Understanding and Improving the U.S. Payment System

As part of the Federal Reserve's work to foster financial stability and support the nation's payment services, it is taking a leading role in assessing the evolution of the payments system. Dave Sapenaro and Kathy Paese shared findings of recent research on gaps and opportunities for improvement to the U.S. payments system during a "Dialogue with the Fed" event held Nov. 6, 2013. Paese also shared a vision on the direction the payments system needs to take in the next 10 years.

Presentation (pdf)

This St. Louis Fed discussion series is designed to give members of the public the opportunity to discuss today's significant economic and financial issues with Federal Reserve experts.

More information about payment-system improvements.

Transcript:

Karen Branding: Hello everyone. Welcome to the Federal Reserve Bank of St. Louis and to our last Dialogue with the Fed session for 2013. We're really glad you could join us here this evening. It's nice to see some familiar faces and it's a special welcome to those of you who are here for the first time. My name is Karen Branding and I oversee public affairs for the Federal Reserve Bank of St. Louis. In a minute I'll introduce our presenters Dave Sapenaro and Kathy Paese. And they're here tonight to talk to you about some recent research across the Federal Reserve on the future of the US payment system. And I know it's a topic that you're interested in, too, so we're glad you're here.

But first, as some of you may know, on December 23rd the Federal Reserve turns 100 years old. And I think part of the genius of the Federal Reserve Act of 1913 was how it structured the organization. Namely that it designed it to have 12 independent regional reserve banks in addition to a board of governors in Washington D.C. So the Federal Reserve Bank of St. Louis, we represent the eighth district of the Federal Reserve. And that's seven states Missouri, Illinois—all or parts of—Missouri, Illinois, Indiana, Kentucky, Mississippi, and Arkansas. And so by design this institution that's about to turn 100 is not a Washington central bank. It's not a Wall Street central bank. It is a federated central bank that was specifically designed to represent the economic conditions and the input of Main Streets all across the country. And tonight's dialogue with the Fed session really is part of that two-way commitment. And so we're interested to have a conversation with you tonight.

We've held several dialogue sessions this year. We were just talking about some of those at one of the tables. In April, we discussed long-term fiscal sustainability. In May, we discussed household financial balance sheets and the importance of that to families and also to the economy. Next week we'll be in Memphis and we'll be talking about economic conditions in Latin America and the implications for the United States. You can find information on all of those on our website and also stay tuned for our lineup next year. We're looking forward to that. So we'll be eager to hear your questions as we move through the presentation tonight. Each of these sessions is webcast. And so that's what the cameras are all about in the back of the room. And we have microphones handy for when you ask questions. It's really important to raise your hand and then the microphone will come over because that way the folks watching by way of webcast will be able to hear your question, too. We also like to gauge audience opinions on different questions throughout the dialogue presentation and we use this polling technology. So each of you in front of you should have a clicker. And we'll be asking you questions throughout the evening tonight and you'll be able to register your opinion using this clicker.

So let's get started by getting to know our audience a little bit better tonight. Oh, by the way, it's all anonymous so your name's not going to pop up anywhere and you can only vote once. You can push different buttons but it will register the last button you pick. So you get one vote and it's the last one you pick. So let's start with our first question, tell us a little bit about your primary employment or your occupation. So take your clicker and match up on your clicker the number that best corresponds to one of the numbers here on this screen. And I'm going to watch up on the top right here to see how many responses that we have. Okay, looks like I'm just about to call the question here. All right so let's take a look at our audience here tonight. Okay, number two is financial activities. Well, that's not surprising because we really targeted our mailing list for this dialogue to a highly qualified audience that was really into payments-specific issues. And it looks like a lot of you came. So 68%, I believe that's the number of our audience, is from financial services. And we have six in professional business services. And we've got some down here non-profit organizations. So good to see you here. It's really exactly the type of audience that we were hoping to get.

Okay, one more question, and is this the first time for you inside the Federal Reserve Bank of St. Louis? One is yes and two is no. Oh, that was an easy one. Look, we're already up at 31. Okay, well let's see. Two is no. 71% of you have been here before, what's good. It's good that we have some new people here because part of what the Fed is all about is to be a more open and transparent organization. So it's always good when we bring more people, more constituents, into our reach and we can connect with them. But we also take heart in the 71% because that means that you're wanting to come back and engage and interact with the Feds. So thanks to everyone, again, for coming. Let's see, I think we're ready to go. If you haven't already there's desserts in the middle of the table. So let's be informal here, enjoy them. They're finger foods, so dig into the desserts. And if you need to use the restroom they're out the door here and down the right—down the hall to the right.

But now let's turn to our topic for tonight, improving the U.S. payment system. It's my pleasure to introduce my colleagues Kathy Paece and Dave Sapenaro. Kathy is the senior vice president of the Treasury Division here at the St. Louis Fed. The Federal Reserve is the fiscal agent for the United States treasury and we manage its financial operations. So most of the 12 reserve banks have a role in those operations. But here at the St. Louis Fed, under Kathy's leadership, she oversees and coordinates all of the Federal Reserve's operations in terms of fiscal agency. She also receives several key services that the St. Louis Fed provides directly to the U.S. Treasury. Prior to her current role she managed the bank's ACH function and electronic services among many other things. I can tell you she is a leader in the Federal Reserve System and she's a principal on the payment study that we'll discuss tonight. It's also my pleasure to introduce Dave Sapenaro. Dave is our first vice president and chief operating officer here at the St. Louis Fed. He also oversees the operations here for the St. Louis Fed and also for our branches in Memphis, Little Rock, and Louisville. Prior to this role Dave lead our treasury functions here in St. Louis and he also worked prior to that at the Kansas City Fed overseeing its ACH and its funds transfer programs. At heart, though, I'd say that Dave is both a strategist and a metrics guy. So that means he has this key ability to not only catalyze an organization to innovate but also to get it done and put things into action. And I've got to say that's probably no doubt one of the many reasons that he was selected to oversee this entire payment study committee for the Federal Reserve System. So, Dave, I'll turn it over to you.

Dave Sapenaro: Thank you, Karen. Can hear me with this, is it on? Okay, great. I want to add my welcome to Karen's. I really appreciate you spending an evening with us here at the Federal Reserve. As Karen said we are going to talk about payments. I was talking with some of you prior to the start of the session tonight and those of us that really understand the payment system it's actually a pretty small portion of the citizenry and the country. Because for most people the payment system is just something behind the scenes and it just works when you write a check or you pay with your debit or credit card. It's just something that happens behind the scenes and it always works and who needs to understand it. But for those of us to have spent most of our careers working in the payment system and making sure that it does work and that we look for ways to improve it over time.

So tonight our agenda is really going to focus on a couple of different things. First, I'm going to provide you with an overview of the Federal Reserve's strategic direction in payments. And then my colleague Kathy is going to talk about a paper that we recently released, a public consultation paper that goes into some gaps and opportunities that we see that are in the payment system based on our research. And also some desired outcomes that we would like to put on the table and get reaction to from all of those involved in the payment system. That paper is out for public comment as we speak. Kathy will talk about we're going to close that public comment in December and then we're going to next year launch into kind of our strategizing phase to kind of digest everything we're getting and try to figure out where do we go as the Federal Reserve and how do we work with all those in the payments industry to improve the payment system over the next several years. So that's what we're going to do tonight. Kathy and I would really prefer that you ask us questions all along the way as opposed to waiting to the end and asking them all then. You can do that but we also, you know, if you have a question or you don't understand something or want more information on something we say please, you know, raise your hand or make a comment. We really like to do it that way.

