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It would take more than 80 years for the nation to try a third time. In
the wake of a particularly severe banking panic in 1907, Congress
concluded that a governmental entity was needed to provide a stabilizing
element to the nation's banking system, and in 1913 it passed the Federal
Reserve Act, which established a central bank. Chief among the Federal Reserve's
legislated responsibilities was bringing "elasticity" to the nation's monetary
system through its operation of the discount window. The Federal Reserve
was also given responsibility to supervise and regulate state member banks
and to ensure the integrity and efficiency of the nation's payments system.
Responsibilities for the latter now include maintaining bank reserve accounts,
furnishing currency for circulation, facilitating the clearance and collection
of checks, transferring funds electronically and acting as fiscal agent
for the Treasury, as well as providing services to other government agencies.
 The basic mission of the Federal Reserve has changed little since its founding
more than 80 years ago, and it reveals why the Fed remains intently concerned
with the nation's payments system today. That mission, founded in the mandates
of the Federal Reserve Act, has been reinforced over the last 20 years by
the Depository Institutions Deregulation and Monetary Control Act of 1980
and the Expedited Funds Availability Act of 1987. Through these actions,
Congress continues to recognize the Fed's importance as both a payments
system regulator and provider.
In carrying out its mandates, the Federal Reserve has over the years worked
actively with the banking industry to make the payments system more efficient,
reliable and predictable. For example, the Fed improved the efficiency of
the payments system significantly with the creation of Fedwire, an electronic
funds transfer system that links Reserve Banks to financial institutions
and government agencies. Having operated for more than 70 years, Fedwire
remains one of the most durable, as well as critical, payments mechanisms
in the United States. Fedwire transfers of reserve balances and book-entry
securities now exceed $1 trillion daily.
In the early 1960s, the Fed helped the payments system take another step
forward in efficiency when it refused to process checks that were not imprinted
with magnetic ink character recognition (MICR) lines, permitting their high-speed
processing. The Federal Reserve also led the industry effort 20 years ago
to develop an automated clearinghouse (ACH) system as a more efficient means of handling recurring payments. Use
of this system continues to grow at double-digit rates annually.
Today, the U.S. payments system is the largest in the world, with an average
of 1.4 billion payment transactions totaling more than $1.5 trillion being
processed daily. But as history has shown us, the system must adapt to the
changing needs of its users. And how its users wish to conduct commerce
is indeed changing. Global markets have become increasingly important for
both businesses and individuals. As a result, rapid cross-border payments
are essential, creating the need for extended hours for trading and funds
transfers. At the same time, the Internet and evolving communication technology
are making it possible to reach customers cost effectively in their homes
and offices, both for banks and nontraditional payments service providers
alike. Software developers and merchants with products and services to sell
are seeking new payments options to facilitate the electronic purchase of
their wares.
In response to the challenges inherent in a rapidly changing payments and
banking environment, the Fed in late 1994 embarked on a nationwide restructuring
of its own management of financial services, which included the creation
of a Financial Services Policy Committee (FSPC). This committee, chaired
by St. Louis Fed President Thomas C. Melzer, is responsible for setting
the strategic direction and policies for Federal Reserve financial services
nationwide, as well as working with payments system participants to explore
and develop new payments options. The restructuring helped integrate what
was primarily a District approach to payments system innovation and delivery
into an increasingly nationwide one. It has also enforced greater accountability
for achieving objectives and a more strategic focus to payments system planning.
This approach allows the Federal Reserve to adapt its financial services
more productively to the changing needs of the market. At the same time,
it aids the Fed in working actively with other payments system entities,
in both the public and private sectors, to develop and improve the payments
system.
Providing certain payments services nationwide, such as check clearing and
ACH, was formerly the exclusive domain of the Federal Reserve. While this
is no longer true, the Fed continues to work with the industry to perfect
each of them, setting standards and shaping their development.
Today, the Fed is working with the industry to help shape the development
of electronic check presentment, or ECP. ECP will allow check data to be presented for settlement electronically
instead of manually, reducing the inefficiency of transporting and processing
checks by labor-intensive, paper-based methods. In this regard, the Fed
has brought representatives of the banking industry and other check clearinghouses
together to strive to set common standards for ECP and actively explore
the benefits and address the barriers to moving toward an electronic-based
check processing and settlement system. The Fed's work in ECP is headquartered
at a System-wide product office at the Federal Reserve Bank of Boston, which
directs the Fed's developmental work in retail payments.
In other arenas, we are working with the U.S. Treasury and other agencies
to reduce the cost of processing government payments and pursuing a number
of changes to large-dollar, or wholesale, payments mechanisms. These efforts
are led by a fiscal agency/cash product office at the Federal Reserve Bank
of Philadelphia and a wholesale payments product office at the Federal Reserve
Bank of New York. In addition, an independent financial services research
group has been created that is dedicated solely to payments system issues.
The group is headquartered at the Federal Reserve Bank of Cleveland. |
