Staff Study 

175 

The Future of Retail Electronic Payments Systems: 
Industry Interviews and Analysis 

Federal Reserve Staff 

for the Payments System Development Committee 

Federal Reserve System 

December 2002 


Foreword 

During the past decade, consumers, businesses, 
and governments have continued to increase their 
use of electronic payments. At the same time, 
advances in computer processing, telecommunications, 
and data storage have contributed to a range 
of payments system innovations. Although only a 
limited number of these innovations have enjoyed 
commercial success so far, there has been some 
movement toward expanding the range of options 
and techniques for making electronic payments in 
the United States and increasing the overall efficiency 
of the payments system. 

To understand the implications of these developments 
and to gather more information about barriers 
to payments innovation, the Federal Reserve’s 
Payments System Development Committee asked 
Federal Reserve staff to conduct discussions with 
a broad range of parties interested in the evolution 
of the payments system. [Begin Footnote 1. A primary 
focus of the Payments System Development 
Committee is to assess whether regulatory or operational 
barriers to innovation may inhibit the long-term 
development of the payments system. Accordingly, the 
committee has engaged in a number of activities, including 
outreach to the private sector, that are aimed at identifying 
and addressing barriers to innovation. End Footnote 1.] 
Special attention was given to issues involving the clearing 
and settlement of retail electronic payments. Part 1 of the 
following report provides an informative overview of the 
diverse opinions expressed in the discussions. 
Part 2 summarizes and provides further information, 
where possible, on specific comments and recommendations 
made by those interviewed. These comments 
and recommendations are directed at both the public 
and private sectors. 

The committee has decided to make this report 
public as part of its ongoing efforts to inform and 
educate the public regarding the important issues 
affecting retail payments in the United States. The 
report itself should be viewed as a general resource 
for the public and not as an endorsement of any 
specific viewpoint or recommendation. The report 
shows that no single issue was consistently identified 
nor any single recommendation made by a significant 
number of organizations interviewed. 

Instead, the recommendations tended to track the 
specific business needs or viewpoints of those 
interviewed. In addition, no systemic problems or 
barriers to innovation were identified in existing 
clearing and settlement arrangements. Rather, these 
arrangements tended to be treated as an institutional 
framework within which to innovate, not a framework 
that needed to be changed. 

Nevertheless, the report does not support or imply 
complacency. Rather, it points to the complexity and 
difficulty of innovation. This situation reinforces the 
need to identify and address barriers to innovation 
when this is in the public interest. It also reinforces 
the need to pay careful attention to clearing and 
settlement arrangements, which are the foundation 
of the payments system. These arrangements must 
evolve so that they support not only safe and efficient 
payments today, but also safe and efficient 
payments in the future. 

Roger W. Ferguson, Jr. (signed) 
Vice Chairman 
Board of Governors of the 
Federal Reserve System 

Cathy E. Minehan (signed) 

President and CEO 

Federal Reserve Bank of Boston 


Contents 

1. Summary of Industry Interviews and Findings 1 

The Interviews 2 

Key Issues 2 

Future Direction 4 

Innovations 4 

On-line Interbank Payments 4 

Timing of Settlement 4 

Standards 5 

Cross-border Payments 5 

Opportunities and Challenges 6 

2. Industry Observations and Recommendations 7 

Innovations in the Market Environment 7 

Net Benefits 7 

Familiarity 7 

Competition for Resources 7 

Critical Mass and Network Effects 8 

Interviewee Recommendations and Discussion 8 

On-line Payments from Deposit Accounts 9 

Dissatisfaction with the Status Quo, and Potential Alternatives 9 

Security Fraud, and Privacy Risks 10 

Interviewee Recommendations and Discussion 10 

Transition of Check Payments from Paper to Electronic 11 

Interviewee Recommendations and Discussion 12 

Real-time Transaction Processing, Clearing, and Settlement 12 

Real-time Clearing and Settlement 13 

Real Time versus Near-real Time 13 

Returned Payments 13 

Interviewee Recommendations and Discussion 14 

Information Related to Electronic Payments 15 

Straight-through Processing 15 

Information Flows 16 

Interviewee Recommendations and Discussion 16 

Standards 16 

Cooperation 16 

Universal Format 16 

Channel Migration 17 

Cross-border Issues 17 

Interviewee Recommendations and Discussion 17 

Cross-border Payments 18 

Interviewee Recommendations and Discussion 18 


Laws, Regulations, and Private-sector Rules 19 

Clarity and Certainty 19 

Periodic Assessments 19 

Regulation versus Self-regulation 20 

Interviewee Recommendations and Discussion 20 

Federal Reserve Services and Miscellaneous Topics 22 

Interviewee Recommendations and Discussion 22 

Table 

1. Organizations Interviewed, by Type 2 

Appendixes 

A. Contributing Federal Reserve Staff Members 24 

B. Interview Process and Potential Limitations 25 

C. A Summary of Recommendations from the Interviews 26 


The Future of Retail Electronic Payments Systems: 
Industry Interviews and Analysis 

1. Summary of Industry Interviews 
and Findings 

Market, technological, and legal developments have 
contributed to a surge of innovation and change 
in payments systems in recent years, including the 
development of new means of making payments and 
the alteration of existing means. Traditional payments 
service providers such as banks and bank associations 
have been involved in a large number of 
challenging projects. [Begin Footnote 1. The term 
‘‘bank’’ is used in this context to mean any depository 
institution, including commercial banks, thrifts, and credit 
unions. End Footnote 1.] A significant amount of creativity 
has also come from new entrants into various 
parts of the payments system, including data-
and transaction-processing firms, technology firms, 
and retailers. The number of project proposals was 
particularly high during the technology boom 
of the 1990s. A few of these have become relatively 
successful, but others have failed. Nevertheless, 
the use of electronic instruments for making retail 
payments has become much more common in the 
United States in the past ten years. On-line commerce 
and banking also continue to grow, although perhaps 
more slowly than initial predictions. Over the longer 
term, however, the continued development of safe 
and efficient electronic commerce and finance will 
likely also require the continued development of safe 
and efficient retail electronic payments systems. 

During the past ten years, the credit card industry 
moved early to facilitate on-line payments in retail 
electronic commerce, and credit cards continue to 
be the dominant payment instrument in this field. [Begin 
Footnote 2. The term ‘‘payment instrument’’ is used in this report as a 
generic term to cover checks, debit cards, credit cards, automated 
clearinghouse (ACH) instructions, and other devices for making 
payments. This usage is consistent with terminology in the 
Federal Reserve System’s Committee on the Federal Reserve in the 
Payments Mechanism (the Rivlin Committee) report and Bank for 
International Settlements reports. This usage, however, is not 
consistent in all cases with U.S. legal definitions of a ‘‘payment 
instrument.’’ End Footnote 2.] Major debit cards that clear 
through the credit card networks can also be used for 
on-line transactions, thereby providing cardholders with 
one means of making payments using traditional 
deposit-account 

balances at banks. Several innovators have attempted 
to create completely new payment instruments for 
use in electronic commerce, although most typically 
provide a new interface for end users to the payments 
system while relying on existing electronic 
systems, such as the automated clearinghouse 
(ACH), for clearing and settlement. [Begin Footnote 3. 
Clearing is the process of transmitting and reconciling 
payment or transfer instructions and in some instances 
confirming payment orders or the security of the 
instructions prior to settlement. Settlement is the 
discharge of obligations with respect to the transfer of 
funds or securities between two or more parties. (Source: 
‘‘A Glossary of Terms Used in Payments and Settlement 
Systems,’’ Committee on Payment and Settlement 
Systems, Bank for International Settlements, January 
2001.) Electronic clearing and settlement systems include 
the ACH, retail electronic funds transfer systems (for 
example, ATM and debit card systems), credit card 
systems, and wire transfer systems. End Footnote 3.] 

