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The Fed Explains the Payments System

Just as we rely on our circulatory system to carry blood through our body and keep us healthy, the United States has a system to keep money moving and keep the economy healthy. It's called the payments system. It's important for Americans to feel confident about the payments system. That's one reason the Federal Reserve was charged with making sure that our monetary circulation system stays in good shape.

How does the Fed do that? We maintain accounts, process checks, and electronically transfer funds. The Fed also distributes and receives currency and coin, and keeps currency in good condition and in circulation to make sure that we can keep up with the public demand.

Every day, millions of transactions valued in the trillions of dollars are handled between sellers and purchasers of goods like umbrellas, services like plumbing, or financial assets like stocks and bonds. The Fed has been working hard for the past 100 years to keep this monetary circulation system healthy. To do this, we watch over different kinds of payments: wholesale payments that transfer large sums of money between banks and businesses, Treasury payments that include government payments like social security and U.S. savings bonds, and retail payments that transfer smaller value funds between consumers and businesses. As consumers, we're most interested in retail payments, so let's focus on those.

Retail payments can cover anything from making a car insurance payment that's automatically debited from your account to paying your bills online to using your debit card or credit card to purchase ice cream or a new dress. The Fed's national Retail Payments Office, called the RPO, is headquartered in Atlanta. The RPO deals with most of the nation's spending money that's held in checking accounts.

Throughout the 20th century, paper checks were one of the most common ways for people to make retail payments. In the year 2000, the Federal Reserve System had 45 check processing centers around the country. Planes had to transport those checks every night to get them to their correct locations for processing. All that changed when the Fed led the charge to pass the Check 21 Act, a 21st-century law allowing a picture of a paper check to act as legal documentation showing that the check had actually been paid. Check 21 drastically reduced the need for paper checks; so much so that only one of those 45 Fed check processing centers exists today.

The amazing thing? In a little more than a decade, this monumental transformation of the retail payments system happened with virtually no disruption to the U.S. payments system, its customers, or its businesses. There have been many changes to the payments system over the years, and the Fed has kept things pumping along smoothly, but the future brings lots of new challenges.

Today, technology is changing quickly; online payments are becoming the standard. We need to make sure they stay secure and efficient. That's why the Atlanta Fed started an internal think tank called the Retail Payments Risk Forum, or RPRF, to convene a range of experts to think about security issues, law enforcement, the banking community, payment providers like credit card companies, and economists. Together, these partners learn all they can about the demands of online security. And while these experts don't have all the answers, they anticipate what kind of challenges are coming up next, both here in the United States and across the globe.

By keeping an eye on what's going on worldwide with payment security, by anticipating what changes technology will bring, and by taking care of the largest payments system in the world, the Federal Reserve will continue to help keep America's economy going strong. To learn more about this and other topics, visit our website at frbatlanta.org.

 

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