Before I get into the meat of the discussion, I want to do a little bit of level setting. Because I know not everybody has a full knowledge of the Federal Reserve and what we do. I think this is a very simple chart that kind of describes what we do as an organization. Most people in the country know about this function, which is our work in establishing a monetary policy for the country. We have some the world's best economist working in the Fed System, including our boss, Jim Bullard. And they, or our boss, Jim, sits on the Federal Open Market Committee which is the policymaking body that sets interest rates. So that's the part of the Fed that's in the news all the time, you know, for a good reason. Another part of the Fed that the bankers in the audience will certainly know is our banking supervision function. We are one of a handful of regulating agencies that examine banks, both for safety and soundness, and for consumer compliance. And we have about 200 staff here in our bank and our district that supervise the state member banks in our region that Karen talked about as well as the bank holding companies. So that's a big responsibility that usually only the bankers know about and the public usually doesn't know much about what we do here. Unless we do something wrong and it hits the news and they always know about what we did there. But the third function which is the reason we're all here tonight is providing financial services to depository institutions and to the US government. This is definitely a responsibility that we have that most people, most of the public, is not aware of. But again, as the bankers know, we do provide banking financial services to banks. And I'll go into a little bit more about our roles there in a minute.

And so this is kind of where we're going to be talking about tonight. So in financial services there are really three roles that we play to accomplish our mission. This kind of big role is as an operator. And what I mean that is actually providing services to banks. We provide automated clearinghouse services. We're one of two national ACH providers in the country. The market share is about split 50-50 between the two operators. And if you're not familiar with the term ACH or automated clearinghouse that's basically think of direct deposit, payroll, direct bill payment, or your, you know, electric company automatically debits your account once a month for the bill—that's the ACH system. And we're one of two switches in the United States that runs that. We're also one of two funds transfer providers in the country. So of course banks know very well about funds transfer. This is a system they used to send money to each other. But individuals and businesses also use funds transfer to send mostly, you know, high dollar payments to each other when speed and security is of the utmost priority. We process check images that are deposited to us from banks. And even though I think we all know checks—there are a lot fewer checks being written today compared to 5 or 10 years ago because of the use of debit and credit cards—there are still tens of billions of checks, paper checks, being written. And when those are deposited ultimately at financial institutions, they are image and exchanged electronically within the banking system. And we are one provider, actually one provider of many. But we have a pretty good market share in that business as well. Then, finally, we have an electronic network that we run that connects banks to the Federal Reserve to send and receive all of these electronic transactions. So on an annual basis this business, this financial services business, is a $300 million business for us. That's the revenues that we charge to banks that use our services. And for those of you outside the banking industry, you know, this is not free these are not free services that we offer. Of course we incur costs and then we charge cost that all goes into our prices that banks pay.

So that is really is the biggest role that we have. We've been in these roles for really ever since the Federal Reserve Act was created. Of course back then it was pretty much just paper check clearing. Then along the way as the electronic payments became popular in the 60's and 70's we got into those businesses as well. But there are two other roles I want to mention tonight, again, for context that we play in the payment system. And that is what we call as a leader and as a catalyst. And what I mean by that is we, because of who we are as the Federal Reserve, as a central bank, we have been given the responsibility by Congress—and I'll use this term loosely—but to kind of oversee the health of the payment system. To make sure that over time the United States has an effective payment system, you know, one that works for businesses and for consumers and one that is secure. And one that is efficient and doesn't use a disproportionate amount of the country's resources to operate. And so we've been given that role and we perform that role through these two specific roles of leader catalyst. So we use our knowledge, we use our experience to do things such as—and again the bankers will know this—but back in the early 2000's, in 2004, Congress passed a law called the check 21 legislation that, essentially, all it did for the most part is make an image of a check a lawful representation of an actual paper check. Well, that law was very important because that then allowed the banking system to image checks and exchange the images versus schlep all the paper around overnight through flights and Federal Express and all these other, you know, paper transportation businesses. So we actually worked with the banking industry and with congressional staffers to help craft that law so that it did what it was supposed to do. And then that allowed the banking industry to do all these things with check images.

So that's an example of how we use our leader-catalyst role as a central bank. We also do things such as we work with the banking industry and others to help develop payment standards. That's a real big deal right now for things like mobile payments. There are all different kinds of standard formats. But I think many of you know that it's very hard to have an electronic system if everybody's using different formats and standards. You really need to try to coalesce around a common standard so that you can gain efficiency by, you know, interchanging all of these things amongst all the different parties in the payment system. So we do a lot of work on standards. Those are just two examples of what we do in this leader-catalyst role. And each of these roles—leader, catalyst and operator—are very important as we pursue our strategic direction, which is showed in summary form on this slide.

So let me just kind of walk you through this slide and verbally kind of tell you what it's saying. On the left-hand side the three big boxes there, those are really our three primary goals that we have in the payment system. What we need to improve safety and security of the payment system. We all know, you know, the stories of hackers and cyber threats and all of that. And it's not solely our job to help ensure the payment system is secure, but we do have a role to play in helping to ensure that the payment system is secure. And these bullets here are really some of the key strategies that we're pursuing to help make that real. We first are looking inside to make sure that our own services that we provide are secure so that as banks transact business with us, you know, they are relying on us to make sure that, you know, those payments are secure as they do business with us. So we obviously have to do that. But we're also now thinking more broadly and thinking end to end about payment security—really from the initiation of the transaction, you know, by a business or consumer—to the very end when the payment is delivered to the recipient. Some of those steps are outside of the banking system or can be outside of the banking system. We want to make sure that that whole end to end process is as secure as it can be. So that consumers and businesses can rely on that and not have to worry a lot about, "Geez, I hope my, you know, payment isn't intercepted along the way and, you know, people are pilfering my personal information or information about what I'm buying." So that's a big goal for us.

Our second goal is improving the speed of the payment system. Now when I say that think of three different things. There's speed of the actual payment being cleared through the payment system. So I initiate a payment, it has to take certain hops all the way through to get to the end recipient. We want to make that as quick as possible. There are a lot of reasons, public policy reasons, to make that as quick as possible. One being the quicker that is, there's less risk in the process of the payment being sent but then not funded by the originator. There's also the actual speed—the transaction goes through—that's one part of speed. And then there's the actual funds movement, that's called settlement. That's the second part of speed. And, again, we need to speed that up as quickly as possible. And then there's a third piece of speed that isn't often thought about but it really is part of a payment, that is notification to the sender and to the receiver that, "Hey, the payment you sent is good, it went. And it's going to be available to the receiver on, you know, X time." And then a notification to the receiver that, "Hey, you received a payment and it's going be available to you to use at X time."

So one of our jobs is to look at the current speed of the payment system for all these three dimensions and see if there are ways to speed all of that up. To go from, in some cases, what's really a batch system today where payments are originated on day one they're settled on day two. To possibly something along the lines of intraday settlements. So that we get this whole thing kind of more current with how life is in other parts, you know, or things are in other parts of our life where it's pretty much instantaneous. Our third goal is improving efficiency. And what I mean by that I think the best way to think about this is if you think for a moment of the United States being a company, our company is using a certain amount of resources to clear and settle these payments. And just like every company, you know, part of our job is to make sure that we're using, you know, resources wisely and that we're not wasting too much resource to do something.

