electronic commerce. fourth, economic “ network effects ” may be important in determining which innovations succeed or fail, at least in the short run. in general, one aspect of a network effect is that the value of a network to its users increases as more users join. we are familiar with this effect in the telephone and other communications markets. in payments, if too few consumers or merchants use a payment network or a new instrument, the system may not be sufficiently valuable to its users for it to become economically viable. to date, some innovations such as stored - value products may have been less than successful in part because of these effects. the role of government and the federal reserve despite some of the challenges in shifting from a paper - based to a more electronic payment system, it is clear that the united states fundamentally has a safe and reliable retail payment system. as that system continues to evolve, the private sector will play the pivotal role in most innovations, while the federal reserve will also continue to play a strong and important role. in general, government, including the federal reserve, must continue to foster the safety and soundness of the payment and financial system, promote competitive markets, and ensure adequate levels of consumer protection. the federal reserve can also continue to modernize its existing payment services and work with the private sector to identify and, when appropriate, address barriers to payment - system innovation. last july, the board announced the formation of the payments system development committee, which i co - chair with cathy minehan, the president of the federal reserve bank of boston. this new group is focusing on key medium - and long - term public policy issues surrounding the development of the retail payment system. in particular, the committee is seeking to work with the public to identify barriers to the future development of the payment system and to recommend solutions to the board and other authorities. during this year, the committee is focusing on four important areas relating to retail and low - value commercial payments. first, we are attempting to learn from both federal reserve and private - sector experience with truncation and electronic check presentment, and to identify barriers to greater use of electronic technologies to collect checks. second, we are assessing gaps in standards that may be inhibiting payment system innovation. third, we are reviewing legal and regulatory issues, with an emphasis this year on the legal underpinnings for converting checks to electronic payments. finally, we are examining the long - run strengths and weaknesses of the clearing and settlement systems for electronic payments.

, this combination of developments is calling into question the size of investments in traditional delivery mechanisms, which are now disparaged as “ legacy systems ” and “ brick and mortar ” investments. as in other industries, banks are increasingly examining both the relative importance of their various delivery channels and the degree to which their products and services are integrated across the channels. in this environment, banks are continuing to experiment with new technologies, services, and business models. it is natural that there is both uncertainty and intense market competition surrounding promising innovations. because of the rapidly changing nature of electronic commerce, some of these innovations will undoubtedly press the very definitions of banking. of course there are also risks, along with the new business opportunities. these risks will continue to require careful monitoring and management. to do otherwise would undermine the hard - won confidence that once lost is not easily regained. payments turning to payments, traditional payment mechanisms such as currency and checks have held the field against many challengers for more than a century. undoubtedly the confidence that has been built up in traditional payment instruments has played a major role in their continuing success. very interesting innovations, however, are being announced almost every day. many of these innovations are being driven by efforts to improve the convenience of payment instruments and systems, including the timing and availability of electronic payments. it might be instructive to review briefly the history of retail payments to understand how the tradeoff among convenience, confidence, and complexity has worked. looking back, the check was used in north america as long ago as colonial times. businesses, in particular, were early users. the widespread use of the check by consumers did not occur in the united states until after world war ii. rising levels of income and restored confidence in the banking system led to the growth of deposit banking. checks were used increasingly to make purchases over the counter as well as to pay bills. checks allowed users to make payments for small as well as very large amounts at any time of the day, without needing to visit a banking office to obtain cash. checks also allowed users to pay bills without visiting physical locations designated by service providers such as utility companies and other major billers. thus checks offered more choices regarding the time and location for making payments and, at the same time, reduced the risk of theft and loss associated with cash payments. ironically, innovations such as automated teller machines, which are not payment instruments but delivery mechanisms for cash, may well have supported the use of cash relative to checks or newer forms of electronic payments