reserve banks, congress adopted several significant departures from the standard business corporation model. notably, three of each bank's nine directors are selected by the board of governors, which designates one of its appointees as the chairman. three of the directors are elected by the stockholding banks and must represent the public. the remaining three directors are chosen by and represent the member banks. the board of governors is also given general oversight authority relating to the reserve banks and their activities. these characteristics reflect the fact that the reserve banks are structured to carry out public policy objectives set in the federal reserve act, not to advance the interests of their shareholders. consolidation of certain reserve bank functions in recent years, in response to major developments in the financial industry and technology, as well as statutory and regulatory changes, a number of reserve bank functions have evolved from highly localized operations at individual reserve bank offices to more consolidated and centralized functions. this trend is particularly evident in the financial services the reserve banks offer to depository institutions. from the creation of the system, the federal reserve has not only been closely involved in overseeing the nation's payment systems but has also been an important operational component of that system. historically, each reserve bank and branch provided a full range of services to local institutions. in particular, the federal reserve act gave the system the authority to establish a nationwide check - clearing system to minimize inefficiencies and disruptions. the ongoing transformation of our retail payments system, resulting from shifts in consumer behavior and rapid industry innovation, has directly affected the operations of the reserve banks. the number of checks being written has been steadily falling as consumers increasingly take advantage of electronic payments mechanisms. in 2003, for the first time, the number of electronic payments in the united states, such as credit card, debit card, and automated clearinghouse ( ach ) payments, exceeded the number of check payments. a range of data indicates that electronic payments have continued to increase and that check payments have continued to decline. not only are more payments being made electronically, but more check payments are also being processed electronically, in part because of the enactment of the check clearing for the twenty - first century act, commonly known as check 21. 2 as a result of these trends, the reserve banks'check - collection volume has declined. since 1999, the number of checks collected through the reserve banks has fallen by about 30 percent. consequently, the reserve banks have taken major steps to reduce check costs, including reducing the resources devoted to

as we administer consumer - protection statutes and work to foster fair and open access to credit and greater public understanding of available financial services. i have stressed the information a reserve bank brings from its community to federal reserve policymaking, but reserve banks also play an increasingly important role in reaching out to convey information to the community. through extensive education efforts, speeches by their presidents and other officers, and discussions with their boards of directors and other groups, reserve banks foster understanding about the system, its policies, and its objectives, as well as about matters of general economic interest. in addition, because of their many contacts with their communities, local offices of the reserve banks play a major role in the federal reserve's efforts to improve financial education and financial literacy. in recent years, financial innovations have widened the range of households that have access to opportunities to borrow and lend and have added to the variety and complexity of instruments they can use. the federal reserve has responded by putting added emphasis on promoting improved financial literacy among the general public. greater financial sophistication among consumers will produce a number of economic benefits. informed consumers place market pressure on financial institutions to offer better products at better prices. increased financial literacy is also likely to result in better management of personal finances. in sum, strong, independent reserve banks grounded in their regions have been critical to the success of the federal reserve. the private - public, centralized - decentralized character of the federal reserve system has contributed to policymaking and has been a part of the fabric of our independence within the government. the reserve banks will need to continue to adapt to changing circumstances, but their essential characteristics will be preserved and will continue to enable them to help the federal reserve pursue the very important public policy objectives we have been entrusted with.