Well, part of our job as the Federal Reserve is to make sure that the country is utilizing an appropriate amount of resources to clear and settle payments. And a great example of this would be prior to this check 21 legislation when paper checks were being written and all the way along the path they were physically transported to the next step. That was just hugely costly to the country, hugely. And when we went to this electronic image interchange that reduced the cost of processing that payment tremendously. And so from a country perspective we used much less overall resource to process those payments. That's a great example of trying to improve payment system efficiency. And one of our jobs is to kind of look holistically across the whole system and look for ways that we can work with all the different payment system providers and look for efficiencies.

So the one major difference in this strategic plan compared to previous plans you might've seen from the Fed, is that really for the first time and I mentioned this earlier, we are looking end to end. Historically, we kind of just looked within the banking system where, you know, the payment came from the bank, it came maybe through us, it went to a bank, and that's kind of all we looked at. But as you all know there's lots of different things going on with the payment that go beyond that, there's beyond the banks. Well, we now want to look holistically across the whole spectrum, not because we're going to offer services to those folks because we're not, but because we really need to make sure that we're safe and we're fast and we're efficient really from and to end. Don't look at a piece, we want to look end to end. And that's a big fundamental change for us going forward. Yes, you had a question? Oh, I think we have a question over here. And thank you for being the first one to interrupt me and ask a question.

Female: So as you were speaking of speed and the advantages, there are many, there also some downsides for, particularly if you're speaking of the ability to complete a transaction and settle it almost instantaneously. You didn't use that word but...

Dave Sapenaro: Yeah, we're thinking along those lines, right.

Female: Yes, well what I note as a consumer and to the extent I've had access to the financial system, there are some benefits to a day or a couple of days, it's called float...

Dave Sapenaro: Yes, we're very familiar with the term float in the Federal Reserve. Yes.

Female: And I wouldn't imagine that some of us would be very happy if we lose float. So how do you reconcile that discrepancy?

Dave Sapenaro: Yeah, well you're getting into a very important public policy issue. It's real. I'm going to tell you that personally, this is a personal Dave opinion not the official opinions of the Federal Reserve, want to make sure I get that out on the web. Make sure that it don't come back to me. But I think even if the Reserve does nothing on speed you're going to see this happen eventually over time. There's just too many things in our society that's becoming instantaneous. And I'm going to contrast what you just said to what I know it is going on with my own kids. I got two boys who are in their early 20's. They turn the question around and they say—and they're sending a payment, right, out of their bank account—they're saying, "Dad, why when I send this payment, why is it still showing up on my online balance? I want this gone." Because they don't use check registers like we all used to do, or some of us still do, you know. Whatever's on their online account statement is their funds balance. And they want it gone kind of for mental record-keeping purposes. And so why you and I might appreciate the float the generation behind us is looking for something very different. Now, that doesn't mean when my sons, you know, get out on their own and, you know, they're dealing with cash flow issues like all of us do they may not change their tune. But I do think there is a generational issue coming here where, you know, the kids everything they do is almost instantaneous with their iPhones and all this. That's just the way the world is. And I think that's going to infiltrate a lot of aspects of life including payment. But I acknowledged to you that there is an issue here with people who need to use that float as kind of a cash management, you know, cash flow tool.

Female: (Unintelligible) from the system?

Dave Sapenaro: Yeah, certainly the longer the funds are in the account, you know, that's helpful for the banks. I'm not going to pretend to talk for the bankers here in the room. But, you know, I suspect over time there's going to be some changes to the payment system that are going to affect all of us in different ways. I think mostly positive, some maybe not so positive. And I'll just make up a hypothetical example because we've already heard it from some bankers that we've talked to you. You know, they're saying that if you make payments faster up to and including the fact that you're going to allow consumers to do something that they would send a payment to their friend immediately. Well, that may start eating into other revenue streams I get from other types of payments. And so while that may sound good, you know, kind of in theory. I don't want to cannibalize my other sources of revenue that come from the payment stream. And you could take some of this and say, well you could construct an argument where for example maybe people use less credit and debit cards if they can send money instantaneously. And that's a different form of payment. Well, you know, banks get an interchange fee from debit and credit cards. So that may, you know—that's one of the reasons why, you know, the payment system is a very complex kind of organism. And you have push on something over here and something pops up over here and maybe you can predict it and maybe you can't. But one of the reasons why—and I'm going to get to my next slide so I can turn it over to Kathy—one of the reasons why we are taking an approach of really talking to a lot of people about what we're doing so that we can talk about things like this. We can get the consumer perspective, we can get the banker perspective, we can get the corporate perspective, we can get payment provider perspectives. So that as we think about different paths we want to go down, you know, we're trying to anticipate implications. And you're bringing up, you know, one of probably many. So really all this slide says, one of the key themes of our strategic plan is we're going to work with a lot of people that are involved in the payment system and really try to make this very all-encompassing. And not just focus on, you know, us talking to banks or us talking to one individual group. It's talking very broadly so we can learn about all of the issues. And that's one of the reasons why we held this session tonight is to offer opportunity for you all to hear what we're doing. And you had a question?

Male: I remember years ago when I used to have to run to the bank before 2 o'clock to make my deposit so that they would be available for the next day. Now, I notice, thank goodness, I don't have to run to the bank every day but I think that they're available at 5 o'clock. I can go until 5 o'clock and they're available the next day. Is that a banking change or is that Federal Reserve change?

Dave Sapenaro: I'm going to say it's probably mostly a banking change. But we certainly—that could have something to do with our various deadlines that we establish for banks to deposit—in this example let's say it's a check—to the extent our deadlines are later in the evening or later in the night, that certainly would allow banks to take deposits from their customers later and then get them to us. Of course now with things being electronic it's a lot different than it was when you had to actually schlep the paper from point to point. But that's another example of if you make a change or we make a change ever here that can have downstream ramifications not only to banks but also to corporates and consumers. I'm going to turn this over to my colleague Kathy and have her talk to you about our public consultation paper and the gaps and opportunities and desired outcomes that we've come up with. And certainly, hopefully, you'll have a lot of questions for her as well. So, Kathy.

Kathy Paese: Thanks, Dave. Well, thank you all for coming tonight on a dark fall evening. It's really good to be here with you. And I mean really good because at about 4 o'clock this afternoon I wasn't sure I was going to be here because I was at O'Hare trying to get on a plane to get over here and get home. So very, very happy to be with all of you tonight. And really excited to talk a lot about the work that we're doing in the payment system. Dave laid the groundwork for some research that we did starting about a year ago and up to the first quarter of 2014. You know, as the Fed formulated our strategic plan for financial services and started to look out and look forward to where we wanted to go, we realized, you know, we really needed to pause a little bit and understand better what was happening today in the U.S. payment system so that we could begin to identify where were there tension points, where were their gaps that needed to be fixed, things that needed to be improved, so that we could really hone our direction and where we were going forward.

So here I'm just outlining for you the study that we did. We gathered a bunch of what we call secondary research. All that means is we went out and looked at a bunch of existing studies on the payment system. And we looked at everything from credit and debit cards to international payments, to mobile payments, to the ACH system and wire and check. And we really just wanted to understand how's it going? How's everybody liking what they're doing? And are there any really big problems out there that we need to think about and consider? And once we got all of that data and information back we then began to organize it and look at specific types of payments. So for example, we were looking at business-to-business payments and seeing were there problems there? I'm going to talk later, many of them are still paper. We're looking for why. And we looked at person-to-person payments. And there's been a lot of revolution with PayPal and Google wallet and a lot of the other new systems that are out there. But we wanted to understand where were there opportunities, potential further opportunities for innovation and improvement? And then after we looked at all of our data we arrived at a number of conclusions based on our analysis. And I'm going to walk through all of those with you right now.

