Explore This Section


E-Payments and the Wave of the Future

Presented by William H. Stone, Jr., First Vice President
Federal Reserve Bank of Philadelphia

2000 Mid-Atlantic E-Commerce Conference
Hosted by the Pennsylvania Chamber for Business and Industry
Lancaster, PA
September 20, 2000

The first question you asked yourself when you saw someone from the Federal Reserve was your luncheon speaker today was, why are we having a speaker talk about interest rates at an e-commerce conference?

As a Fed person, that's what people have come to expect. Fed people talk about the economy, and interest rates. Well, it's true that conducting monetary policy is one of our most critical missions, but it's only one. Another important mission is more in line with what you'd expect at an e-commerce conference–payments, specifically e-payments.

Many people don't know that the Federal Reserve plays important roles in the payments system, and the fact that people don't need to think much about it is good. This means they have confidence in the U.S. payments system. Our roles include providing payments services such as cash, check, automated clearinghouse payments and wire transfers to depository institutions and the federal government. However, our larger role is to oversee all U.S payments activities whether we have an operating role or not. Congress gave us this role because a smoothly functioning payments system is critical to the nation's economic growth and financial stability.

As the people charged with this mission of providing an effective payments system, we must ensure, at all times, the integrity, efficiency and accessibility of U.S. dollar payments and settlement systems. This leadership role assumes we are responsible for maintaining expertise in the payments system to reduce risk and promote the best possible technology for getting your payments processed safely and accurately.

Many of you have heard the projections of decades past of how we're moving to a cashless and then a checkless society. In Philadelphia, each day we handle about 5 million checks and send out $115 million in cash. Not only don't we have a cashless or checkless payment system, in fact, paper payments are still growing.

This conference points to many technological advances that we can all expect to embrace. However, related payments issues have received less attention in the e-commerce revolution even though the settlement of payments is a required part of any e-business transaction. Supporting a system that would become increasingly electronic is a great and welcome challenge, and one we have been encouraging for a long time.

Specifically, the Federal Reserve has been a big proponent of moving from paper-based payments (checks) to electronic payments. Innovations in technology will undoubtedly keep the push going, but ironically enough, checks and cash will continue to be the preferred payment method for smaller value transactions for years to come. Last year alone, Americans wrote approximately 68 billion checks. Even in our now wired world, it seems paper systems (cash and checks) still have the dominant role in the payments that are made by consumers and businesses.

Many people can't help but wonder how this is even possible in an age of highly advanced telecommunications and Internet use. Actually, the reasons are pretty simple. Paper systems have progressed quite well in support of the differing needs of society and they've continued to provide a versatile, efficient form of payment in the U.S. However, given the dominance of technology in just about every aspect of our society, we don't believe the current popular use of paper is sustainable. We are convinced that consumers, businesses and financial institutions have much to gain with the transformation to an electronic-based payment system based on services such as electronic bill presentment and bill payment, direct deposit of paychecks, and check truncation where a check is scanned at the point of sale or deposit and the data is immediately captured. This eliminates physical processing of the check, cutting down on costs and labor involved in traditional check processing.

What can we do to accelerate this process? At this stage it is important that the Federal Reserve support private–sector innovation. With technology advancing so rapidly, we should not pretend that we can somehow provide better answers than the competitive marketplace. Now is not the time to stifle innovation, but to promote it. This doesn't imply a passive role for the Federal Reserve, but one where we are providing active support and investing resources, where appropriate, to promote pilots using new technology, to provide for proof of concept and to help remove regulatory and legislative barriers to progress. Recent examples include supporting smart cards for the U.S. Treasury, participating in drafting progressive e-signature legislation, drafting legislation to support electronic check presentment expansion, and working with funds transfer providers to provide for seamless movement from one network to another and end–to–end electronic processing.

One of the suggestions we receive from time to time to speed the evolution to electronic payments is to disinvest in paper processing and to make that service worse or at least significantly more expensive. We have rejected this strategy for many reasons; the strongest is that paper payments will be around in large volumes for a long time even if electronic payments growth accelerates significantly. We have focused our investment on reducing the need for paper handling in the end–to–end processing of checks and, more recently, on supporting improved fraud prevention technologies. The cost for handling paper payments has risen, but pricing in the private sector often is unrelated to costs, and many times the individual or business making the decision on how payments are made is not bearing the increased cost.

Promoting greater consumer awareness also is important. In recent years, we have become more aggressive in using marketing tools to promote the benefits of electronic payments to both consumers and businesses. Our Bank has supported promotional campaigns with the local Automated Clearinghouse Association to promote ACH direct deposit and bill payment in the York region, and soon we will be expanding the program further to other regions.

One of the reasons the payments evolution is slower in this country than in some other developed countries is not that they have better technology; it is a matter of political will. In this country we like choice and competitive markets while other countries will more readily legislate change for societal benefit. Any strategy to move consumers and businesses to more electronic payment alternatives must demonstrate high reliability, meet privacy requirements, be highly secure, and demonstrate clear benefits for users. I cannot overemphasize the importance of these four criteria because to generate momentum and remove regulatory hurdles where necessary, failure in any of these areas can result in stifling opposition.

Although I am more optimistic about the opportunities to make real progress in e–payments than ever before, we cannot be complacent. The competitive process will by its nature result in failures. We need to minimize the risk of experimentation and never risk systemic disruptions. Non–depository institutions must understand that taking a more substantial role in the payment systems, particularly in regard to settling transactions, will be unlikely to come without greater regulatory scrutiny. Progress is likely to be frustratingly slow compared to the pace of other technological change. However, the rewards to success will be high with billions of dollars of potential cost reductions and huge marketing advantage to the truly innovative. So let's work together to make sure highly reliable, low–cost electronic payments are indeed the wave of the future.