The most striking development in the U.S. payments 
system has been the overall growth in electronic 
payments using credit and debit cards and the 
ACH. The number of noncash retail payments made 
with these instruments grew fivefold from 1979 to 
2000, with debit cards growing dramatically toward 
the end of the period. [Begin Footnote 4. Most of the 
data cited in this paragraph is from ‘‘A Snapshot of the 
U.S. Payments Landscape,’’ Federal Reserve System, Retail 
Payments Research Project, 2002 (available at 
www.frbservices.org/Industry/frIndustry.cfm), and from 
Geoffrey R. Gerdes and Jack K. Walton II, ‘‘The Use of 
Checks and Other Noncash Payment Instruments in the 
United States,’’ Federal Reserve Bulletin, vol. 88 (August 
2002), pp. 360-374 (available at 
www.federalreserve.gov/pubs/bulletin/2002/0802_2nd.pdf). 
End Footnote 4.] The proportion of retail noncash 
payments made electronically grew from 
15 percent in 1979 to 40 percent in 2000. Indeed, 
although checks are still the dominant noncash retail 
payment instrument by volume and value, recent 
evidence suggests that the aggregate number of 
checks written may have peaked in the mid-1990s. 
Businesses, in particular, continue to use checks 
heavily as a means of payment (almost 14 billion 
business payments in 2000), but they are slowly 
migrating toward the greater use of electronic 
payment instruments, including the ACH and 
wire transfer systems. 

Although the use of electronic payments systems the basic design of core retail payments has not changed considerably. 


2 Staff Study 175 

Looking forward, innovation may become increasingly 
desirable, to strengthen both the safety and the 
efficiency of various elements of electronic payments 
systems. As in the past, innovators will likely face 
numerous business challenges, including slowly 
changing payments practices by users of payments 
systems. Innovation, however, should not be 
hindered by significant barriers to improvement 
or by a lack of flexibility in markets. From the 
standpoint of public policy, it is important to 
identify barriers to innovation and, when appropriate, 
to search for ways to address them. 

The Interviews 

In light of recent innovations and anticipated developments 
in the payments system, the Federal 
Reserve’s Payments System Development Committee 
(PSDC) asked Federal Reserve staff to seek the views 
of private-sector organizations and other interested 
parties, including government agencies, about 
longer-term payments system developments in 
general, and the key issues that will shape future 
clearing and settlement systems in particular. [Begin 
Footnote 5. The Federal Reserve Board established the PSDC in 1999 to 
work with the private sector to identify barriers to innovation in the 
payments system, identify strategies for enhancing the long-term 
efficiency of existing U.S. payments systems, and develop strategies for 
moving to the next generation of electronic payments. PSDC members 
are Board Vice Chairman Roger W. Ferguson, Jr., and Federal Reserve 
Bank of Boston President Cathy E. Minehan (co-chairs), Federal Reserve 
Bank of Chicago President Michael H. Moskow, Federal Reserve 
Bank of New York First Vice President Jamie B. Stewart, and Federal 
Reserve Bank of Atlanta First Vice President Patrick K. Barron. Federal 
Reserve staff who contributed to the project are listed in appendix A. 
End Footnote 5.] 

Staff separately interviewed representatives of 
forty-nine organizations, mainly from the end 
of 2001 through the first half of 2002. [Begin Footnote 6. 
Appendix B provides information on the interview process 
and assesses the potential limitations of the process. End 
Footnote 6.] These organizations included, corporate end banks, private-nonbank suppliers of payments services (see table 1). 
In the interviews, staff sought views on several key 
questions, including 

• What are providers of financial services and 
information technology doing that will change 
and improve the nation’s payments systems? 

• What are corporate users of payments services 
doing that will change and improve the ways 
in which they make and receive payments? 

• What barriers to innovation have been 
encountered? 

• What issues should be brought to the attention 
of the Federal Reserve or other appropriate 
organizations? 

The general findings from the interviews are summarized 
in the remainder of this section. Details 
and recommendations from the interviewees are 
presented in part 2. 

Key Issues 

More than one hundred individuals participated in 
the interviews. They discussed numerous projects 
and raised a range of issues. Overall, the discussions 
yielded a picture of a payments system in flux, with 

1. Organizations Interviewed, by Type. Accessibility note: the following table consists of 3 columns and 10 rows. 

Begin Header Row. Column 1: Type of organization. 

Column 2: Number 
interviewed. 

Column 3:.Description. End Header Row. 

Type of organization: Corporate end users. 

Type of organization: Corporate end users, 
Number interviewed: 6. 

Type of organization: Corporate end users, Description: Large industrial firms; physical and virtual retailers. 

Type of organization: Technology firms. 

Type of organization: Technology firms, 
Number interviewed: 8. 

Type of organization: Technology firms, Description: Firms (such as software vendors and system 
integrators) that work with corporate end users and banks to build and manage their internal 
information technology. 

Type of organization: Financial services providers. 

Type of organization: Financial services providers, 
Number interviewed: 6. 

Type of organization: Financial services providers, Description: Nonbank firms that offer payments 
services, such as electronic money, to consumer and 

Type of organization: Other service providers. 

Type of organization: Other service providers, 
Number interviewed: 2. 

Type of organization: Other service providers, Description: Firms that provide security services 
supporting the financial industry. 

Type of organization: Payments processors. 

Type of organization: Payments processors, 
Number interviewed: 4. 

Type of organization: Payments processors, Description: Firms that provide transaction and clearing 
services on behalf of corporate end users and 

Type of organization: Banks. 

Type of organization: Banks, 
Number interviewed: 8. 

Type of organization: Banks, Description: Small, mid-size, and large depository institutions. 

Type of organization: Infrastructure providers. 

Type of organization: Infrastructure providers, 
Number interviewed: 8. 

Type of organization: Infrastructure providers, Description: Credit card associations, electronic funds 
transfer networks, and other operators of clearing 

Type of organization: Others. 

Type of organization: Others, 
Number interviewed: 7. 

Type of organization: Others, Description: Payments system rule-making associations, government 
agencies, law and consulting firms, and other parties interested in the payments system, domestically 
and abroad. 

Type of organization: Total interviewed. 

Type of organization: Total interviewed, 
Number interviewed: 49. 




The Future of Retail Electronic Payments Systems: Industry Interviews and Analysis 3 

many organizations pursuing one or more efforts 
simultaneously. Interviewees expressed different 
visions of the future and varying perceptions of 
barriers to innovation. Some of the differences can 
be attributed to the large number and different types 
of organizations involved in the payments system; 
other differences are a result of interviewees having 
different organizational priorities and constraints. 
Taken together, these differences make gaining wide 
cooperation among service providers and, potentially, 
end users on significant undertakings, such as 
infrastructure changes, extremely challenging. For 
this and other reasons, incremental changes rather 
than broad visions frequently dominated the interview 
discussions. Not surprisingly, even discussions 
of incremental changes often revealed considerably 
different approaches to solving associated problems. 
Although the interviewees raised numerous issues 
and proposed differing approaches, most of their key 
points can be grouped into a few broad categories. 
Overall, their responses provide insight into the 
current state of retail payments systems and suggest 
actions that the Federal Reserve, the financial industry, 
or others could take to foster efficiency and 
safety. 