So this chart outlines at a really high level. And I'm going to pause here and spend a fair bit of time on this slide walking through each one of sort of the conditions or situations that we identified in the research that we did. So the first one has to do with check writing. And even though check writing has fallen off the cliff in terms of volumes of checks that are written out in the United States every day, there still is a persistent number of them that are written. Now let me ask all of you guys here and you can just shout out, what do you right checks for? Taxes, oh, I'm working on that one, yeah. Doctor bills. Contributions. There you go, that's just disappointing. Right. And we pay each other checks, right? When a friend of yours buys dinner or something and you need to give them money, contributions. So a lot of them are person-to-person payments. Some of them are person to business payments. Some of them are person to government payments. So there still is a fair bit of check writing that goes on out there. And so we're beginning to really try and drill down on that and understand why. And are there ways and things that we can do to try and address people who are continuing to write checks? And the reason we're so focused on that is because checks in some respects are expensive to print and costly to clear, although they're much better with the images that we now clear today.

The second thing that we observed in our research is that we continue to see that businesses have difficulty paying each other electronically. And a lot of this has to do with invoice information or the payment information that goes along with the payment itself. So you think about the ACH, the automatic clearinghouse system, it's perfect for things like direct deposit of pay and direct debit of bill payments and the like. It's not so good between two trading partners who are paying each other and want to know when's my product going to be delivered, what's my P.O. number, what's the invoice number? And some of that related information doesn't flow easily through the payment system today. And that's why we continue to see persistently high numbers of checks that are written between businesses.

The third thing that we observed had to do with what we call closed payment communities. And so the biggest one you guys are probably familiar with is PayPal. And basically what we mean by a closed community is you have to be a member of PayPal to pay somebody else with PayPal. So if you want to pay another person that individual has to have an account at PayPal. Same with Google wallet, it's another closed network system. There are also some large financial institutions that have products where you can pay someone else as long as they also are a customer of that bank or credit union. So we're seeing a lot of these closed loop systems popping up all over the place. And what's happening is they're closed. And so Google wallet doesn't talk to PayPal. And if you're a PayPal customer and your friend has an account with Google wallet you can't pay them. And so we're creating inefficiency in the payment system by having all these closed loop or little proprietary networks of payments popping up all over the place. And so that's something we're definitely looking at for the future.

The fourth thing that we're talking about there has to do with what Dave was describing earlier about contemporary features of the payment channel. So I'm sure most of you buy things online. Is there anybody here who doesn't buy anything, something? You don't buy stuff online? Amazing. Well, most of us who buy things online, you know, you're really—at least I am—I hit the button to purchase something and I get an email that says, "Here's your order confirmation." And then a day later, perhaps 12 hours later I get an email that says, "Your item's been shipped. It's on the way." And then, you know, the next day, two or three days later you're getting an email saying, "We hope you liked your item. Here's another sale of other stuff you should buy." And so there's a lot features out there of some of these more robust and new payments mechanisms out there. And that's just online shopping, that really isn't a separate payment mechanism. But we all are getting really accustomed to getting a lot of information about our purchases and our payments and how things are flowing through. And so when you think about something like the automatic clearinghouse system, it's a batch system, it's excellent for things like payroll but it's not so good for giving real-time notification of payment and where your payment is through the process. We just don't do that. The Fed wire system doesn't do that, the check clearing system doesn't do that, the credit and debit card systems don't do that today.

So we're beginning to see more people expecting to get the information and know what's the status of their payment or their order. It's just becoming a regular part of commerce and how we do business. The third thing has to do with—we're calling it slowness of the U.S. payment system. I think it ties a little bit to the one before about the contemporary features. As we want faster notifications about payments we also, many people do, not all, but many people want the money to actually move faster as well. And we're actually doing some primary research on this right now as a follow-up to this study. We've done focus groups in Chicago and San Francisco in the last couple of months. And we're asking both small businesses and individuals about how quickly they want things to clear. And as Dave said, for many people we're finding, especially the younger generation that are very into debit cards and credit cards, they're just looking online at their balances and they expect those funds to be gone very quickly. So we're seeing some perceived slowness in the clearing of payments in the United States. And I will say—I guess I'll pause and mention here—you know, the U.S. is, while we're a very big player in global commerce we're not the only player. So we have seen in the last two years in the U.K. and Australia, Hong Kong is building them—they're building and developing faster payment systems for retail transactions that they're implementing. And the U.K. just implemented theirs I think about 18 months ago.

So we're in a situation where the rest of the world is going faster. And the U.S. very much is holding on to our checks and we're holding onto our slower payments. And at some point in time it's going to become a problem for us as the rest of the world moves faster if we continue to stay in a slower environment. You know, mobile technology is the next one there. And that's just, you know, absolutely exploding everywhere. And Dave and I and our colleagues in the Fed system are really trying to get our minds wrapped around, you know, what is mobile mean for us? Because as most of you know, with your mobile phone and some of the new chip phones that have the embedded intelligence in them, are coming into the United States. More of them will come in starting in 2014, where you can wave you phone at Starbucks in front of the cash register and it'll pay for your coffee. We're beginning, you know, mobile is really just a front end. It's the term we use is it's a form factor, it's a vehicle, it's a way to initiate a payment. Just like sticking a card in through a card reader at the retail store. And so, you know, the backend settlement is going to be credit card, debit card, it might go through the ACH ultimately.

So your phone is just your front end, it's a form factor. But what we're seeing is that more and more financial institutions are building strong capabilities on those smart phones. And so you are able to move money between your accounts at your bank using a mobile app. And you're able to do more payment like activities with that actual smart device. So we're thinking about security. We're thinking about really how does mobile change the whole calculus for the U.S. payment system and where do we go? We have obstacles on international payments. In a nutshell, international payments are slow, they're costly and they're inconvenient. I mean, other than perhaps using Western Union to send a remittance or a payment to another country, it's not really easy for people to make an international payment. Many have to go to their financial institution, which is good. Financial institutions are a good way to do that but the settlement of those payments can often take four or five days or longer. They're expensive to make. And we're beginning to see a large demand for international payments as we have more immigrants migrating to our country and wanting to make remittance payments back home to family members back at home.

So international payments is another area where we saw a lot of gaps and opportunities. And then finally, security. You know, Dave touched on it and I'll touch on it again here. The number and the complexity of threats against the payment system in the United States is exploding. And, you know, we had here in St. Louis the situation with Schnucks Markets and the debit and credit card numbers, which was extremely unfortunate but not unusual actually and not rare. That same situation has happened to a number of very large retailers and merchants across the United States and some here in St. Louis. Some of the events are more public than others. But we're seeing increased—the fraudsters are going after the payment system. And they begin to see what's happening is the technology and the capability is kind of running ahead of some of the security that's available out there. So I'll go back to mobile. Some of the security on mobile phones isn't quite where we feel comfortable with just yet to make sure that people can't hack in and look at your transactions and your personal data. So I would say security of the payment system continues to be a major concern. So let me just pause there. I've thrown a lot at you about different gaps and opportunities and just ask you, does this resonate with you? Are there things here? (A) Do you think these are the right things? And (B) Is there anything missing? Do you think we didn't find some kind of major opportunity or gap, something we should be looking at that we're not looking at? So I'll just pause, anybody? Yeah. Thanks, Marcella.

