Financial Update (January-March 1998)
Fed Committee Releases Results of
Payments Services Study
he Federal Reserve should continue to provide check and automated clearinghouse (ACH) services to financial institutions, according to a Fed study that included the views of 450 financial institutions nationwide as well as others with a stake in the payments system. The study also recommended that the Fed work closely with payments system service providers and users to develop the next generation of payments services.
The results of the study were part of the final report from the Committee on the Federal Reserve in the Payments Mechanism, led by Fed Vice Chair Alice M. Rivlin. As part of its study, the committee held 52 regional forums with financial institutions, service providers and trade groups. At the forums, these stakeholders discussed options for the Fed's role in the retail payments system, which ranged from the Fed exiting the payments system to adopting a leadership role in the industry.
Continue Check Collection Services
From their study, the committee found that the payments system would be best served by the Fed's continued participation as a provider of check services. The majority of payments system stakeholders felt that the Fed's withdrawal from the check market would result in disruption in the check collection system in the short run and provide no substantial long-run benefits. Additionally, the committee found that a Fed withdrawal could hamper the current migration of paper-based check products to electronic forms since market participants would need to concentrate on filling the paper processing void left by a Fed exit.
Based on input from forum participants, the committee recommended that the Fed
Encourage Greater Use of ACH Services
- examine the implications of making check collection presentment times the same for itself and commercial providers;
- continue electronic check presentment (ECP) and truncation efforts to meet demand, establish prices that encourage electronic banking, and provide enhanced imaging and information services to make electronic processing more efficient for banks;
- use industry pilots to determine ECP barriers and benefits;
- create an industry working group to determine the cost and feasibility of ECP and truncation and foster widespread adoption of an ECP system;
- consider amending Regulation CC to include provisions to return dishonored checks in electronic form, extend presentment deadlines for banks that warrant the accuracy of their electronic files, and require all depository institutions to accept presentment in paper or electronic form;
- collaborate with the industry to establish a legal foundation for electronic payments processing as well as standards and protocols for image archives;
- promote public acceptance of ECP and truncation through educational efforts to address issues of concern to consumers; and
- make greater use of its existing pricing authority to enhance check collection system efficiency.
The committee said that the Fed's continuation as an automated clearinghouse (ACH) service provider would promote future efficiency by aiding the migration to electronic payments. Because it is the dominant provider of ACH services, the Fed is in a unique position to work with the financial services industry to encourage the innovation of products to increase ACH usage. The committee recommended the Fed should
Looking to the Future
- address technical issues that affect the Fed's ability to receive and process vendor payment information and engage in efforts to promote financial electronic data interchange,
- make greater use of its existing pricing authority to enhance the efficiency of the ACH system,
- enhance its infrastructure to support cross-border ACH transactions,
- offer enhanced settlement service to commercial ACH providers to stimulate growth of electronic payment services, and
- encourage the use of ACH products, such as direct deposits and recurring payments, by changing rules and reducing ACH barriers and increasing ACH marketing and education efforts.
Given the diverse and decentralized nature of the U.S. financial system, the transition to the most efficient and reliable payments method could be hindered because of coordination and standardization difficulties across all payment participants. In its report, the committee indicated that the Fed could play a role in establishing a more widespread adoption of electronic payments instruments by
The committee's final report is available on the Board of Governors Web site.
- encouraging and facilitating communication with retail payments system participants,
- working to ensure that the necessary legal, regulatory and market foundations are in place to improve the payments system by identifying legal impediments to the growth of emerging payment methods areas in which new or amended standards would promote growth,
- educating consumers, businesses and financial institutions about new and existing electronic payments, and
- working with retail payments system participants to ensure access to a secure and reliable system for clearing and settling retail transactions, and
- assessing what role the Fed's infrastructure should play in the retail payments system of the future.
Fed operations staff around the nation are currently considering the next steps the Fed will take to implement the recommendations in the study. These steps will be communicated as they occur.