As we know, the failure of private-sector innovators to address risk early may ultimately force public policy to prescribe solutions. I would now like to give you an overview of the recent work of the Federal Reserve's Payments System Development Committee, which I co-chair with Cathy Minehan, President of the Boston Fed. The Board created this committee last year to help follow up on the work of my predecessor, Alice Rivlin, and to help stimulate the Federal Reserve System's engagement with the private sector on a range of issues involving payments system innovation. The current areas of concentration by the committee include electronic check truncation and presentment, efforts to reduce legal and regulatory barriers to innovation, standards, and future clearing and settlement systems to support electronic commerce. In this age of the Internet, the committee's work on electronic check collection deserves comment.
Checks continue to be the most widely used retail payment instrument after currency.
At the same time, it has been very difficult for the banking industry to move from a paper-based to an electronic check collection system. There has been experimentation with check truncation and electronic presentment in the United States since the 1960s, with limited success. Recently, the banking industry has shown renewed interest in this topic. The Federal Reserve Banks now present about 20 percent of their checks electronically to more than 3,800 banking organizations. Both the Federal Reserve and the private sector are piloting new arrangements for truncation, presentment, and digital imaging.