Male: I think one of the gaps and opportunities is the fact that we have so many different payment channels. And, you know, when we talk about, you know, near real-time payments it almost becomes adding another channel, which is adding more cost, which is inefficient. And I think one of the opportunities we have here is to consolidate some of our payment channels to increase efficiency while achieving the other objectives.

Kathy Paese: Yeah, that's a good perspective, good perspective. Anybody else? Any other observations?

Dave Sapenaro: Kathy, can I just comment on that comment real quick?

Kathy Paese: Sure.

Dave Sapenaro: We've had other bankers agree with your comment. We've had bankers who say, "No, leave the current rails alone. They do well with what they were designed to do. You'll never really be able to tweak them enough to kind of move us ahead over the next 10 or 20 years. You kind of have to go start a brand-new one." And so there really is this kind of debate.

Kathy Paese: Yes, we actually have a dichotomy view. And I think to Dave's point, I don't think we would be suggesting that we eliminate anything. The rails that are in place today all serve a very good function. You know, Fed Wire, for example has got a ton of security around it. It's used for really high value payments. You wouldn't want to take the high-value payments that are run through that and run them through ACH for example where there's a little bit less level of security and redundancy. And it's batch, it's not real-time. So, you know, there's pros and cons. I think they all fill an absolutely specific niche. But the question is is there a need and is there room for something new or a desire? And we haven't come to a conclusion about that yet. Absolutely. Yeah, question?

Female: I'm wondering to the extent—what the extent is to which you've investigated the new technologies? I'm sure you've heard of the square?

Kathy Paese: Yes.

Female: And I'm not sure whether those opportunities sit on top of our alongside a number of the payment processing systems such as credit card companies. Because they were designed to thwart or actually increase or improve the small vendors access to payment options that weren't available. So there are entrepreneurs, there are inventors who are creating a new conversation about payment systems. And are you able to incorporate or absorb those as part of the process?

Kathy Paese: Yes, absolutely. Absolutely. And square has been a fabulous innovation, especially for small business. But square really is a form factor. Square is just an initiation device and most of them are settled through a credit card on the backend. We had a number of the square representatives here is it earlier this year, Karen, or was at last year? A year and half ago they came and addressed us as part of our management conference. And I gave them trouble afterward because right now square is only giving you access to the credit card networks. And my comment to them was, "You guys got to figure out how to get access to the ACH so that you're not just using—but how square works for those of you who don't know what square is—it's a little plastic device that you stick in through your antenna opening on your smart phone and it essentially becomes a credit card reader. And the application you can load on an iPad or an iPhone. And you set your customers up and you tap and you enter the dollar amount and the payment then is connected and automatically sent through the credit card network. So it's been a fabulous innovation. And will move more things electronically but right now it's just a doorway to the credit card network. So yeah, James?

Male: Thanks Kathy. A question around mobile technology. So cell phones you were talking about that but there's a big push right now by the card brands: Visa, MasterCard, Discover for chip and pin. Does the Fed have a position about whether or not they think that chip—I mean in some cases that's really actually fairly old technology.

Kathy Paese: It is.

Male: I mean, the magnetic strip is even older yet, but does the Fed think we should skip over chip and pin or any thoughts?

Kathy Paese: We have no formal opinion. Let me say that and I will also qualify these are the comments of Kathy Paese and not of the Federal Reserve Bank. Chip and pin is ubiquitous today. It's very common and used throughout a lot of different systems. I think it's going to be here for a while but the next generation of technology is coming in the smart phones with the chips that are embedded in them. So I don't think we would say we're against chip and pin because it's a good strong protection that exist today. But the next technology is coming and it's coming quick. And I know a number of merchants and others are going to be challenged with do they want to invest in systems that use chip and pin or do they will just wait and go straight to the next thing that's coming. So it's a dilemma for sure.

Male: Kathy, my question is kind of two-fold. The first one is your team is looking at this for a reason. I'm sure the Fed—and I guess I'm curious, where do you see the end result or what are you trying to accomplish? Is it efficiency, is it cost? And then the second part is, I text—which for me is revolutionary—but I text my son and I told him that I was coming to this. And he said, "Dad, you know what? I see the day where there will not be checks, currency, we'll wave our hand and the transaction will occur. And so I'm curious where do you think—and where are you guys thinking down the road and where do you see this going?

Kathy Paese: You know, Hardy, I'm so glad you came tonight. Because that's a perfect segue to the next thing that I'm going to talk about. So I will answer your question there about where we're going in the future but let me answer the first part of your question and that is why are we doing this. And I think it gets back to some of the goals that Dave outlined earlier. I think we are looking at how efficiency and how to make payments more efficient, have less hops along the way, be originated electronically and not on paper –which is really inefficient. And I think with efficiency also goes cost. And we're trying to drive down the cost of processing and handling payments in the background. I think insecurity. I think those are really the main reasons we're invested in trying to see the payment system improve is to address those things. But to your other question about where are we going, thank you for the segue.

So after Dave and I and our colleagues looked at the research that we gathered we began to try and formulate a vision, a ten-year vision, for where did we think the U.S. payment system should go? And we developed five outcomes, what we're calling five desired outcomes. And these represent the Federal Reserve's view of in 10 years how would we like to see the payment system evolve? What are the things we would like to see in place based on the research that we've gotten so far? And these are the things we're socializing. And you guys better get your clickers ready because you're going to have to vote soon. All right? Because I'm going to go through some of these ask some questions as we go along the way. So the first desired outcome that I think we see, based on the gaps and opportunities in the U.S. today and what's going on in the global economy, has to do with a more ubiquitous, real-time retail payment system. That's the last time I'm going to say that because it's a mouthful. And really what we're talking about there is faster payments, okay? But I want to be clear to address some of the earlier questions, we are just talking about retail payments. We're not talking about bank to bank settlement payments; we're not talking about salary payments or necessarily automatic debits. We're talking about retail transactions primarily merchants and individuals. And while they're not technically retail, I think we would also put person-to-person or P to P transactions in that category as well. And let me talk a little bit about the word ubiquitous.

So this gets at that notion that I talked about earlier about all the different closed networks and closed systems that are popping up. We sort of need something that's going to knit all of those different networks together and be more ubiquitous, meaning it's accessible and available to everybody just like the credit card network or debit card network is today. And so the top bullet there describes the outcome as we see it. And let me just key in on a couple of concepts there. The first one is confirmation of good funds at payment initiation. And what we mean is, when you initiate a payment to someone else or someone, you know, you agree that you're going to send money to someone you know that the money is good. You know that you've got the money in your account and that there's really no chance that the money's going to have to come back or be returned. So in the wire transfer business, in the check business, in the ACH business today people initiate, write checks, send them through, and sometimes when they get to the other end we find out that there's insufficient funds in their account. And those transactions end up having to come back through and they become an exception, what we call an exception process.

So I think the state that, ideally, we think would be helpful is if we were able to initiate transactions and know that the funds were good on the front end and returns wouldn't be happening. So timely notification gets at what we talked about earlier about some of the slowness and some of the more contemporary features of the payment system that don't exist today. And the other part that I will pick up on there is that the sender doesn't require the sender to know the recipient's bank account number. So right now for a company to send a salary payment on behalf of one of their employees they've got to know what their bank account number is and what, you know, what the bank is, what the routing number is. And all of that information has to be in place today. I think the situation we see is that you could send an email using some kind of a system saying, you know, "Send $100 to Hardy Washington because I lost my football bet with him," or it would be basketball, Hardy. It would be something like that that I wouldn't need to know Hardy's banking account information. I could send an email and that would be translated. They would know what Hardy's bank account information is and it would make it more ubiquitous, easier, faster flow of funds.

