Financial Update (April-June 1999)


Cover Story

Advice to the Fed

Strategies for the New Millennium


Year 2000

Did You Know?

Data Bank

The Docket

Atlanta Fed Official Outlines
Strategies for the New Millennium

If we are to hasten the evolution (to electronic payments), we will need to do so in three ways: by paying particularly close attention to the needs of consumers, by finding more ways to work in a highly collaborative environment and by developing resolutions to the myriad problems that confront us.


T wenty-five years ago, the Atlanta Payments Project, a group organized by the Atlanta Fed that studied the U.S. payments system, predicted that America would move to a largely electronic payments system and that point-of-sale systems would replace checks. Other more recent prognosticators have declared that automated clearinghouse transactions would replace fixed recurring payments, that smart cards would replace cash and that electronic data interchange would replace a variety of paper-based corporate-to-corporate transactions.

Twenty-five years later, none of these predictions have come true. The volume of checks that Americans write continues to grow, point-of-sale transactions are not widespread, automated clearinghouse (ACH) transactions are used far less than checks, electronic data interchange's growth has been steady but modest, and smart cards have not replaced cash.

So where did the forecasters go wrong? According to Patrick Barron, first vice president and chief operating officer of the Federal Reserve Bank of Atlanta, the industry focused on what made sense for it internally from an efficiency and quality standpoint but did not spend enough time and energy considering what its customers wanted. Speaking at the 1999 Bank Administration Institute's Float Conference, in Orlando, Fla., Barron noted that the financial services industry has had difficulty developing an agenda for making changes in products and services that match what consumers want.

Examining the Fed's Current Role

Barron said that the Fed has also struggled with its role in working with the industry to facilitate change. For the past few years, a major portion of the Federal Reserve's mission has been to foster the integrity, efficiency and accessibility of the payments system. "But converting these words into action has been difficult for the Fed," he said.

Two years ago, when the Committee on the Federal Reserve Payments Mechanism examined the Fed's payments system role, it found that the Fed's involvement in the nation's check and ACH infrastructure was crucial to the system's long-term success. It also found that institutions of all sizes would welcome the Fed's taking a stronger role in helping the industry navigate through changes.

In an effort to meet its goals, and in response to this committee's findings, the Fed plans to collaborate with the financial services industry to move the payments system forward.

The Fed as a Facilitator for Change

According to Barron, there are three ways the Fed can achieve these objectives — as a collaborative leader, a regulator and a service provider. As a leader, the Fed can facilitate change by sponsoring research into problems with the payments system and by working with the industry to establish standards of work and educate consumers.

To help the industry understand existing challenges with the payments system, the Fed is conducting research that can help the industry focus its efforts. Last year, the Fed's Retail Payments Office conducted a survey to find out why consumers use — and do not use — ACH transactions. This study's findings have been shared with the industry, and, as a result of the findings, the Fed, the Treasury and others in the industry have changed their marketing messages to emphasize the ease and security of ACH transactions.

The Fed's Retail Payments Office is currently involved in an extensive research effort examining the current state of payments and the systems that consumers and businesses use. Subsequent research will identify potential electronic alternatives to checks, which are used in a wide range of ways. The research will also identify barriers to change and actions the industry can take to overcome these barriers, Barron said.

The Fed is collaborating with the financial services industry to set standards and promote innovations in the payments system on issues like electronic checks. Through this effort, the Fed is striving to improve the way checks are processed and thus save time and money for banks and consumers.

In the area of training and education, the Fed is part of an industry consortium focusing on the advantages of new technologies to customers and outlining reasons for changing existing habits. Using the findings from last year's ACH research, the Fed is working with the National Automated Clearinghouse Association, local ACH associations and the U.S. Treasury Department to promote the use of ACH for direct deposit and direct payment.

The Fed as a Policy and Rule Maker

The Fed can also, through its regulatory role, not only help move payments system innovations forward but also clarify legal issues, define standards and help the industry mitigate risk, according to Barron. These efforts are already taking shape through such initiatives as the reengineering of return item processing and the clarification of rules for converting checks to electronic entries at the point of sale.

The Fed as Service Provider

The Fed's service provider role is the third way it is playing an important part in the evolution of the payment system. The Fed already presents almost one-fifth of all checks electronically. And over the next several years the Fed will be planning a total electronic check presentment pilot in the state of Montana. The pilot will involve full imaging of all items as well as establishing a basis for the legal and operational infrastructure needed to support the project.

Barron concluded by noting that these efforts to facilitate transition to more electronic payments do not mean the Fed should stop improving the check system. "We do not eliminate payment systems," he said. "We simply add on new options with our ever-expanding economy. If we are to hasten the evolution, we will need to do so in three ways: by paying particularly close attention to the needs of consumers, by finding more ways to work in a highly collaborative environment and by developing resolutions to the myriad problems that confront us."