Federal Reserve helps keep payments flowing

Most of us are familiar with the Federal Reserve's role in conducting monetary policy and in supervising and regulating financial institutions, but perhaps less well known is the central bank's important role in the U.S. payments system. A 2011 conference hosted by the Atlanta Fed's Retail Payments Risk Forum shed some light on this topic.

Photo of Louise RosemanLouise Roseman, who heads the Division of Reserve Bank Operations and Payments Systems at the Board of Governors, spoke about the Fed's diverse roles in the payments system, including service provider, regulator, and liquidity provider. The Fed's responsibilities have evolved alongside broader changes in the payments system such as the rise of electronic payments.

"The payments system is really the plumbing for our economy," Roseman told the audience. Indeed, a payments system that is efficient and that users have confidence in undergirds a well-functioning economy, she explained. Part of the Fed's mission as the U.S. central bank is to foster such a system.

One of the first payment services the Fed took on shortly after its creation in 1913 was check collection. Not surprisingly, the process was far less efficient back then than it is these days, Roseman noted. Over time, the Fed's payment services have grown to include Fedwire funds transfers and automated clearinghouse (ACH) payments, both of which have benefited from technological changes. Indeed, she added, when the Fedwire service was introduced in 1918, the Reserve Banks used Western Union telegraph wires to send payment instructions.

The Fed has also seen its regulatory responsibilities expand. The central bank initially had a limited role in regulating payments as it only had authority for the ones it processed, Roseman explained. Since then, several federal laws have given the Fed increased authority to regulate payments more broadly, including debit interchange fees and even Internet gambling, she explained. The Fed has used this authority to help the payments system, especially interbank payments, run more smoothly.

Another of the central bank's important roles is to be a "catalyst for change," Roseman told the audience. It does this by making full use of its expertise and its role as an objective, neutral party in the payments system, she explained. For instance, the Fed had a catalyzing role in developing the Check 21 law, which "fundamentally changed the way checks are collected in the country," she said. Check 21 allowed banks to settle checks through electronically exchanged images, eliminating the need to fly and drive paper checks all over the country. Among other things, the Fed consulted with interested parties to flesh out a concept for the law, collected and incorporated feedback, and eventually sent a statute to Congress.

Want to learn more about the Federal Reserve's role in the payments system? Watch video highlights from Roseman's presentation.