Ms. Rivlin discusses the Federal Reserve's role in the payments system  (Central Bank Articles and Speeches, 28 Sep 98)
Central bank: fed | Type: speech | Date: 1998-10-11

Ms.

Rivlin

discusses

the

Federal

Reserve's

role

in

the

payments

system Remarks by the Vice-Chair of the US Federal Reserve System, Ms. Alice M.

Rivlin, at the Administration

Institute's

Symposium

on

Payments

System

Strategy

in

Washington,

D.C. 9/28/98.

## The Federal Reserve's Roles in the Payments SystemThis

is

an

exciting

time

to

have

a

conference

on

payment

system

strat because there are real opportunities for rapid change over the next few years in the wa payments, especially retail payments in the United States.

You will be discussing some opportunities and possibilities over the next few days with experts on the forefront You

will

hear

presentations

that

describe

new

worlds

in

which

payments

are

made efficiently, more conveniently, with greater security and less fraud than they are nowgiant corporations and sophisticated techies, but by ordinary folks and average enterpr about their daily activities.But

while

there

are

opportunities

and

possibilities,

there

are

also

e uncertainties,

both

about

the

direction

that

technological

change

will

take

and willingness and ability of individuals and institutions to embrace these changes.

It possible that a decade from now we will have a radically different retail payments sys United States than we have now.

It could be a system that depends very little on paper and air transportation of paper messages.

It could instead be one in which both consu businesses, not to mention governments, make almost all of their payments by electroni from wherever they happen to be.

On the other hand, it is also possible that not much w to retail payments over the next decade or at least that change will not accelerate fro pace.

Some

of

the

people

in

this

room

could

be

back

here

in

ten

years

assessing promising innovations of the late 1990's never came into general use, and why, althoug debit

and

automated

clearinghouse

(ACH)

payments

continued

to

expand

rapidly,

billio paper checks were still being written and physically transported for presentment.In part - although only in part - the outcome depends on us, on the peopl room,

and

the

enterprises

and

institutions

we

represent.

It

depends

on

how

effecti imaginatively we all do our individual jobs and on whether we find constructive ways together.I happen to be one of those who thinks change in retail payments could acc quite rapidly in the next few years and that paper check volume could begin to decline the relatively near term.

I say could rather than will because I realize that predic made many times before and has always proved wrong.

I guess like so many others I am struck by the absurdity of moving so many little pieces of paper around the country messages

could

be

sent

so

much

more

efficiently

by

electronic

means.

Every

time

I Reserve Bank and watch those high speed sorters working so hard and the trucks coming out to the airplanes, I think, 'This is a really impressive, fast and cost-effective paper, but why are we moving paper?' The 'we,' of course, is not just the Federal Rese all those banks and clearing houses and other participants in the system.

And the answ we are all moving all this paper is that customers want us to move it and are willin have it done.

But the answer still doesn't make a whole lot of sense.There are several interrelated reasons why change could be expected to acc in the retail payments arena in the near future.- First, of course, is the rapidity with which technology is evolving and c dropping

in

computing

and

telecommunications.

Many

types

of

information including payments information, can be transmitted much faster and cheaper was possible even a year or two ago, and there seems to be no end to the p in sight.- But the avalanche of technological progress may actually be holding up a leap forward in the efficiency of retail payments.

Because the network ef important and the players who have to commit to a new technology to make viable are quite numerous, change may come slowly at first.

Potential playe be confused by the multiplicity of options and reluctant to commit if they likely that something faster, cheaper and more convenient may come along s It's

like

hanging

on

to

your

old

television

for

a

while

in

hopes

that generation of models will give you a lot more definition for less money.- A second reason is that the restructuring of the whole financial services across

geographic

and

product

lines

is

providing

a

huge

opportunity

for institutions

to

rethink

how

they

transmit

information

and

make

and

re payments.

This

restructuring,

combined

with

the

onrush

of

technology

and heavy emphasis across all business sectors on competitiveness, cost reducti efficiency, could accelerate the substitution of electronic for paper based at the consumer as well as business level.- But in the short-run, restructuring, like rapid technological change, may slow things down just because information technology people and their top b simply have too much to think about at once.

Coping with mergers, the year and

the

transition

to

the

Euro

--

not

to

mention

wild

swings

in

the

f markets -- may not allow radical changes in payments technology to get m attention in the next year or two.- A third reason to expect acceleration of change in retail payments is the e growth

of

the

Internet

and

its

increasing

use

for

shopping

and

bus transactions.

The number of consumers and small businesses using the Inte routinely

for

transactions

that

require

payments

could

skyrocket

if different types of industries move in this direction at once.- GLYPH It could quickly become 'normal,' not only to shop for mortgage rates o Internet, but to apply for mortgage loans and get approved over the Inte well.- GLYPH It could also become normal for potential college students of all ages for colleges or course offerings over the Internet and to apply and be a electronically as well.- GLYPH It is possible that paying taxes, trading securities and making some k purchases on the Internet could become routine activities of a large fra the population quite quickly (the way making phone calls and driving a became

routine

quite

quickly

for

earlier

generations).

