randall s kroszner : the future of payments – challenges and opportunities remarks by mr randall s kroszner, member of the board of governors of the us federal reserve system, at the 2007 payments conference titled “ competitive forces shaping the payments environment : what's next? ”, federal reserve bank of chicago, chicago, illinois, 10 may 2007. * * * i am pleased to have the opportunity to speak at this conference on competitive forces shaping the payments environment. 1 spurred by a period of rapid innovation, we are at a crucial juncture in the evolution of the u. s. payments system. the long - predicted decline of the paper check is materializing as consumers and businesses continue to embrace alternative ways of making and clearing payments. a 2004 federal reserve study of retail payments revealed that electronic payments have now surpassed the use of checks as the preferred means of making noncash payments. 2 the use of debit cards has grown strongly, and the number of checks being converted into ach payments has grown to nearly 3 billion annually. electronic check clearing has begun to grow exponentially in response to changes in check law. as a consequence of the accelerating pace of change, we participants in the payments system cannot help but challenge our fundamental assumptions about payment operations, which were based on long - standing processes for clearing paper. and adjustments are being made. the federal reserve banks, for example, have cut the number of offices at which they process checks in half since 2003, and more consolidations are planned for later this year. check transportation networks, particularly air transportation networks, are also beginning to shrink. our conference organizers are to be applauded for bringing together industry participants, regulators, and academics at this crucial juncture to consider " what ’ s next " for the payments system. after briefly describing the evolution of the payments system, i will discuss how recent regulatory changes and technological innovation have interacted to affect the payments system – that is, how regulatory changes have affected the use of technology in the payments system and how technological innovations have affected how the payments system is regulated. i will then discuss some key characteristics of successful payments innovations and highlight some challenges and tradeoffs, such as the tradeoff between convenience and security, that need to be considered as the payments system continues to evolve. finally, i will discuss the future of electronic check clearing and the important and complementary roles the federal reserve and the private sector will need to play in the continued evolution of the payments system. evolution in the

generation shouldering at least some of that burden, especially in light of the sacrifices that previous generations made to give us the prosperity we enjoy today. the choice of which generations should bear the burden of population aging has consequences for economic efficiency as well as for intergenerational equity. if we decide to pass the burden on to future generations - that is, if we neither increase saving now nor reduce the benefits to be paid in the future by social security and medicare - then the children and grandchildren of the baby boomers are likely to face much higher tax rates. a large increase in tax rates would surely have adverse effects on a wide range of economic incentives, including the incentives to work and save, which would hamper economic performance. alternatively, to avoid large tax increases, the government could decide to sharply reduce non - entitlement spending in the future. however, such actions might also have important social costs that need to be taken into consideration. sharing the burden of population aging if, as a nation, we were to accept the premise that the baby - boom generation should share at least some of the burden of population aging, what policy steps might be implied? as i have already noted, from a broad economic perspective, the most useful actions are likely to be those that promote national saving. perhaps the most straightforward way to raise national saving - although not a politically easy one - is to reduce the government ’ s current and projected budget deficits. to the extent that reduced government borrowing allows more private saving to be used for capital formation or to acquire foreign assets, future u. s. output and income will be enhanced and the future burdens associated with demographic change will be smaller. increasing private saving, which is the saving of both the corporate sector and the household sector, is likewise desirable. corporate saving, in the form of retained earnings, is currently at relatively high levels, but household saving rates are exceptionally low. 3 a broad - based increase in household saving would benefit both the economy and the millions of american families who currently hold very little wealth. unfortunately, many years of concentrated attention on this issue by policymakers and economists have failed to uncover a silver bullet for increasing household saving. one promising area that deserves more attention is financial education. the federal reserve has actively supported such efforts, which may be useful in helping people understand the importance of saving and to learn about alternative saving vehicles. psychologists have also studied how the framing of alternatives affects people ’ s saving decisions. for example, studies suggest that employees