Error processing SSI file

The Benefits and the Drawbacks

To be sure, if such technological innovations work, they could provide us with remarkable opportunities to increase not only convenience in the way we pay for things, but efficiency and reliability as well.

Check fraud and currency counterfeiting could be severely curtailed. The cost of processing and delivering paper checks-estimated to be as much as one percent of the nation's GDP-could be drastically reduced. Of course, potential problems abound in bringing these benefits to bear.

The cost of implementing or participating in these new systems may be too big for some institutions to absorb. The infrastructure necessary for widespread merchant and consumer use of these payment methods--retrofitting ATM machines, installing point-of-sale terminals and so forth--will take some time to unfold. With many security issues still unresolved, consumer acceptance of electronic payments technology is also up in the air.

Perhaps most important of all, consumers remain comfortable with traditional payments options, most notably cash and checks. Service providers will need to make a strong case for the new payment alternatives to persuade people to change.

The Public Policy Issues

And consumer acceptance is not the only obstacle. There are numerous public policy issues facing government officials, regulators and the public alike. For example, software companies, telecommunications conglomerates and others outside the established governmental and banking networks now have the technological capability to issue electronic currency. But how will consumers know if an issuing authority is legitimate? What happens if an issuing authority fails? And what effect, if any, will electronic currency have on the conduct of monetary policy?

In addition, while check fraud and certain types of street crime may retreat in the wake of electronic payment advances, new types of fraud will no doubt arise. Indeed, the government may find it more difficult to collect taxes and fight financial crime with individuals transferring funds anonymously and instantaneously around the world. Under the Bank Secrecy Act, for example, anyone transporting more than $10,000 in currency across international borders must report it to the Internal Revenue Service. Should that requirement be applied to electronic cash carried across the border? To Internet transactions? If so, how will such transactions be monitored?

Consumers, meanwhile, want to be sure their electronic payments are secure and private. Will security standards remain a step ahead of computer hackers? Can consumers disavow an unauthorized electronic transaction? Who is responsible for consumer losses when a system malfunctions? How easy will it be for governments and businesses to tap into private information about individuals? Do creditors, tax authorities and law enforcement agencies have a right to such information?

There are no easy answers to these complex questions. But they signal an approaching crossroads in the evolution of payments technology. It is instructive to know how we reached this point. Indeed, the historical evolution of our payments system is an interesting story, and it's one that has involved a critical role for the Federal Reserve.

[Return To Previous Page][Continue To Next Page]