• Many interviewees stated that having a ‘‘business 
case’’ for adopting an innovation in electronic 
payments systems and, particularly, identifying the 
demand for innovation are much more important 
than simply having access to the new technology 
that would permit the innovation. Providers of 
payments services cannot assume that an innovative 
service will generate significant demand just 
because the service provides new technical capabilities 
in a creative way. Providing a net benefit to 
the key participants in a transaction, such as 
banks, service providers, and end users, appears 
frequently to be the most important aspect of 
successful innovation. 

• Interviewees expressed a desire for further development 
of low-cost instruments for initiating rapid 
interbank transfers to and from deposit accounts 
using the Internet. [Begin Footnote 7. Interbank funds 
transfers involve the exchange of payment instructions 
and funds between banks. End Footnote 7.] Currently, 
few instruments allow end users to make real-time, 
on-line purchases using funds from a demand deposit 
account. The inability to verify easily and reliably 
the identity of individuals attempting to make 

(or receive) payments over the Internet poses a 
significant problem for the advancement of such 
transfers. Proposals for solving the problem were 
varied. 

• Several organizations expressed a desire to 
improve check collection, although they saw 
improved collection as only a temporary measure 
until electronically initiated payments are even 
more widely adopted than at present. The events 
of September 11, 2001, in particular, led organizations 
to place greater emphasis on the transformation 
of checks into electronic payment instructions 
and on moving toward greater use of electronic 
payment instruments overall. 

• Interviewees expressed differing views on how 
quickly a payment transaction should settle— 
real time, near-real time, or next day. Many 
interviewees preferred real-time settlement but 
concluded that in light of cost considerations, 
less-costly alternatives that could achieve similar 
results, such as payment guarantees with 
next-day settlement, might be acceptable. 

• Some interviewees believed that the exchange 
of information with business partners about an 
underlying payments transaction is more important 
to a business than the potential savings from 
making or receiving payments electronically. 
They perceived considerable value in receiving 
an electronic payment and associated information 
formatted in such a way that the payment and 
information can be processed straight through 

to their internal systems. Incomplete technology 
integration, however, limits banks’, corporations’, 
and consumers’ ability to send, receive, and use 
electronically transmitted business information 
at low cost. 

• Several interviewees believed that the lack of 
agreed-upon standards for payment messages, 
such as message formats and the way in which 
payments information is included, and the consequent 
lack of systems interoperability are the 
greatest problems for the financial industry. 

The lack of interoperability affects transactions 
among businesses and, in some cases, between 
businesses and their banks. The interviewees’ 
suggestions for achieving agreement on standards 
varied considerably, with no single suggestion 
receiving broad endorsement. 

• Cross-border electronic payments, which can be 
quite costly and cumbersome, concerned several 
interviewees. In particular, the lack of compatible 
standards for sending electronic payments across 
payments systems in different countries contributes 
to the cost and difficulty. 

• Many organizations view laws and regulations 
related to payments as complex, confusing, and 
adding some uncertainty to their operations. 
Interviewees appeared, however, to take regulations 
as a given, something to be worked with 


4 Staff Study 175 

or around but not necessarily changed. Few 
interviewees made specific suggestions for 
improving the legal and regulatory environment 
to foster greater innovation. 
• Several interviewees stated that the Federal 
Reserve should continue to adopt innovation 
or extend its services so as to foster innovation 
in the private sector. 

Future Direction 

The Payments System Development Committee 
intends to explore several issues raised in the interviews 
and examine the recommendations that relate 
to the Federal Reserve Board and the Reserve Banks. 
The following subsections present areas where the 
PSDC believes the Federal Reserve and other organizations 
may contribute to reducing barriers or 
fostering innovation in the payments system. At the 
same time, the PSDC encourages participants in all 
aspects of the payments system to explore and 
address, where appropriate, the issues raised in the 
interviews. Participants at all levels—large organizations 
that have historically been active in the 
payments arena as well as small, less traditional 
organizations—have roles in facilitating change. 

Innovations 

To foster innovation, the Federal Reserve will continue 
to consider requests from the private sector to 
support payments innovation through its operations 
or by other means, as appropriate. Currently, the 
Federal Reserve Banks are providing limited operational 
support to one private-sector project, the 
Universal Payment Identification Code project 
of the Clearing House (formerly the New York 
Clearing House). The Federal Reserve will also 
continue to consider requests for changes to portions 
of its regulations that are seen as presenting potential 
barriers to innovation. In addition, the Board has sent 
to Congress proposed legislation intended to address 
a perceived barrier to greater use of electronic check 
presentment. [Begin Footnote 8. The draft act submitted 
by the Federal Reserve Board, referred to as the Check 
Truncation Act, is available at 
www.federalreserve.gov/paymentsystems/truncation/default.htm. 
See also The Check Clearing for the 21st Century Act 
(H.R. 5414, 107th Congress (2002)) and The Check 
Truncation Act (S. 3034, 107th Congress (2002)), which 
are available at http://thomas.loc.gov/. End Footnote 8.] 

On-line Interbank Payments 

The Internet has transformed the way consumers 
and businesses think about and conduct commerce, 
yet surprisingly few options exist for making electronic 
commerce payments, especially compared with 
the number of options for making payments associated 
with more traditional commerce. [Begin Footnote 8. 
Commerce includes consumer-to-business, business-to-
consumer, consumer-to-consumer, and business-to-business 
payments. For the purposes of this report, business 
payments cover payments by or to governments, businesses, 
and other organizations. End Footnote 8.] Specifically, 
consumers and businesses have only limited options 
for making payments using their demand deposit 
accounts, which is somewhat surprising considering 
that other than currency, demand deposits represent 
the predominant medium of exchange. There may be 
several explanations for this phenomenon. Demand 
may be insufficient for alternative on-line payment 
instruments. Security issues may have held back 
development. With notable exceptions, the existing 
clearing and settlement infrastructure may not be 
conducive to an on-line environment. It may also 
be that the complexity of this issue and the large 
number of players that it may involve do not 
lead to simple and widely acceptable solutions. 
The PSDC believes that the development of additional, 
secure on-line payment instruments that use 
demand deposit accounts is potentially important 
for fostering electronic commerce in the long term, 
and it will continue to monitor the progress of 
initiatives in this area. 

Timing of Settlement 

As the time between the clearing and settlement 
of a payment lengthens, the risks to the payments 
participants generally increase. In the past, banks and 
nonbank firms considered this risk a cost of participating 
in the payments system, but they have 
become less accepting of this risk as the costs of 
technology have decreased and their sophistication 
in risk management has increased. So although firms 
may disagree about whether real-time or near-realtime 
clearing and settlement is preferable, the 
broader message is clearly that they should be faster 
and final. 

Interviewees suggested faster clearing and settlement 
not only for payment instructions but also 
for return instructions, that is, for instructions that 
receiving banks return to sending or originating 
banks, for example, because of insufficient funds to 
settle an instruction or a closed account. Returns are 
an important part of the payments process, and there 


The Future of Retail Electronic Payments Systems: Industry Interviews and Analysis 5 

is room for improvement in return times, particularly 
for ACH debit transactions. Improvements in returns 
could reduce risk and help participants more effectively 
manage it. For example, originators of ACH 
debit transfer instructions could manage their risks 
more effectively if they did not have to wait three 
or four days to receive notification that such an 
instruction has been returned. 

As an initial step, the Federal Reserve Banks are 
working with industry representatives on a pilot 
project involving a same-day ACH product that 
would involve settlement by close of business for 
transactions received that day by a specified cutoff 
time. Same-day ACH would not only speed the 
clearing and settlement of forward-originated ACH 
payments but would also shorten the time frame 
in which the originating bank would receive returns. 
This effort, although significant, is only one step. 
The Reserve Banks and others, including infrastructure 
providers and banks, may need to take 
additional actions to achieve faster clearing and 
settlement of both forward-originated and returned 
instructions. 