So as Dave mentioned, we've developed this consultation paper that we issued back in September. And the questions that are in the boxes at the bottom there, those are the questions that are embedded in that consultation paper. And we have copies of it for you outside after the end of our session tonight that you can pick up a copy and read it. And I'm not going to go through all of these questions with you right now. But just to give you a sense of, this is the kind of input that we're looking for from all of you, from anyone in the industry, about real-time payments, faster payments, do we need them or not? But now you get to vote and get to tell us. So our question is, "Do you or your organization have a need for faster payments?" So I will let you go ahead and vote. All right. I think we're done. Wow, that's amazing, that's a big number, 90%. I have to say, Dave, of all the sessions we've done that's the largest number that we've seen. So that's really interesting. So let me pause and if you're willing to admit your vote because it was anonymous, why? Why do you think you need faster payments?

Male: So we're a direct bank. So people don't have the opportunity to go to a brick and mortar. So it is a high demand for being able to—and just education around ACH in general which we do provide self-service of—"Why can't I move X number of dollars, what do you mean risk? Why does it take three or four days to get there? Why are you taking advantage of my flow?" Well, we're not really trying to.

Kathy Paese: Right.

Male: And my question is though also -- I kind of hesitated -- I hit yes but I kind of hesitated. And so the question is why should I not cede that responsibility to the Apples and the Googles and the PayPal's who can use a debit card or credit card rail to withdrawal down from a bank account and provide that quick payment and instead partner with them? Why should I take the infrastructure or responsibility? Why can't I just provide a sound, safe, bank account for them and use the common rails to populate those iTunes and Google wallets, etc.?

Kathy Paese: Well, and I would say this question doesn't presuppose the answer of how. It's just a question of do we need it. And I'll talk a little bit later about there's a number of different ways it could be accomplished. And I don't think we've arrived at an answer for that particular question yet. Anybody else? Yeah, over here. I'll get to you, Jim.

Male: I'll just talk a little bit from a personal experience a couple months ago. I moved a significant amount of money from my—from an investment account to a bank. I was going away on vacation; I knew I had some checks that I had to clear. Well, I guess I wrote the check a little bit too big, so the bank held my money for 10 days, 9 or something like that. They're making great money on the float. I understand how float works and they're making money on that. Meanwhile, they're charging me for overdrafts and nonsufficient funds. And so I'm building up charges and interest on my credit card because it bounces over there. Well, in my investment account the money's out. So it's out here, it's in a bank, but not in my account. I can't use it and I'm incurring all the fees. So just from a personal perspective, from a consumer perspective, yeah, I mean, there's no reason for that. One day, like you said...

Kathy Paese: Right, that would've helped you.

Male: Overnight, all you need to know that the money's there, not 10 days. We're not mailing checks back and forth anymore.

Kathy Paese: No, good point, good point. Thank you for that perspective. And Marcella, I think there was one more. Oh, okay. Over there on James, too. Yeah.

Male: On international you mentioned earlier, it takes about five days –when I wire money internationally it comes out of my account immediately—but it's about five days before my supplier gets it in Italy. In Israel it's a little quicker. So I mean, it's part of life and we're all used to it. But I think that could be sped up. Especially if you're wiring in advance because it only takes about two days Federal Express for me to get--sometimes the next day depending—but usually two days I have merchandise.

Kathy Paese: Interesting.

Male: And I had another one but I forget what it was.

Kathy Paese: All right, well I think James had a comment.

Male: So as a credit card processor we get a demand more and more. And I can probably see for some others in the room that are in the same industry at a higher and higher demand every day for faster deposits to their account. Which of course is—we're constrained by the ACH system for how quickly. Now, of course we have risks that we need to review and so there are other things that go into how quickly we can deposit. But if we could do same day deposits for merchants that of course would be would very—especially restaurants. And in various industries it's even more important. But that is a big deal in growing within retailers.

Kathy Paese: Interesting, very interesting. We got another comment over here.

Male: The sooner you have the information the sooner you can move on. Otherwise you're constantly backlogged waiting for something to happen.

Kathy Paese: That's a good point. I think that goes with sort of the real-time notifications going with the money at the same time. We had, Marcella, we had another one in the back.

Male: On following up on James's point about the need for risk management and oversight of fraud controls. It seems like there is a downside to speeding up payments. It's constraining the ability to monitor and detect fraud and other types of activities that would just benefit from faster payments because money could move that much more quickly. The second thing I want to just mention as more of a question. In part of this discussion about speeding up the system, is their discussion of eliminating or limiting the impact of weekends and bank holidays as an impediment to the flow of funds?

Kathy Paese: That's a really, really good question. And I would tell you we have not begun to address that issue yet. Just little anecdote to sort of tie into something that James said. The Fed tried to work with the banking industry and NACHA, the National ACH Association, last year to get a same-day ACH rule passed. And it was overwhelmingly voted down by many of the larger financial institutions. And some of it had to do with staffing and the fact that they didn't want to have to have staff overnight in their operations taking in payments that were processed same-day and coming in at 2:00 or 3:00 in the morning. So given the hesitancy we've seen to some of that, I'm guessing there won't be a lot support for expanding banking operations for payments. But that remains to be seen. And certainly that is not something we're evaluating right now as part of all this. Your point about risk and fraud is extremely valid and one that we're worried about and concerned about. That gets to this point—it was back on the other slide—about good funds. And so when you make a debit card transaction right now, you know, there's an online real-time check against the balance in your account to make sure that you've got the money there so that when the transaction goes everybody knows that the funds are good and they're going to be debited out. I think, you know, visually that's sort of what we have in mind: Is there some way to do a check of the funds first, which would help mitigate some of the fraud risk, but certainly not all of it? And you're absolutely right. The faster things go you've got a have the controls and the gates along way to make sure that the fraud doesn't explode. And that's absolutely a risk that I'm not sure we totally have our arms around just yet. Yeah. She's getting her exercise tonight, that's all good.

Female: And if I could just introduction from our perspective as a financial institution, same-day settlement is something we are certainly anxious to participate in. But from our perspective we have to rely on our processors. And it's almost a payments free-for-all out there. So as things are happening we have to rely on our sort of providers to get up to speed as well.

Kathy Paese: That's exactly right.

Female: So I think that's a hindrance as well.

Kathy Paese: Yeah, and that's a very good point that we do have the sort of intermediaries the large, third-party processors out there. And they're an important cog in the wheel and the flow of the funds to make sure they're operating as efficiently and on board. Well, good. Well, thank you for that. Okay. One more and then I've got to move on because I've got to get you guys out of here at 8:30.

Female: I would like to know is there anyone willing to say why they don't want this?

