The payments environment of the late 20th century is much different from that of 1913, the year the Federal Reserve System was established. Back then, cash was still king, widespread use of checks was in its infancy, and the automated clearing house might as well have referred to the corner saloon instead of an electronic method for transferring funds. As years went by, the Federal Reserve adapted to changing payment methods and a changing landscape for financial institutions. At the brink of a new century, the Fed last year commissioned a review, led by Vice Chair Alice Rivlin, to study what future role, if any, the Fed should have in the payments system.
Governor Rivlin and her committee looked closely at the retail payments system, which has seen dramatic innovations in the commercial sector, as well as technological advances that have led to entirely new payment mechanisms. The committee received input from representatives from more than 450 organizations—including many from the Eighth District—on five hypothetical scenarios, ranging from the Fed exiting check collection and ACH services altogether to adopting a leadership role in spurring innovation and market acceptance of new payment services and products. The committee reached two general conclusions:
As facilitator at all the forums and meetings held in the Eighth District, I conveyed to the Rivlin Committee valuable input I received from these gatherings. What I learned supported the committee's conclusions. That is, financial institutions believe that the Fed should become more involved in establishing the basic conditions needed to facilitate more widespread adoption of electronic payment instruments.
In many ways, this means continuing the momentum we have built up in several areas of the payments field. In ACH, for example, the Fed has partnered with NACHA and others to promote direct deposit and direct payment to corporations and consumers, as well as bankers. The committee recommended that we further address the technical ACH format-related issues that limit the ability of depository institutions and corporations to receive and process vendor payment information.
In check collection, the committee found that the Fed's withdrawal from the market would result in a short-term disruption, with few long-term benefits. Moreover, Federal Reserve withdrawal could hamper the current migration of paper-based check products to electronic forms, since market participants would need to concentrate on filling the paper collection void left by the Fed. Thus, the Fed will continue efforts to push electronic check presentment and truncation services to meet market demand while continuing to process and clear the substantial paper check volume that remains in the system.
As the banking industry marches into the next generation of payments, no one can say for certain what new issues will emerge. What I can say is that I believe the Federal Reserve is ready to meet the Rivlin Committee's recommendation that it emerge as more of a leader and facilitator in the transition of the financial services industry to a more electronic payments system.