Standards 

The payments system is evolving as businesses and 
consumers seek the convenience and efficiency of 
electronic payment instruments. The development 
and adoption of standards are key to achieving 
widespread use of electronic payments as well as 
other goals such as payments system safety and 
accessibility. A common standard can enable the 
straight-through processing of electronic payments 
files from the originator of the transfer to the 
receiver. Open standards, such as eXtensible Markup 
Language, or XML, can further promote interoperability 
by enabling systems based on different 
standards to communicate more readily. The lack 
of a common standard for a payments system and 
its participants at various levels can increase the 
cost of participating in the system and introduce 
inefficiencies such as format translation and manual 
processing. 

In light of the current environment, the PSDC 
recently undertook a review of Federal Reserve 
activities related to standards development and the 
Reserve Banks have instituted several changes to 
make their activities related to standards more 
proactive and collaborative with industry initiatives. 
The Reserve Banks have increased their participation 
in several bodies concerned with standards, such as 
the Internet Engineering Task Force and the Organization 
for the Advancement of Structured Informa-

tion Standards. The Reserve Banks have also discussed 
with SWIFT, a company specializing in the 
transmission of messages for payments and other 
financial transactions, its continuing efforts to 
develop and revise file-transfer and other standards 
for cross-border payments. The Reserve Banks plan 
to continue to work with SWIFT and other organizations 
on cross-border initiatives. The Reserve Banks 
are also considering the adoption of SWIFT standards 
for their Fedwire funds transfer service and will be 
conducting further analysis and seeking further 
industry views on this proposal moving forward. 
Finally, the Reserve Banks have created an industry 
group (the Interoperability in the Check Processing 
and Truncation Environments Workgroup) to establish 
workable action plans, including implementation 
strategies and timelines, for reducing obstacles to the 
collection and settlement of checks without the 
movement of paper. At the same time, the Reserve 
Banks are continuing to work on initiatives with 
respect to electronic check presentment (ECP) and 
related standards activities. 

Cross-border Payments 

The speed, cost, and reliability of payments that 
must cross national borders are a concern for consumers 
and businesses that have international 
relationships. Some believe that the Federal Reserve 
should play a more proactive role in addressing these 
concerns. The Federal Reserve Banks are currently 
offering cross-border ACH services into Canada and 
are pursing ACH initiatives for cross-border payments 
involving Mexico, Europe, and other areas. 
In addition, the Federal Reserve is working at the 
international level with other central banks to better 
understand retail payments systems. For instance, 
in September 2002, the Committee on Payment and 
Settlement Systems, which meets at the Bank for 
International Settlements, published a preliminary 
paper on policy issues for retail payments, ‘‘Policy 
Issues for Central Banks in Retail Payments.’’ [Begin 
Footnote 10. The Committee on Payment and Settlement 
Systems consists of the central banks of the Group of Ten 
countries, Hong Kong SAR, and Singapore plus the 
European Central Bank. The committee serves as a forum 
for the central banks to monitor and analyze developments 
in wholesale and retail payments and clearing and 
settlement systems. Further information is available 
at www.bis.org/index.htm; the preliminary paper is at 
www.bis.org/publ/cpss50.htm. End Footnote 10.] 
The paper requests information on consumer and 
business cross-border payments to help inform the 
committee and its member central banks. While these 
efforts are a beginning, the PSDC believes that there 
may be a need for further enhancements in the 


6 Staff Study 175 

payments system to improve the variety of cross-
border payments services offered to end users. In this 
respect, private-sector organizations will need to play 
a key role in fostering faster, safer, and lower cost 
cross-border payments. 

Opportunities and Challenges 

Over time, existing clearing and settlement systems 
will be redesigned in fundamental ways to accommodate 
new technologies and new business processes. 
Some interviewees envision advanced systems that 
give end users options in such areas as timing, 
finality, information capability, and fees. Such 
systems might incorporate tools for managing 
the risk of originating and receiving payments, 
including tools for authenticating and authorizing 
end users in real time. Other interviewees look 
to a future in which end users have direct and 
easy access to clearing and settlement systems— 
a change that would increase end users’ control 
and options and lower their costs but also would 
likely add risk to those systems and alter traditional 
banking practices. Still other interviewees foresee 
more-limited, but nevertheless challenging, possibilities. 
For example, some picture a universal 
payment message that enables interoperability 
among existing payments systems, thereby 
increasing processing flexibility and efficiency. 
Such a message format might also accommodate 
more-efficient, more-reliable means for transferring 
and integrating payments and payment-related 
information. 

Regardless of the way the future unfolds, it is clear 
that payments systems will change over time. Existing 
systems will be redesigned, or perhaps replaced 
altogether, and established business relationships 
may be altered. The ways in which these changes 
will be worked out in the marketplace cannot be 
readily predicted. Nonetheless, the opportunities are 
intriguing. For instance, if a uniform and efficient 
means of transferring and integrating payments and 
payment-related information, such as purchasing 
agreements and invoices, were to become widely 
available, businesses could see a major change in the 
way account payables and receivables are reconciled. 
Further, the continuing proliferation of computers 
and spread of access to the Internet could make it 
possible for payments providers to offer consumers 
faster and cheaper services. 

At the same time the redesign or replacement of 
existing payments systems opens opportunities, there 

will also be a need to develop safeguards to ensure a 
balance between safety and efficiency. Market developments 
and business practices, including those in 
the credit card industry, are responding to consumer 
and business needs related to authentication and 
authorization techniques for on-line retail payments. 
On the other hand, authentication and authorization 
techniques have not evolved as far as many would 
like, potentially limiting the use of some types of 
payments, particularly on-line payments. It seems 
likely that as merchants, financial institutions, and 
other service providers gain experience, payments 
systems will be able to employ robust, but cost-
effective, authentication and authorization 
techniques. 

The redesign or replacement of existing payments 
systems may also require participants and their 
customers to make changes to their own systems and 
processes. Making such changes may not come easily 
or cheaply. Currently, incomplete integration of 
technology widely affects the ability of banks, 
corporations, and consumers to develop and use new 
payments and information services. This incompatibility 
problem has hindered developments in the 
past and is likely to do so in the future. Indeed, 
during the interview period, firms’ priorities were 
moving in another direction: Spending on technology 
was declining, and corporate technology priorities 
were shifting to address the business and security 
issues resulting from the terrorist attacks on September 
11, 2001. This environment may help explain why 
interviewees tended to focus on making incremental 
changes to payments systems and building on the 
existing infrastructure rather than on creating new 
systems. 

The existing clearing and settlement infrastructure 
was generally developed to support check 
payments and the early generation of electronic 
payments. It may no longer fully suit the needs of 
participants in the current, rapidly evolving market 
with its more-distributed computer and communications 
infrastructure. Although they do not share 
a single vision of a future payments system, payments 
service providers and their customers will 
need to work together in the future—to replace 
aging technologies and to continue the search for 
safe and efficient means of conducting business. 
In this environment, existing and potential service 
providers, including those providing clearing and 
settlement services, will need to find ways to lay 
a strong foundation for both strategic and incremental 
enhancements of payments systems to 
support the evolving needs of commerce. 


The Future of Retail Electronic Payments Systems: Industry Interviews and Analysis 7 

2. Industry Observations and 
Recommendations 

The interviews with industry representatives highlighted 
key issues that will affect the future development 
of the payments system. The issues can be 
grouped into nine distinct, though overlapping, 
topics: 

• Innovations in the market environment 

• On-line payments from deposit accounts 

• Transition of check payments from paper to 
electronic 

• Real-time transaction processing, clearing, and 
settlement 

• Information related to electronic payments 

• Standards 

• Cross-border payments 

• Laws, regulations, and private-sector rules 

• Federal Reserve services and miscellaneous topics. 