If

this

happe demand for electronic retail payments is likely to rise rapidly as well aover into increased demand for (or reduced resistance to) electronic pay methods for non-Internet transactions as well.- The key unknown here is how fast average people become comfortable with PCS lose their anxiety about electronic transmission and storage of data and ov the feeling that if something isn't written on paper and saved in a drawer real.- The usual assumption is that computer literacy is age- and income-related a it will take a long time before older and less affluent (or at least les people get comfortable with electronic payments and paperless transactions we

could

be

in

for

some

surprises

as

governments

move

quickly

to

electr benefit payments, which mainly affect older and less affluent groups.

Aggr efforts to improve computer instruction in low income schools, compensate less rich educational environments with creative use of the Internet, and welfare families for

modern

clerical

and

data

processing

jobs

could

unde some

widespread

assumptions

pretty

quickly,

as

could

aggressive

marketing senior citizen computer access and services.

The most rapidly grow demographic group currently on the Internet is retirees.For all of these reasons, I would be willing to bet that, despite the rela pace

of

change

in

retail

payments

over

the

past

several

decades

and

despite

Ame long-standing affection for the convenience, flexibility and familiarity of the paper c likely to get to some sort of tipping point early in the next century (less than a deca after which electronic retail payments quite quickly become the norm and the volume of falls rapidly.This does not mean that I see retail payments moving to some single elec payment instrument that would substitute for the check in all or most of its uses.

Rath we will see the evolution of several different systems, adapted to different kinds of p consumers

and

businesses

make.

Some

of

these

systems

are

in

use

already,

some

wil discussed today, others are not yet ready for prime time.

Some will be developed by the system, some by non-banks in cooperation, or even in competition, with depository instiSo what will be the role of the Federal Reserve in all this?

As you know, Fed committee which is explicitly focussed on this question.

We issued a report last Ja are continuing to discuss how the Fed can best contribute to the efficiency and safety payments system to which all depository institutions have access.

The Committee now co of Presidents McDonough and Minehan, Governors Kelley and Ferguson and myself.

You wi hear from Governor Ferguson tomorrow afternoon.We see our role as working closely with the other participants in the pa process to help modernize the retail payments system and facilitate the transition over efficient, convenient, and primarily electronic system.We spent quite a lot of time and energy last year discussing whether we exit the business of processing check and ACH payments.

We decided to stay in and us operational presence to help modernize both check and ACH and to work actively with oth evolve a vision of a more efficient future payments system and help remove obstacle realization.

## In practice, what does that mean?First, it means increased efforts by the Federal Reserve Banks - as prov check and ACH services - to develop new products that reduce costs and to price and them effectively.

In the first instance, that means focussing on ECP with truncation an in order to meet market demand and gain experience with different technologies.

We h learn a great deal more about whether the wider use of these products can reduce the check collection by substituting electronic technologies for the transportation and pr paper.

We are involved in several pilot studies of ECP, including one which we hope wil all

depository

institutions

in

the

whole

state

of

Montana.

Montana

has

small

banks dispersed over great distances.

It seems like the right place to see whether, if vir institutions participate, it would be cheaper and more satisfactory to send images el rather than to move paper over thousands of miles.Like others who have been studying the business case for ECP and imaging, believe the jury is still out.

It is not clear that moving the whole national check pro to ECP (with or without imaging) would provide net societal benefits even if the willin resources to do it could be found.

So you will see us working hard, in collaboration w in the industry, to explore, in practical ways, the potential advantages and disadvantagYou will also see us working hard, in collaboration with NACHA and others improve ACH service, make it more user friendly and increase its use.You will see us trying, through surveys, focus groups and other tools, more about how consumers and businesses use different types of retail payments and ho think about them.

As we have worked on positioning the Fed to help move the nation payments system of the future, we realized that many of our assumptions about the comp and use of retail payments, paper checks in particular, are based on information co survey in 1979 and were likely seriously out of date.

We and the industry need more information on which to base strategies going forward.We will also be reaching out to participants in the payments system in a va groupings to talk about alternative visions of the payments system of the future, what regulatory and technological barriers there might be to getting there and what we might do to reduce those barriers.We certainly do not see the Fed managing the process of transition to a mor electronic payments system.

We believe strongly that innovations must come primarily fr private sector and be tested in the marketplace to see if they meet customer needs at prices.

But there are times when progress can be stymied by legal or regulatory barrier absence

of

technological

standards,

especially

standards

that

allow

communication competing systems.

In these instances, dialogue and collaborative effort can pay off for system and its customers.

The Fed wants to be an active participant in that dialogue other providers and users of the retail payment system as we work together to make it be