazil is doing something in this area. In the March 2021 Wall Street Journal article “Brazil’s Central Bank Uses Payment Platform to Spur Competition,” Paulo Trevisani and Jeffrey T. Lewis report:
Brazil’s central bank is revving up its yearslong effort to bust up the country’s clubby banking industry, using a pandemic-driven shift toward touchless payments to launch its own digital platform.
The payment system, dubbed Pix, was set up and is maintained by the central bank instead of private payments players, unlike similar systems in other countries. Since its launch in November, Pix is already handling a larger share of digital payments than its private-sector alternatives, advancing the regulator’s goal of spurring competition and getting more Brazilians to use financial services.
…
“Our concern is how can we make the system more competitive, more efficient?” said Roberto Campos Neto, president of the Central Bank of Brazil.
Although some of the banks who belonged to the old oligopoly are no doubt losing, many other firms are benefitting:
New entrants are expanding quickly and attracting both domestic and foreign investors, said Carlos Lobo, a partner at corporate law firm Hughes, Hubbard & Reed LLP.
“All companies in this ecosystem are seeing an absurd growth in their valuation. They are attracting foreign investors, who also like the regulation the central bank has in place.”
The benefit to welfare seems substantial. Suppose that payment systems are now taking a 2% fee. Whichever side of a transaction that is levied on, it is like a 2% tax in its distortionary effects. And it is like a 2% tax on top of other marginal tax rates in the narrower sense of taxes. An extra 2% added to the marginal tax rate would be a big deal. Ergo, a 2% payment fee is a big deal. If the government can make that go away, it is like a tax cut in its benefits for the economy.
Of course, another reason I am interested in making the electronic payment landscape more competitive is that when electronic payments (including payments with credit and debit cards) are a larger fraction of payments compared to paper currency transactions, then the modifications of paper currency policy needed to enable deep negative rates carry a lower political cost and hence are more likely to be used. And I see deep negative rates as something that could have saved us from most of the hit from the Great Recession. See:
Seeing digital cash in the context of opening up more monetary policy space points to one detail of how digital cash should be implemented: digital cash should have a nonzero interest rate. If, say, the rate was even as little as +3 basis points in a situation like today, that would at least set the precedent for a nonzero interest rate that could go negative at some point in the future. That would be better than to hardwire a zero interest rate into the payment system offerings of the government.
Central banks and other parts of governments should stop running away from negative rates and beginning explaining how wonderful they are. They help avoid recessions and thereby help savers: temporarily low rates lead to recovery and hither rates. Deep negative rates for a short time are better for savers than zero rates for years and years and years. Negative rates also help borrowers because borrowers are hurt by recessions and negative rates end recessions sooner. And they give borrowers more buying power during the recession when they need it most.