Innovations in the Market Environment 

Net Benefits 

Many of those interviewed, including those working 
with a second or third generation of innovations, 
stated that having a ‘‘business case’’ for adopting an 
innovation is much more important than the technology 
that would permit its adoption. [Begin Footnote 11. 
‘‘Business case’’ is a catch-all term for the assessment of the 
likely overall profitability of a proposed investment. Factors 
contributing to profitability include, but are not limited to, 
the cost of developing and implementing a technological 
change, the time to develop and implement change, the 
increased revenues or 
decreased costs from the change, and the distribution of net 
benefits among participants. End Footnote 11.] For a new 
payments method to be adopted broadly, it generally 
must have positive net benefits (or, at the very least, 
no net costs) for each critical party involved (of 
which there are many). 

The recent history of payments innovation illustrates 
the link between net benefits and the broad 
acceptance of new instruments and services. For 
instance, according to one software provider, three 
key factors influenced the ultimate acceptance of 
electronic credit card terminals at merchant locations 
during the 1980s: The terminals required little 
up-front investment or reengineering of business 
processes by merchants, added value to merchants’ 
businesses by reducing fraudulent transactions, and 
reduced the transaction time for consumers because 
retailers no longer needed to review a ‘‘hot list’’ of 

bad cards or place phone calls to get an authorization 
code. Conversely, payment instruments or 
services that require significant changes to internal 
business processes or computer systems, with modest 
improvement in payments practices, may be too 
costly or complex to succeed. Also, instruments or 
services requiring modifications to several systems 
overseen by several departments in a single organization 
can fall victim to conflicting priorities and 
incentives within that organization. Further, a 
requirement for significant or costly actions by large 
numbers of consumers, such as upgrading personal 
computers or downloading software, can be costly 
and inconvenient and imply very low rates of 
adoption. 

Familiarity 

Innovations that require little change from known 
and established practices may be more readily 
accepted than those that are substantially new and 
unfamiliar. To bring new payments services to end 
users, firms, especially emerging players, are using 
new technology to leverage existing payments 
systems. By doing so, the firms both take advantage 
of established practices that are familiar to users and 
reduce their start-up costs. With little change in 
payments habits, consumers engaged in electronic 
commerce have generally been able to conduct 
transactions using credit cards or signature-based 
debit cards and receive much faster service than they 
would have had they paid by check. Where these 
credit and debit card arrangements would have 
required significant changes in rules and business 
practices, firms promoting new types of person-to-
person electronic payments to support on-line 
commerce have been able to attract users. For 
example, Internet auction purchases between individuals 
or between individuals and small businesses 
have been supported by new forms of person-to-
person payments, which so far have proved more 
effective than checks or credit cards in supporting 
such commerce. Interestingly, these types of payments 
have relied on the credit card and ACH 
relationships for funding on-line payments and 
accounts as well as withdrawing funds from these 
accounts. 

Competition for Resources 

New, perhaps innovative, payments technologies 
frequently compete with checks and more-established 


8 Staff Study 175 

electronic payments methods for financial resources 
and management attention within a firm or industry. 
For example, a number of firms reported conflicts 
within banks over how to support existing payments 
services and at the same time provide 
for the development and deployment of new, 
unproven technologies and emerging services. 
Long-term projects or changes that threaten current 
business lines, especially profitable credit and debit 
card operations, may not receive organizational 
support because of departmental conflicts and 
short planning horizons. [Begin Footnote 12. Banks 
earn revenue from credit and signature-based debit cards 
through transaction fees. Transaction fees, which 
are calculated as a percentage of the value of a transaction, 
are collected from the merchant. Each party in the process— 
the merchant’s bank, the cardholder’s bank, and the card 
association—receives a portion of the total fees paid by the 
merchant. In addition, a cardholder’s bank earns interest 
on outstanding balances and also charges service fees to 
cardholders. Overall, for cardholders’ banks, revenue from 
credit card transactions appears to be the second highest 
source of revenue from payments services, after deposit 
accounts (Lawrence J. Radecki, ‘‘Banks’ Payments-Driven 
Revenues,’’ Federal Reserve Bank of New York, 1999). 
Signature-based debit cards also appear to be a fairly 
lucrative source of earnings from transaction fees. 
End Footnote 12.] Emerging players believe 
that the result of such competing influences has been 
the protection of established electronic payment 
instruments (that is, debit and credit card products) 
at the expense of innovation and evolution of the 
payments market. 

Critical Mass and Network Effects 

Some payments innovators believe that because the 
U.S. banking system is more fragmented than those 
of other countries (for example, Canada and 
Belgium), the U.S. market presents more challenges 
in convincing a critical mass of banks and their 
customers to adopt new products and services. 
If a payments innovation requires change— 
in systems, services, practices, or habits—by a 
substantial number of end users, banks, software 
vendors, or intermediaries, then individuals or firms 
may be reluctant to adopt until others go first. 
This reluctance may delay adoption of an otherwise 
useful or cost-effective innovation. For this reason, 
some innovators may choose to introduce new 
products in smaller, more concentrated markets— 
perhaps outside the United States or in a ‘‘closed’’ 
environment such as a college or corporate campus— 
where the hurdles to coordinating actions among 
different participants in a payments system are 
lower. 

Interviewee Recommendations and Discussion 
[Begin Footnote 13. All of the interviewee 
recommendations in this report are listed together in 
appendix C. End Footnote 13.] 

• The Federal Reserve should encourage innovation in 
electronic payments and support innovative private-
sector payments projects through its operations or other 
means. (Recommended by eight organizations) 

The Federal Reserve strongly believes that private-
sector innovation can improve payments system 
efficiency. It supports increased use of electronic 
payments and a reduction of paper in the payments 
system. In their operations, the Federal Reserve 
Banks, for instance, are working to develop value-
added Fedwire and ACH services that will be useful 
to consumers and businesses and increase their use 
of electronic payments. The Federal Reserve will 
also continue to consider whether and how much 
to support private-sector payments innovations. 
Several firms have identified projects in various 
stages of development that they would like the 
Federal Reserve to support. The Clearing House, 
for example, asked for operational and settlement 
support of its Universal Payment Identification Code 
(UPIC) initiative. [Begin Footnote 14. The Clearing 
House established the UPIC concept for its ACH and 
wholesale payments systems. UPIC is intended to promote 
electronic credit payments between business partners. 
It allows a business to give its partners an electronic address 
to which electronic payments may be sent (using a credit 
transfer) without disclosing information that could be used 

to initiate an unauthorized debit transaction. UPIC substitutes 
for bank account and routing number information in the 
transactions. The Clearing House assigns UPIC numbers 
permanently, which allows a business to change its banking 
relationships without notifying its partners. Further information 
is available at www.upic.com. Related to this project, the 
Clearing House conducted research, including interviews, to 
better understand the barriers to businesses’ greater use of 
electronic payments and electronic data. In August 2002, the 
Clearing House published a report on its findings titled 
‘‘The Remaining Barriers to ePayments and Straight-through 
Processing.’’ (See www.epaynetwork.com/files/CH_Study_Final.pdf.) 
End Footnote 14.] Subsequently, the Reserve Banks 
made minor changes to their ACH operating system 
and agreed to support the project, which began in 
May 2002. 

