Why the Fed?
Understanding why the Fed is involved in improving the nation's payment system is important. As the nation's central bank, the Fed has a stake in ensuring that the payment system is functioning at its highest level. The 2015 paper was clear in this regard: "A U.S. payment system that is safe, efficient and broadly accessible is vital to the U.S. economy, and the Federal Reserve plays an important role in promoting these qualities as a leader, catalyst for change and provider of payment services to financial institutions and the U.S. Treasury."
The Fed serves four main roles in the payment system:
An operator in the payment system is an entity that provides direct payment system services, and the Fed has long been a provider of such services. Currently, the Federal Reserve participates through the following key offerings:
Fedwire is a real-time (or immediate) settlement system used by banks, businesses and government agencies for mission-critical, same-day transactions. Typically, this service is used for very large transactions. In 2014, an average day for Fedwire involved 538,000 transactions totaling $3.5 trillion for an average value of around $6.5 million per transaction.
The FedACH services are used to clear and settle credit and debit transactions, typically on a one-day lag. Typical ACH transactions include direct deposit of payroll, direct payments for monthly bills and various federal government payments. In 2014, the Fed processed an average of 46.3 million commercial automated clearinghouse transactions each day totaling $79.2 billion. That's an average of $1,712 per transaction.
While the Fed has long been a provider of check-clearing services, the process has changed considerably over the years as check writing has declined and legislation such as the Check Clearing for the 21st Century Act (which allowed for the electronic collection of checks) has added efficiencies to the process. The Federal Reserve System operated 45 check processing sites as recently as 2003; that number was managed down to a single site in mid-2010.
National Settlement Service
Some financial institutions have agreements that allow for transactions among the institutions to be summed up and settled at once, rather than having every transaction settled individually. The National Settlement Service receives files containing the summation of these transactions and settles them for all involved institutions on the books of the Fed.
The Fed is responsible for maintaining public confidence in U.S. currency. This includes supplying enough currency and coin to meet demand, maintaining the quality and integrity of the physical money in circulation and ensuring that local financial institutions have ready access to currency.
The Fed develops and implements regulations to operationalize various payment system legislation enacted by Congress. Examples of recent regulations include:
- Regulation CC, Availability of Funds and Collection of Checks. Among other things, this regulation governs when deposits must be available to bank customers and also the use of check images for settlement instead of physical checks.
- Regulation II, Debit Card Interchange Fees and Routing. This regulation establishes standards for assessing whether debit card fees are reasonable and proportional to transactions.
As one of four national banking supervision agencies, as well as the supervisor for state-chartered banks, the Fed examines the safety and soundness of the banks it supervises, including use of the payment system.
This final role is perhaps the most significant for the current undertaking. In its position as the nation's central bank, the Fed has the ability to bring various stakeholders together to help create a shared focus on and to commit to improving the U.S. payment system.
Traditionally, improvements in the payment system have been left to market forces, rather than government direction. Yet, as a 2013 Fed paper noted: "History shows that it is sometimes beneficial for a central coordinating body to take steps to facilitate cooperation to address network or coordination challenges that otherwise impede innovation, efficiency and other public benefits. The Federal Reserve banks believe that ubiquitous, open payment networks and/or broadly interoperable networks best serve the public interest because the more members of society who can be reached with a payment instrument, the more valuable the payment instrument is to each of the other members of society." 1
Thus, the Fed's involvement is based on a twofold perspective:
- The public is best served by ubiquitous, open payment networks and/or networks that can work together.
- The Fed has the ability to bring the various stakeholders in the payment system together to collaborate on the future of the payment system in the U.S.
The latter perspective is the focus of the Fed's "leader/catalyst" role, in which it acts as a convener and provides resources to supporting initiatives.
- "Payment System Improvement – Public Consultation Paper," Federal Reserve Financial Services, Sept. 10, 2013. [ back to text ]