The Beating Heart of US Government Payments: Risks, Interconnectivity, and a Black Swan.

I was listening to the Feb. 5, 2025 episode of the Odd Lots podcast entitled "The Treasury Payment System Elon Musk Now Has Access To". The podcast discusses a particular department of the US Treasury called the Bureau of the Fiscal Services.

From the podcast: "88% of government payments flow through this system every year and it is what I've described as the beating pulsating heart of the federal government's payments. Before you get to the banking system, before you get to the Federal Reserve this is the heart, this is the artery that is making it all function. It is the most important aspect of the federal government even though no one's ever heard of it."  

Watching the flow of money is a smart approach from the DOGE team. If you want to understand what drives and motivates a system then watching the flow of money through that system will be educational.

Financial institutions today operate within a highly interconnected digital ecosystem, where banks, payment processors, fintech firms, and regulatory bodies rely on shared infrastructure to facilitate seamless transactions. The rise of real-time payment networks, automated trading systems, and cloud-based financial services has further entrenched this inter-connectedness. Global financial giants no longer operate in isolation; they depend on a complex web of data-sharing agreements, third-party vendors, and cross-border regulatory frameworks. From high-frequency trading algorithms to instant mobile banking transfers, financial IT systems have become deeply integrated, ensuring speed and efficiency but also creating significant inter-dependencies.

The rapid expansion of APIs (Application Programming Interfaces) has accelerated this transformation, enabling banks to connect with fintech startups, credit agencies, and other financial institutions in ways previously unimaginable. Open banking regulations, such as those in the European Union and Australia, have compelled banks to make customer data accessible to third parties, fostering competition but also heightening the level of inter-connectivity. Moreover, cloud service providers like AWS, Google Cloud, and Microsoft Azure now host critical banking applications, meaning that even traditional financial institutions are reliant on external tech infrastructure. This level of integration has created a landscape where financial services operate in real-time across multiple platforms, allowing instant settlements and automated risk assessments.

However, this tight integration carries unprecedented systemic risks, as failures in one part of the network can cascade rapidly across multiple institutions. A failure at a major cloud provider, for instance, could simultaneously disrupt several banks, payment networks, and stock exchanges, paralyzing financial markets. Similarly, a cyberattack targeting a widely used financial API could compromise the data integrity of countless banks at once. These interconnected IT systems have effectively eliminated many of the firewalls that once existed between institutions, making it harder to isolate issues before they become systemic crises.

The concentration of financial services within a handful of key technology providers also increases vulnerability to single points of failure. A cyberattack on Swift, the international payments network, or a technical failure in a major real-time gross settlement (RTGS) system, could bring global transactions to a standstill. Regulatory oversight struggles to keep pace with these technological advancements, often reacting only after failures occur. As financial firms continue to digitize and integrate their systems further, the industry faces a critical challenge: ensuring resilience against cascading failures while maintaining the speed and efficiency that modern markets demand.

So, what could go wrong at the Bureau of the Fiscal Services?  

Again from the podcast: "I guess my question is, you know, if DOGE starts cutting off certain payments for whatever reason is there a backup contingency payment processor or is there like another agency that could maybe step in and do some of this?

No, there is no rule book or game plan. If this system goes down then the payments don't go out that day. And, if they break this system in a in in a way that takes months to fix that we have no rule book to for this."

Oh.

Thankfully, many of the grey-beard cobol programmers on these old financial systems know the potential for chaos and will be spelling it out. I think the likelihood of something catastrophic is remote. And, we never know when we're going to come face-to-face with a black swan.