• The financial industry should work with vendors of 
bank software and other service providers to facilitate 
greater use of electronic payments. (two organizations) 

Over the past decade, banks have increasingly used 
off-the-shelf software developed by vendors rather 
than creating their own payments-processing software. 
Vendors of bank software and other service 
providers now play a significant role in changing 
and improving the efficiency of the payments system. 
The cooperation of these organizations in making 


The Future of Retail Electronic Payments Systems: Industry Interviews and Analysis 9 

changes to established payments systems has become 
increasingly important. Closer cooperation with 
software vendors, for example, was among the 
improvements the National Automated Clearing 
House Association (NACHA), which develops and 
maintains the operating rules for the ACH payments 
system, recommended in its paper ‘‘The Future 
Vision of the ACH Network.’’ [Begin Footnote 15. 
NACHA published ‘‘The Future Vision of the ACH Network’’ 
in April 2002. The paper sets forth twelve recommendations 
related to risk management, quality, and value-added services for 
the ACH network. The executive summary is available at 
www.nacha.org. End Footnote 15.] The Federal Reserve 
Banks are also working with the major provider of 
ACH software, used by banks and others, to ensure 
that the software is compatible with changes to the 
Reserve Banks’ ACH service. These efforts toward 
a more collaborative approach by payments system 
organizations and vendors should help streamline 
and facilitate future changes in the payments system. 

• The Federal Reserve Banks should set a dollar limit on 
checks that they process. Payees would need to arrange 
for alternative, electronic payments for amounts above 
the limit. (two organizations) 

To encourage the electronic processing of large 
payments, the Federal Reserve Banks no longer 
handle commercial checks in amounts $100 million 
or more. In July 2001, the Reserve Banks also began 
to charge institutions $50 for any check for $10 million 
or more deposited with them. 

On-line Payments from Deposit Accounts 

Interviewees expressed a desire for further development 
of low-cost payment instruments that would 
permit consumers and businesses to make real-time 
interbank funds transfers for the purpose of conducting 
electronic commerce. Funds in deposit accounts 
are widely used for making payments in the United 
States, yet few instruments exist that allow account 
holders to access their deposit accounts for the 
purpose of conducting electronic commerce. The 
option most widely available today is the signature-
based debit card (for example, the Visa Check Card 
and Debit MasterCard Card), which allows a cardholder 
to draw on a deposit account to pay a merchant 
that accepts cards issued by the sponsoring 
card association. [Begin Footnote 16. First-generation 
experiments with a PIN-based debit card in 
which the card is not present have not yet proved commercially 
successful, though the debit card networks continue to seek ways 
to use their existing infrastructure and relationships to offer 
products that debit deposit accounts. ACH payments over the 
Internet are still relatively new (accounting for fewer than 1 percent 
of all ACH transactions in 2001), and end users and processors 
expressed concern that the difficulties associated with authenticating 
and authorizing users are likely to hinder widespread 
adoption. Other options include home banking and bill-payment 
systems that allow users to make remittance payments or one-time 
funds transfers; these products are not particularly well suited to 
conducting on-line commerce, however. End Footnote 16.] Credit cards, 
however, are 

currently the dominant payment instrument for 
consumer and some low-value forms of business 
transactions in electronic commerce. 

Dissatisfaction with the Status Quo, 
and Potential Alternatives 

Merchants and a variety of others that were interviewed 
stated that they would like to reduce their 
payments-related costs by developing alternatives 
to credit cards for electronic commerce. Merchants 
expressed a belief that the fees for credit card payments 
are higher than for alternative instruments 
and not sufficiently sensitive to risk. [Begin Footnote 17. 
On-line merchants, in particular, stated that the credit card 
fee structure does not distinguish adequately between different 
types of card-not-present transactions, which have different levels 
of chargeback risk. These merchants claimed that even effectively 
managing the credit and fraud risks of on-line transactions does 
not reduce their credit card fees. Merchants also suggested that the 
first transaction with a particular customer is risky because of 
authentication and authorization risks but that subsequent transactions 
typically become more predictable and less risky. End Footnote 
17.] Moreover, transaction increases, dollars, to conducting on-line transactions. To avoid such 
costs, retailers, the U.S. Treasury, and others have 
developed some ACH-based solutions. For example, 
Treasury’s Pay.gov Internet portal permits secure 
payments over the ACH using certain security-
enhancing and fraud-prevention technologies. 
Notwithstanding the cost concerns of those interviewed, 
credit cards do provide important risk-
management services to merchants and consumers 
in conducting on-line transactions, along with 
reliable processing systems and widely shared 
rules. [Begin Footnote 18. The card associations and others 
pointed out that the associations provide important services for their 
fees, particularly risk management and consumer protection for 
fraudulent transactions; some claimed that the latter service 
facilitated Internet shopping. Specifically, Visa and MasterCard 
provide ‘‘zero-liability’’ protection for consumer transactions made 
using their respective credit and debit cards when the transaction 
flows through their individual networks. The protection applies to 
cards issued in the United States for on-line and traditional transactions. 
Each program has provisions for transaction eligibility; for example, the 
protection may apply only if the account is in good standing. 
Some interviewees also believe that the similarity of credit cards 
(and signature-based debit cards) to traditional processes and the 
simplicity of using them for on-line transactions greatly affects 
their relative use on the Internet. End Footnote 18.] 


10 Staff Study 175 

In response to a perceived market opportunity for 
more payments options on the Internet (more in line 
with the payment mix available for traditional 
commerce), several developers are trying to devise 
new services. Currently, several infrastructure providers 
and others are developing credit-push instruments 
using the ACH and retail electronic funds 
transfer (EFT) networks. A credit-push transfer 
would enable an account holder to ‘‘push’’ a 
payment from his or her deposit account—in contrast 
to a debit transaction, in which a receiver of a 
payment requests a transfer of funds from a deposit 
account. In theory, the push approach increases the 
account holder’s control over the account—thus 
increasing comfort with the transaction—and reduces 
the likelihood that the account holder will claim that 
a transaction was not authorized. With this model in 
mind, NACHA had been developing a credit-push 
instrument, called ACH Credit Transactions Initiated 
Online, or ACTION, that would authenticate buyers 
over the Internet, guarantee payment to the merchant, 
and clear and settle the payment using the 
ACH network. In November 2002, NACHA decided 
to place the proof of concept for ACTION on hold 
until better market conditions exist for launching the 
initiative. Several organizations expressed enthusiasm 
for on-line retail payments using the ACH network 
because of its low cost and the potential to provide 
services to consumers who have deposit accounts 
but do not have credit cards or signature-based debit 
cards. However, credit-push instruments rely on the 
willingness of banks to originate ACH payments, 
and not all banks originate ACH transactions or want 
to take on the security, fraud, and financial risks of 
doing so. 

Security, Fraud, and Privacy Risks 

Several interviewees, including infrastructure providers 
and processors, noted some concern about 
security, fraud, and privacy risks associated with 
making deposit accounts widely available to individuals 
and businesses for electronic commerce. 
Technology firms and others have been working 
on various approaches to address these concerns. 
Today, however, easily deployable, cost-effective 
methods for authenticating and authorizing retail 
payments transactions in real time to manage security 
and fraud risks on line are limited. [Begin Footnote 
19. Authentication involves verifying the origin of a 
message (such as a deposit account) or the identity of 
the originator. Authorization involves granting authority 
to send a payment instruction. End Footnote 19.] Some 
firms—mostly infrastructure and software 

providers—are experimenting with authenticating 
an on-line ‘‘session.’’ A session would comprise 
all activities, from browsing to making a payment 
transaction, from the moment the user’s identity 
is verified until the communication is broken. 
Some major card associations are using techniques 
that authenticate only the individual payment 
transaction and not the entire session (for example, 
Verified-by-Visa and Secure Payment Application 
by MasterCard). Other techniques for authorization 
and authentication are less technology intensive. 
For example, some end users and processors search 
commercial databases to authenticate users or 
provide for authorization of ACH payments; 
the searches are expensive, however, and are not 
foolproof. For the future, some infrastructure providers 
proposed preserving the underlying ACH infrastructure 
but adding on a system for authentication 
or authorization, or both. One approach would use 
familiar PIN-based debit card authorization capabilities, 
which are real-time, in conjunction with an ACH 
transfer. [Begin Footnote 20. NACHA noted in its paper 
‘‘The Future Vision of the ACH Network’’ that it ‘‘. . . does not 
believe that the ACH network should evolve into a real-time, 
on-line network similar to the wire funds transfer payment systems.’’ 
End Footnote 20.] 

