Financial Update (Fourth Quarter 2006)
Fed Vice Chair: Payment
Paper shrinks, electronic payments grow
Speaking at the Western Payments Alliance symposium, Kohn said that the Federal Reserve has seen a rapid increase in the electronic processing of checks and a corresponding drop-off in its paper check processing. As Check 21 legislation has diminished the importance of geography and physical transportation in check processing, banks have responded by increasingly accommodating end-to-end electronic check clearing.
Kohn referred to the Fed's 2003 study of retail payments, which revealed dramatic changes in consumer behavior, including the fact that the number of electronic payments—credit card, debit card, and automated clearinghouse payments—in the United States now exceeds the number of payments made by check.
"Consumers seem to view debit cards as a natural progression from cash and checks because they are a convenient electronic means of making payments without incurring the additional debt often associated with credit card use," Kohn said.
The Fed's role will evolve
Just as the Fed has already halved the number of its offices that process paper checks, it will continue to respond to market forces. "Ultimately, perhaps sometime late in the next decade, the Reserve Banks might process checks at only a single office nationwide," Kohn said, adding that this change will benefit bank customers by making check deposits available to them sooner "because all checks will eventually become local checks."
However, this quicker availability could come at a greater risk for banks, he said, because a bank seldom learns that a local check is unpaid before it must make the funds available to the consumer for withdrawal.
Safety, efficiency remain payment priorities
Despite the quickly evolving payment landscape, Kohn said the Fed remains committed to a dependable payment system. "The retail payment system will continue to become increasingly electronic even though the exact nature of that system is not clear," he said. "What is clear, however, is that the Federal Reserve will continue to foster a safe and efficient payment system."