Financial Update (Second Quarter 2007)

Fed Governor Kroszner: Public, Private Sectors Must Cooperate on Payment System

Randall KrosznerBoth the private and public sectors will continue to play important roles in shaping the evolution of the national payment system, Federal Reserve Governor Randall Kroszner said in a recent speech at the 2007 Payments Conference at the Federal Reserve Bank of Chicago.

"As we ask each other 'what's next?' during this time of transition, I believe that dialogue among payments system participants and users is critically important," Kroszner said. "Information and different points of view will help us all identify and address issues of innovation, risk, and efficiency in a balanced and thoughtful manner."

Minding the marketplace
As the payment system evolves, public sector regulators must continue to refine rules to reflect new marketplace realities, Kroszner said. Meanwhile, the private sector needs to advance sensible innovations that address real marketplace needs, including the need to control risk, he added.

Indeed, Kroszner said, one of the central challenges to payment system innovation in the future will be the need to balance convenience and security.

Governor Kroszner's speech off-site image

In balancing the costs and benefits of providing security and convenience in payments, Kroszner said, "we can anticipate that when the costs of prevention fall or fraud begins to increase, banks, businesses, and consumers will react by implementing or demanding changes in policies, business processes, and technology to address risk."

ACH's growth heightens need for scrutiny
Specifically within the automated clearinghouse (ACH), the risk profile is changing as the ACH has grown in size and complexity. Parties using the network to make one-time payments over the telephone and Internet have fueled its growth, Kroszner said.

He said that ACH operators, including the Fed and the National Automated Clearinghouse Association, have been working with the industry to control emerging types of fraud and related risks.

In addition to discussing the future of payments, Kroszner also recapped recent changes. He noted, for instance, that as the use of electronic payments has doubled over the first half of this decade and check volume has at the same time fallen dramatically, Federal Reserve Banks have responded by reducing the number of their check processing offices by half.

May 24, 2007