Interviewee Recommendations and Discussion 

• The financial industry should facilitate the on-line 
transfer of funds from deposit accounts. (six 
organizations) 

Three of the six firms making this recommendation 
recommended developing on-line credit-push instruments. 
While some organizations are working on 
such instruments, others are experimenting with 
on-line debit payments. In the past several years, 
both NYCE and STAR (the latter working with 
NACHA) have completed pilot programs involving 
debit payments over the Internet using public key 
technology. As with on-line credit-push initiatives, 
on-line debit payments using the ATM networks 
are still at a relatively early stage of development, 
and their commercial viability has yet to be 
demonstrated. 

• The Federal Reserve should support the creation of 
authentication techniques and should require the 
authentication of consumers in on-line transactions. 
(one organization) 

The Federal Reserve recognizes the importance of 
authenticating on-line transactions and encourages 
the private sector to develop authentication tech-


The Future of Retail Electronic Payments Systems: Industry Interviews and Analysis 11 

niques for on-line retail payments. Currently, the 
private sector is experimenting with several possible 
ways to address the lack of adequate authentication 
techniques. It will be up to the market—financial 
institutions, processors, vendors, and end users— 
to determine whether to adopt these authentication 
techniques or to otherwise manage their risks. The 
Federal Reserve believes that customer authentication 
techniques are most efficiently and effectively determined 
by the private-sector participants that use 
those techniques. 

• The Federal Reserve should support the creation of an 
authority that certifies that a payments product or 
service is safe and protects the privacy of end users. 
(one organization) 

The Federal Reserve does not anticipate that it would 
become, or be a participant in, a certification authority 
for the safety and privacy of payments products 
or services. Such a role would raise several issues, 
including moral hazard. The Banking Industry 
Technology Secretariat (BITS) offers a product certification 
program that certifies technology products 
related to financial services on the basis of a 
minimum standard of security (more information 
is available at www.bitsinfo.org/fslab.html). 
In addition, other firms, such as Verisign, certify 
the security of web sites on the basis of a stated 
set of criteria. 

• The Federal Reserve should help promote digital 
certificates and perhaps serve as a root authority that 
would issue and certify digital certificates. (one 
organization) 

The general market for digital certificates is still 
evolving, and future developments cannot be fully 
anticipated. However, several private-sector service 
providers, such as Identrus and Verisign, currently 
provide a range of services related to digital certificates. 
The Federal Reserve does not currently foresee 
for itself a role as a general root authority for digital 
certificates issued by the financial industry [Begin 
Footnote 21. A root authority is the owner of the digital certificate 

system. The root authority sets the rules for the digital certificate 
system, names the entities (referred to as certificate authorities) 
that will issue and approve certificates in that system, and warrants 
the certificate authorities’ qualifications. End Footnote 21.] The 
Federal Reserve Banks do, however, serve as the root 
authority for issuing digital certificates that authenticate 
their own customers’ access to the Reserve 
Banks’ web-based services; serving as the root 
authority for such certificates is critical to safeguarding 
their security. 

Transition of Check Payments 
from Paper to Electronic 

On the assumption that checks will continue to play 
a significant role in the U.S. payments system for 
some time, several banks, a third-party processor, 
a payments association, and a retailer discussed their 
efforts to deploy new electronic tools for the collection 
of check payments. These organizations are 
motivated by a desire to reduce the cost of check 
collection, but they also see the deployment of these 
new electronic tools as a transition step until there 
is greater acceptance of payments that are initiated 
electronically. Interviewees noted, for instance, that 
truncating checks earlier in the payments or collection 
process than has been the case historically could 
combine the benefits of checks to users with the 
processing efficiencies of electronic payments 
systems. Processing efficiencies reduce the handling 
of paper and may enable faster clearing and return 
of some checks. [Begin Footnote 22. The Federal 
Reserve Board continues to monitor developments in the check 
collection and return process and will consider 
changes to funds availability schedules, defined in Regulation CC, 
if such developments improve return times significantly. (See 

64 FR 37708, July 13, 1999, for a discussion of the factors the Board 
would consider in shortening the funds availability schedules 
in Regulation CC.) End Footnote 22.] 

In a process that has become increasingly popular 
over the past few years, merchants and billers may 
scan paper checks at the point of sale and at lockbox 
locations, respectively, using special reading equipment 
to convert the paper payments to electronic 
payments that can be cleared through the electronic 
funds transfer systems, such as the debit card and 
ACH networks. At the point of sale, the merchant 
returns the paper check to the user immediately, 
while at lockbox locations, the mailed check is 
destroyed after a short period of time and only 
an electronic copy is retained. One retailer estimates 
that for point-of-sale transactions, eliminating the 
handling of paper could reduce its check-processing 
costs 80 percent. [Begin Footnote 23. This retailer, 
as well as others, is also experimenting with 
the electronic capture of signatures for credit cards and signature-
based debit cards. The electronic capture of signatures eliminates 
the need to retain the customer receipt in paper form and thus 
reduces handling costs. End Footnote 23.] 

Processors and banks also expressed interest in 
imaging and truncating checks as early as possible 
in the check-clearing process to reduce costs and 
improve collection times. One processor, for instance, 
wanted the Federal Reserve Banks to capture images 
of checks at the Reserve Bank at which the check 
is first deposited and reengineer their systems to 
present images rather than physical checks directly 
to banks in that or any other Reserve Bank District. 


12 Staff Study 175 

One bank advocated intervening one step earlier 
in the process by truncating, imaging, and storing 
checks at the commercial bank of first deposit. 

To help address barriers to market-led check 
truncation and imaging, the Federal Reserve Board 
sent proposed legislation to Congress on this subject 
in December 2001. The proposed act is designed to 
facilitate check truncation by creating a new negotiable 
instrument called a substitute check, which 
would permit banks to truncate the original checks, 
to process the check information electronically, 
and to deliver substitute checks to banks that want 
to continue receiving paper checks. Several firms 
mentioned the potential benefits of the proposed act. 
One processor stated that with such a law, it would 
be able to move any check anywhere in the United 
States within four hours of receipt, which could 
eliminate one or more days from check clearing 
times. 

At the same time, one bank expressed concerns 
about the industry’s limited ability to support image 
exchange between processors and banks. Currently, 
image standards are generally proprietary and 
therefore may not be sufficiently interoperable to 
enable the easy exchange of images, such as among 
archives provided by different banks and vendors 
or using different data-compression techniques. [Begin 
Footnote 24. The Federal Reserve Banks, in their FedImage 
project, are working toward converting their diverse image-
processing platforms to a standard, centrally managed national 
image archive. End Footnote 24.] 
One bank stated that private-sector participants 
need to collaborate more in building image-exchange 
systems. The use of multiple formats for electronic 
check presentment files also increases processing 
costs and reduces efficiency because it increases the 
likelihood that files will be used only once rather 
than as source data for subsequent transmissions 
or stored and conveyed when needed. Also, despite 
increases in telecommunications capacity, many in 
the banking industry are concerned that capacity 
would be insufficient to support the widespread 
transmission of check images, which require large 
data files. 