Kathy Paese: Yeah anyone willing to say why? Ten percent, so that was probably three people. Anybody? I don't want to put anybody on the spot. All right. Yes, it would be. Well, and if anyone wants to come tell me afterward privately that would be good, too. I'd be happy to know. All right, let me move on to our next desired outcome. And it has to do with improved efficiency. And Dave and I have already talked a lot about this so I won't spend a ton of time on this particular outcome. But it has to do with a lot of what we've already talked about—reducing the cost of handling payments in the back end and the end-to-end cost of processing and handling a payment. And that's what the Federal Reserve refers to as societal costs. What do we all pay for payments to be transacted? So, I mean, just to give a little bit more explanation on this. When you buy something at a retailer's store who accepts a credit card, that retailer is going to have to pay an interchange fee to take your credit card payment. So theoretically the cost of that interchange could be built into the price of the good or the service that you buy. And so that is societal cost, that's a cost to you. It doesn't look like a fee that's added to your bill, but it's kind of built-in and embedded in the cost of goods and services.

So I think our view is that by eliminating checks and paper payments and moving to greater electronification of payments from beginning to end we will be able to take a lot of the cost out. And let me just give you one example that's very personal and near and dear to my heart. We've been working with the Treasury for the last five or seven years to try and eliminate most of the Social Security payments that are made by check every month. And those in the banking industry here will know the Treasury implemented a mandate that took effect earlier this year. And our bank here in St. Louis was very instrumental in helping Treasury convert more than 12 million Americans from getting a check every month for their Social Security payment to getting that payment electronically by ACH. In that five or seven year period of time with those 12 million people we converted—we have saved the Treasury over $1 billion by eliminating those checks every month going to all those individuals. That's what we've done so far. We've estimated over the course of the next 5 to 10 years we will save another billion dollars. So $2 billion by taking those Treasury checks and those benefit checks out of the system and making them electronic.

So that's more about what we're talking about improving the efficiency and reducing the overall cost of payments in the payment system. And so, you know, we're—again—we're focused on these business-to-business payments in the checks that are written. And are there things that can be done to encourage more businesses to pay each other electronically? Now, I will tell you in some of the focus groups I sat in in Chicago a couple of months ago, some of the small businesses that were there get to the very points that some of you have raised earlier. And that is they want to pay slow and they want to get their money fast. And so it's a dichotomy and it's a tension. And so they all say, "Yes. I want electronic payments. I want people to pay me electronically but I want to pay everyone else on paper because it's slow and I get the benefit of the float." And so there's an absolute tension and conflict in that. And I think that's why we see so many business payments are still very paper-based and very check heavy.

So those are some of the questions and things we're thinking about on efficiency. And then I'll touch briefly on cross-border payments. To your point, Jim, you know, we're looking at what can we do in the future to try and improve cross-border payments. And I think our vision 10 years out is that people have more options for making international payments; that those payments are made more quickly. Just to give you a quick of review, you know, we have the ACH system here in the U.S. Well, you know, the U.K. has their own ACH system and so does China and Asia and so does South America. And so when we send international payments, you know, a bank sends us those funds, you know, then we've got to get them to the gateway operator in those countries. They've got to get into their ACH system and then they've got to get to the bank there. So I mean it's a very long and very costly process. And so our vision is that they would be more convenient, it would be faster, we would have more automated integration between each country's electronic payment system, and we could make those payments more cheaply. So that's what we're thinking about on international.

And then our last desired outcome, again, has to do with safety and security. And I think our view and our vision is, you know, the Fed's payment systems will remain extremely secure and I want to emphasize that. We don't believe that our systems are insecure today or unsecure we believe they're very, very secure. But as I mentioned earlier the threats against them are evolving and are increasing so the protections need to also get more robust and more sophisticated as the threats get more sophisticated. So we will be spending a lot of time continuing to make sure that our security of our own systems is up to snuff in keeping pace with the threats against us. And then I think our view is that we will have collaborated with other stakeholders in the industry, whether it's the credit and debit card networks or other ACH operators or financial institutions, or others to make sure that we all collectively have those safety precautions in place. We work with mobile payment providers to look at the security in mobile payments and the like. So I think our vision is a more secure environment. But the reality is trying to keep ahead of the hackers and the fraudsters is a full-time job.

So, all right. So now you get to vote again. This is the interactive portion of the program. So I've laid out for you five priorities, five desired outcomes, five things that we could focus on for the future and I've laid them out there. Number one has to do with security, two has to do with speed, three is implementing improvements to get business and more payments electronic, four has to do with international payments. So if you had to pick one of those—we're going to ask you to vote and pick one or if you don't think any of those are right and we should be focused on something else pick none of the above and let us know what you think. So go ahead and vote. Yes, sir, Mr. Pace?

Male: I would like to ask a question before I answer this.

Kathy Paese: All right.

Male: Dave, you described earlier how, besides the Fed, there's another organization that does ACH for example.

Kathy Paese: The clearinghouse.

Male: Or besides the Fed there are various organizations that clear checks. Are there, in these other organizations, people who are looking at security, speed, and safety? I figure there's got to be—for example—by the way this question is not a plant. Before I answer this question I'd like to know how much activity is going on in these three things in other segments of the industry. And how much emphasis the Fed ought to place these things to me would depend on what is going on elsewhere.

Kathy Paese: Well, that's an excellent question. I would say our release of this paper back in September and the discussions like what we're having tonight is trying to raise the awareness of these issues amongst all of those other players. Now, I will tell you I can't think of one financial institution in the country who would tell you that security wasn't a priority for them. It's a priority for everybody. Now, some people are doing more than others but I would say everybody is pretty focused on security. Now, not as many people right now our focus on faster payments are making international better but I think that's part of what we're trying to achieve with discussions like this. And with the white paper that we hope to release next year stating what our future direction is is that we get the collaboration with the industry on these things. So your question is a good one because the industry and financial institution software providers, retailers may not choose to engage with us on all of these. But back to Dave's earlier point about the role of the Fed, you know, we can try and take our leader-catalyst role and try and cajole and encourage others in the industry to focus and think about these things. Even if we're not taking an operator role where we're, you know—we don't have to build a new payment system somebody else can do that. We don't have to do it. But it depends on what the engagement is and I don't think we have a full picture that yet. All right. Yes, sir?

Male: Personally, you know, when I was writing checks I really wasn't having any problems. It might have been slow and inefficient but just in the past year alone we got six family members, three of which have had credit cards compromised, and one of which has had a debit card compromised to the tune of several thousand dollars.

Kathy Paese: Yeah.

Male: So we do this research and say, "Okay, here, the system's become more efficient, quicker payments, everything else." Are we creating a whole other problem and to what—I mean that's a huge problem. At lease I see it that way, it has been with me.

Kathy Paese: It is. No, I would say absolutely. And that gets to the comment about increasing complexity and frequency of attacks. Absolutely, we're seeing that out there. But here's the thing that lots of people may not understand is every time you write a check you're handing the person across the counter from you your bank account number and the routing number of their bank. Most of us want to protect that with our lives because that's sort of the keys to the kingdom. If they get your bank account number they can go in and get anything. And yet everyone—most people are very comfortable writing checks—and don't realize that they've got their name, address, the bank, the routing number, and their bank account number all that personal sensitive information they're handing to a stranger. With credit cards, you know, we type in our number on the Internet—some of us who shop on the Internet—you know, a hundred times a week or, you know, I don't know, my husband buys stuff on Internet all the time. And we throw those numbers out very readily and we don't really think about it. And, unfortunately, I mean, that's where the fraudsters and the hackers go. They buy reams of numbers they're for sale on the Internet. Credit card numbers you can go out and buy a block of them, create a bunch of cards, distribute them and use them. And so the technology on the fraud side of credit card is very robust and sophisticated. So I think we would agree with you. And when I speak about our role as leader-catalyst and focused on security that's sort of where we're aiming is, are there things we can do working with the credit card companies to try and mitigate and reduce that threat on existing rails for sure. Yes, sir?

