When the Federal Reserve was created more than 100 years ago, the primary goal was financial stability. In the aftermath of the financial crisis of 2007-2009, today's public discourse about the Fed is largely focused on its roles with respect to monetary policy, being the lender of last resort and supervision of financial institutions. Nonetheless, financial stability remains of utmost importance. One aspect of financial stability that is receiving increased attention is the payment system. A reliable, efficient and safe payment system is essential to a healthy economy. Quite possibly, the payment system is at a critical juncture in its evolution.
The payment system has been a focal point for the Fed since its founding. Partly in response to disruptions in payments during the Panic of 1907, the Federal Reserve Act allowed for the establishment of a national check-clearing system.1 The act also created the Federal Reserve note. Since then, Federal Reserve banks have provided cash to meet banks' demand, cleared checks and provided FedACH and Fedwire services, which allow funds to be transferred electronically (e.g., direct deposits, bill payments, wire transfers).
Technology is at the center of changes throughout the payment system, from the elements underpinning payments processing to the services provided to users. While the former changes are less apparent than the latter changes to most of us, they are no less important for reliability, efficiency and safety. Technology is changing the face of payments, as has been evident in the preference shift from checks to credit/debit cards and the rising interest in mobile payments.2 Beyond these mainstream innovations, we have also seen the introduction of virtual currencies such as Bitcoin. Regarding the evolving technology more generally, there have been changes both in the clearing and settlement technology and in the front-end technology, which uses the existing payment-clearing and settlement systems. For instance, card readers attached to mobile phones allow consumers a slightly different way to pay for goods and services while using a credit card, but the settlement technology largely remains the same. In the face of these technological advancements, it is incumbent on the Fed to understand these changes given its stake in a smoothly functioning payment system.
While payments have been evolving for hundreds of years, we need continued innovation to further improve the U.S. payment system in terms of speed, cost and safety. We can learn from other countries that have already made such improvements. For example, some countries have infrastructures in place that allow for near-real-time retail payments, including the United Kingdom and its Faster Payments Service, while others are relatively close to implementing such a system, including Australia with its New Payments Platform.3 In the U.S., continued innovation must further the country toward common goals that will best serve the U.S. public and the economy.
In light of the payment system's importance to financial stability, the public relies on the Fed to make sure that the payment system is running effectively, efficiently and safely. To that end, one of the Fed's payment system roles is to be a leader, convener and catalyst. While our role is not to dictate how the payment system will evolve, we have and will continue to bring together stakeholders to discuss and support efforts to improve the payment system, which is covered in more detail in this annual report's featured essay by our Bank's First Vice President David Sapenaro. This is a worthy goal and an appropriate role for a central bank to play.
President and CEO
- See Chapter 7, "The Federal Reserve in the U.S. Payments System," in The Federal Reserve System: Purposes & Functions, published by the Board of Governors of the Federal Reserve System. [ back to text ]
- See the "Mobile Payments Innovation" sidebar for additional reading on mobile payments. [ back to text ]
- For more information on near-real-time payments, see the speech by former Cleveland Fed President Sandra Pianalto on Sept. 24, 2013, "In Pursuit of a Better Payments System." [ back to text ]