mr. ferguson discusses the consumer side of electronic banking and its implications for federal reserve policy development remarks by mr. roger w. ferguson, jr., a member of the board of governors of the us federal reserve system, at the bank administration institute ’ s symposium on payments system strategy held in washington, d. c. on 29 / 9 / 98. electronic banking : where are the customers? what do they think? what does it mean for the federal reserve? it is my pleasure to be here this afternoon, and i want to thank the bai for inviting me to speak to this symposium on payments system strategy. the focus of my remarks today will be on the interaction between electronic banking and the household sector, how this interaction should influence our “ strategic ” thinking about the evolution of the demand for electronic banking by households, and what this may mean for the strategies the federal reserve should adopt in developing policy in the payments area, and in other areas as well. some of my comments will, by necessity, by quite speculative, and perhaps even somewhat controversial. but my desire is to contribute positively to efforts by all market participants to understand and adapt to the rapidly changing and highly uncertain world of electronic commerce. what is electronic banking? i will begin by defining what i mean by electronic banking. i would propose that we use a very broad definition. thus, at one end i would include telephone banking, credit cards, atms, and direct deposit, all of which are fairly mature and familiar products, but ones that are certainly electronically based. at the other end are stored - value cards and internet - based stored value products, products that are still mostly in the experimental stage. in the middle are debit cards, a product that has been around for a number of years but which only recently began to achieve wide market penetration, electronic bill payment innovations, and pc banking, a newer product that is becoming increasingly robust and sophisticated. defining electronic banking in this way has many advantages, not the least of which is that it helps us to see electronic banking as a continuum that has, in fact, been evolving for quite some time. an implication of this perspective is that lessons learned from past electronic developments may help us better understand both today and the future. who uses electronic banking? in the federal reserve ’ s 1995 survey of consumer finances of over 4, 000 american households, we asked a series of questions regarding households ’ use of electronic and other banking products. our intent was to establish some benchmark data for 1995

but how much has it changed? unfortunately, we do not seem to have a very clear picture of the overall trends. as i am sure each of you is well aware, estimates of the current state - of - the - world, and projections of the future state - of - the - world are all over the map. use of debit cards is on the rise, and continued growth is frequently predicted. an increasing number of banks are providing pc banking services and it will be interesting to see whether new product offerings currently being developed will substantially increase market penetration here, particularly as household pcs with modems become more ubiquitous. experience with stored - value cards has not come close to meeting the expectations that some had several years ago. most stored - value card pilots seem to suggest that, while the technology works, consumer and business demand is weak. recent federal reserve research on the use of the ach shows that while ach volume continues to increase at double - digit rates, a significant untapped market remains. more than half of households surveyed earlier this year receive one or more payments via direct deposit and about one - third of all businesses surveyed offer this payment option ( with almost three - quarters of medium and large companies offering it ). more than one - third of households surveyed use ach direct payment and only 13 percent of businesses offer this payment option ( although almost three - quarters of utility companies offer it ). users of both direct deposit and direct debit report very high satisfaction levels ; nonusers cite more difficult problem resolution and lack of availability. in addition, nonusers of direct payment expressed concern that this option would diminish their control over payments, as well as reduce privacy and security. it is interesting to note that when one looks at the incidence of consumer complaints received by the federal reserve board, electronic banking does not stand out as a troublesome area. for example, through july of this year, only two percent of the total complaints involved electronic funds transfer transactions. for the entire year of 1997, only three and one - half percent of all complaints were so directed. what might the future hold? so, what, on balance, should we expect in the future? it is useful to consider this question in the context of both the typical product life cycle as well as in relation to the several key factors for the success of new payment services. some retail payment services, such as stored value products, are at the beginning of the product life cycle, and it is not clear