Male: Doesn't some of that security, especially with Internet purchases lie with the purchaser? I know if I'm going to do an Internet purchase I'm going to do it while I'm sitting at home behind my router, behind my firewall, I'm not going to do it sitting at a Panera where it's much more likely to get hacked. So some of that security, you know, and I don't think anything that you do within the credit card and payment system is going to help the person that's sitting in Panera making purchases on their computer.

Kathy Paese: I would agree with that. But I would also tell you that, you know, retailers also need to look at the security of their websites and make sure that they're not penetrable and that, for example, there's actually a law out there right now that when you type in your credit card on the Internet what you should see is dot, dot, dot, asterisk, asterisk, asterisk. And I can't tell you the number of places I go to where my number is open and in the clear that anybody can read it. And that's actually a violation, you know, you could go and hammer people if you wanted to. But I think the retailers have some responsibility there, too. All right, let's go see did everybody vote. I've only got 29 votes. Two people choose not to vote. Did ya'll vote? All right. I got 30. Paul was that you, did you just vote? Yes, good Lord. Okay, here we go. Oh, interesting. So a lot of focus on security. I think we would absolutely agree. About a third of you said speeding up. And then a little bit less than that talking about improvements for business and business checks. So that's a really interesting outcome for us. That's very valuable input. That's wonderful, thank you. Because, you know, we only have so much time and resources that we can focus on. So I think we really need to figure out where are the major areas that we need to focus our attention where we can have the greatest impact on the payment system going forward.

Well, let me just close up here with a couple of slides talking about sort of our last desired outcome here actually is what we're doing tonight. And that is that the Fed has more engagement with the public. We spent a lot of time talking with financial institutions. We need to continue that and do it more. But I think we feel like we need to talk to other players in the payment space, both users of the payment system and those that support it. And so I think another desired outcome for us is that we would have much more structured engagement with the industry. You know, that we would have a district dialogue once a year talking about the payment system, for example, and the like. So I think that's our last desired outcome. All right. So you've got one more chance to vote. I think this is the last question. So our question is, "What role do you think the Fed should play in improving the payment system?" And so going a little bit along the lines of what Dave outlined earlier. One is we could continue to be an operator. And I would tell you I think it's our intent to remain an operator. We could be a convener or, you know, this is our catalyst role where we're sort of Switzerland, we're the independent neutral party that brings together other parts of the payment system to talk about improvements. And how can we all work collaboratively together to get them done? Standard-setter is acting as an entity that helps sort of define, say security standards that we could work with credit card companies on. That's just an example. But there's other standards as Dave mentioned on mobile payments and trying to get mobile payment security and things like that in place. And then as regulator. You know, we put it at the bottom, I think for us this is perhaps—and maybe a lot of the financial institutions in the room—sort of the option of last choice. Because I think we would much prefer that the industry step in and innovatively take action without the Fed or someone having to mandate that action gets taken. So and then, we've got all of the above and none of the above. So I'll let you guys pick what roles you think the Fed should play going forward. All right, we got two more to go. Paul, did you hit your number?

Male: I did. I was early on this one.

Kathy Paese: Okay. One more. Anybody? Who forgot to vote? Okay, I'm going to go ahead and hit the button. Number five, all of the above. Dave we're going to be really busy.

Dave Sapenaro: We need more staff.

Kathy Paese: We need more people. Well, that's really interesting. I have to tell you that's a surprising outcome for me. Because I would not of expected that. I would've expected maybe some in the middle but not that in particular. Very interesting. Thank you. So as Dave mentioned we've issued this public consultation paper that's outside for you. It basically—much of what I've just gone over with you tonight is in the paper with a lot more explanation and detail. Although I was heavily involved in editing and writing the paper it's much clearer, I'm sure, than what I've just walked through with all of you. So I encourage you all if you're interested in these issues to get a copy of the paper on your way out. In the paper it has all this information about how you can respond and give us input. I will just mention again the closeout on this is December 13. So we've got a couple more weeks left, a little over a month, to get comments in.

And then just briefly I'll just mention our next steps and where we're going from here. So we're getting all the input from the industry based on these dialogues like this that are happening all across the country in the next four to five weeks. And as I mentioned earlier, we're conducted some primary research of our on to determine is there really demand for faster payments or not. And we're doing some internal analysis on, you know, if we did go down the route of a faster payment system what would be the best way to implement that in the United States? We will look at models from other countries. We will look at enhancements to existing rails, potentially a new rail, and do some analysis there. And then it's very much our intent on our bottom bullet there that Dave and his executive committee will help formulate our direction. And so by mid-year next year we hope to issue what we're calling a white paper, a public document that outlines the direction we believe we'd like to go. And hopefully some of the answers to some of the questions we've raised with you here tonight will be addressed in that paper. We've got a lot of work to do between now and then to sort it all out. But we really appreciate your engagement and you coming tonight and openly sharing your thoughts and views. It's really important. All the policymakers within the Fed will be taking all this back and mulling and thinking and noodling on it. And so thanks again. So before we close we've got about two minutes any other questions or comments from anybody before I close out? Yes, sir.

Male: This is more about our future. What with the bitcoin system, the payments, bitcoin, what do you see in that?

Kathy Paese: You know, bitcoin is interesting. For those of you that haven't heard of bitcoin, bitcoin is a new virtual currency that's been developed out there. It's not—it's a currency that's not in central bank money and that's the key distinction. So the Federal Reserve doesn't back it, it doesn't have the full faith and credit of the United States. But it's a form of currency or exchange of value that's been created out there. And I think it's a little bit early for us to say exactly what will happen with bitcoin. There's been a lot of attention given to it, but it's not regulated, its value isn't controlled. And so, I mean, it's nothing the Federal Reserve will take a formal position on. But it will be interesting to watch and see what the demand and use of bitcoin is going forward. Any other questions? Yeah. Yeah. Yes.

Female: In general, I'm sure that, because security is so important and technology is driven by encryption requirements that have to continuously be upgraded.

Kathy Paese: Yes.

Female: I imagine that you're looking at that as an adjunct to the security questions?

Kathy Paese: Yes, actually we already use encryption extensively, we do. So the product that Dave mentioned we call Fed Line that we use to send and receive transactions between financial institutions relies heavily on encryption. And so that will be a key tool in our chest for security for some time to come.

Female: Absolutely. That's almost a given. I guess my question really is just as you've spoken several times to the bad guys and how determined they are to break into systems, there is a continuous upgrading of and in terms of looking at what's next, you call them rails. Whatever the next rail might be how do you build in and consider the continuous improvements that have to be made in the areas of security as it relates to encryption and cross-border requirements? I guess that's really the question.

Kathy Paese: Right. You know, again, I'd say encryption is an important tool for all of those things. Certainly, if we made a decision to move forward with some kind of a new system—and, again, I want to be clear there's no assumption here that the Fed would build it, okay. There may be others in the industry that may step in to build it privately. I think we would want to work with those players to ensure that the security standards were effective and met what we thought were the appropriate amount of standards. I will say, you know, encryption is important but we've got two-factor—meaning we've got tokens and other things we use in addition to encryption to try and make sure our systems are secure. And I think we would work to make sure any future system has all of those protections as part of it. Thank you for that. And thanks all of you. We're a couple minutes after but thanks for coming. Have a good night.