Banks Can and Should Improve Payment System, Atlanta Fed Official Says
Although financial institutions are making progress in the transition from paper to electronic payments, in general U.S. bankers “can—and should—do better,” said Pat Barron, Atlanta Fed first vice president and Federal Reserve retail payments product director. “Payments are still plagued by inefficiency, and financial institutions are not yet leveraging the true potential of electronic payments.”
Speaking at an October conference on global payments in France, Barron challenged U.S. financial institutions to move past yesterday’s business models or risk losing their best customers to more nimble and aggressive nonbank competitors. He urged U.S. bankers to “commit to a future built on the efficiency of electronics.”
Stressing that financial institutions should focus on operational efficiency and provide cost-effective services, he added, “I foresee many financial institutions confronting tough choices as they try to sustain growth in a time of rapid innovation, regulatory change, and shifting customer demands.”
Post-Katrina, Fed kept payments moving
Barron began his remarks by describing the Fed’s role as a leader in the payment system, dedicated to fostering efficiency and accessibility throughout the U.S. financial services industry. He cited the Fed’s work to keep the payment system running in the U.S. Gulf Coast region following Hurricane Katrina.
In Katrina’s aftermath, Barron said, the FedACH (automated clearinghouse) electronic payments system continued to operate and was available as soon as financial institutions could connect to it. On the other hand, many paper checks were damaged or lost during the hurricane and the subsequent flooding.
Electronic payments, checks head in opposite directions
Barron cited a 2004 Federal Reserve study that showed that U.S. check volume is declining at about 5 percent a year. In 2003, the number of electronic transactions exceeded the number of checks processed for the first time. In contrast, ACH volume increased 18 percent in the second quarter of 2005 compared with year-earlier levels, he said.
In this rapidly changing environment, perhaps financial institutions’ most dangerous course of action, Barron said, is inaction. “In this competitive jungle, it’s a matter of survival to align services with customers’ needs and thus provide low-cost and convenient services.”