Interviewee Recommendations and Discussion 

• The Federal Reserve Banks should support the initiation 
and transmission of image and electronic check presentment 
(ECP) files from the Reserve Bank of first deposit. 
(one organization) 

Currently, check images and ECP files are captured at 
and transmitted from the Federal Reserve Bank office 

that serves the paying bank. [Begin Footnote 25. In 
this report, ECP refers to presentment (as defined in the 
Uniform Commercial Code) through the transmission of the MICR 
(magnetic ink character recognition) information printed on the 
checks to the paying bank. Some private-sector providers of check 
services, in contrast, use the term ECP to refer to the transmission 
of MICR data but not to presentment; in these arrangements, 
receipt of the physical check constitutes presentment. End 
Footnote 25.] This means that checks 
destined for a bank outside the depositing bank’s 
region must be physically transported (frequently 
by air). The checks must also be physically sorted 
and reconciled at least twice by the Reserve Banks. 
If the Reserve Banks were to create the images and 
the ECP files at the Reserve Bank of first deposit, the 
Federal Reserve System could eliminate transportation 
costs and repeat processing. The Reserve Banks 
are currently exploring with the banking industry the 
feasibility of a pilot project to test transmission of 
ECP and image files from the Reserve Bank of first 
deposit. 

• The Federal Reserve Banks should support efforts to 
make image archives interoperable. (one organization) 

Banks and end users may store images in multiple 
archives (such as archives provided by the Federal 
Reserve Banks and by Viewpointe). One firm proposed 
that archive providers communicate in such 
a way that a bank or end user could retrieve all 
of its images through one access point regardless 
of the archive in which the images were stored. 
Thus, an image could be retrieved promptly without 
the end user or the bank needing to know its actual 
location. Such an arrangement might require contractual 
as well as technical agreements to address 
standard approaches to identifying the storage 
location of any particular check image. Currently, 
the Federal Reserve Banks are facilitating industry 
discussions on interoperability in electronic check 
processing and truncation to identify key barriers 
and areas for industry collaboration. 

Real-time Transaction Processing, 
Clearing, and Settlement 

Interviewees differed on how quickly a payments 
transaction should clear and settle—for example, in 
real time or near-real time or on the next day. Generally, 
their first thought was that clearing and settlement 
should always occur immediately to reduce 
risk. Further discussion, however, frequently revealed 
that alternative procedures might also enable firms to 
manage risk effectively. Not surprisingly, cost considerations 
weighed against real-time functionality in 
instances in which alternative, less-costly solutions 
could achieve similar results. 


The Future of Retail Electronic Payments Systems: Industry Interviews and Analysis 13 

Real-time Clearing and Settlement 

Several firms—end users, technology firms, some 
banks, and service providers—suggested developing 
a payments system capable of immediate and final 
funds transfers much like the current wire transfer 
systems but more broadly accessible to consumers 
and businesses and at a low price for general commercial 
use. The Securities Industry Association STP 
Payments Processing Subcommittee, for example, 
discussed the merits of such features for securities 
payments in its updated white paper and noted that 
these features do not currently exist in a single 

payments system. [Begin Footnote 26. The white 
paper is available at 
www.sia.com/stp/pdf/Payments_White_Paper_v3.6_082902.PDF. 
End Footnote 26.] 

Some interviewees noted the costs and difficulties 
of implementing the equivalent of a broadly 
accessible—perhaps on-line—wire transfer system. 
For example, transition costs could be substantial 
for banks that would need to modify their consumer 
deposit systems for real-time, on-line processing. 
Such systems now permit memo posting for debit 
card transactions, but further enhancements would 
likely be needed. Banks would need to modify their 
internal accounting systems and their interfaces with 
clearing and settlement systems. Legal and financial 
risk issues and, possibly, issues related to consumer 
protection would also need to be addressed. Further, 
some interviewees indicated that the business practices 
and management structures in end-user organizations, 
banks, and clearing organizations may not 
be sufficiently flexible to make the decisions needed 
to support the long-term development of faster 
payments processing or electronic commerce more 
generally. Some other interviewees also noted the 
apparent anomaly between the widespread availability 
of on-line, interactive capabilities on the Internet 
and the difficulties of developing real-time, on-line 
interbank payments systems that can be widely used 
in electronic commerce. 

Real Time versus Near-real Time 

A number of interviewees suggested that other 
procedures—procedures less-costly than real-time 
clearing and settlement—might enable firms to 
manage risk effectively. Several merchants and 
infrastructure providers noted that real-time payment 
guarantees, or at least real-time verification that the 
counterparty has good funds, followed by later 
settlement, might be adequate to support the current 
needs of electronic commerce without establishing 
new systems or making costly investments. 

Several interviewees, however, noted that verification 
alone, without a final transfer of funds or a payment 
guarantee in real time, still presents risk. The acceptability 
of these alternative procedures apparently 
varies depending on the type and risk of the business 
transaction, such as the purchase of a car versus 
a book. 

If recipients of payments are interested in receiving 
funds on a near-real-time basis, such as on the same 
day, financial industry efforts could focus on improving 
same-day interbank clearing and settlement 
procedures rather than on deploying a new, general, 
real-time funds transfer system. For instance, various 
parties—banks, processors, and corporate end 
users—suggested making same-day settlement more 
widely available for ACH transactions, which would 
speed up these payments and help manage risk. 

Returned Payments 

The speed with which returned payments reach the 
originating bank and the originator of the transactions, 
particularly for ACH debit transactions, was 
discussed by many interviewees. ACH debit transactions 
may be returned for several reasons, including 
insufficient funds to cover the debit or the use of an 
incorrect account number. Such returns may take 
several days—generally three or four business 
days—before the originator receives notice of the 
return. [Begin Footnote 27. If an ACH payment 
is originated on a Monday (T) and 
settles on a Tuesday (T+1), it must be returned to the originating 
bank by Thursday morning (T+3). NACHA operating rules provide 
that a receiving bank (for a debit transaction, the paying 
bank) may return the transaction to the originating bank within 
two banking days following the settlement date of the original 
transaction if the transaction information is incorrect (for example, 
if it contains an invalid account number) or if the payor does not 
have sufficient funds to cover the debit. Once the originating bank 
receives the return notification, it sends notice to its customer. 
If the transaction was not authorized by the account-holding 
consumer, under Regulation E, the consumer must notify his bank 
of the unauthorized transaction within sixty days from the date 
his account statement was sent or his passbook documentation 
was made available to him. Under NACHA operating rules, 
the consumer’s bank may return the transaction up to sixty days 
from the settlement date of the original transaction. The sixty-day 
timeframe for unauthorized transactions applies only to transactions 
involving consumer accounts. End Footnote 27.] In effect, 
the ACH system for debit transactions 
operates on the principle that ‘‘no news is 
good news.’’ In the meantime, however, the services 
or goods sold in exchange for an ACH debit may no 
longer be recoverable. There appears to be consensus 
that the return process for ACH payments places 
undue risk on originators, may lower the willingness 
of firms to use ACH debits for some types of transactions, 
and reduces the overall efficiency and 


14 Staff Study 175 

increases the risk of the settlement of the underlying 
transaction. To address their risk exposure from ACH 
debit returns, firms currently manage risk on the 
basis of the typical return period. For example, an 
intermediary, such as a provider of billing services, 
that originates debit payments on behalf of originators 
(billers) may place a ‘‘hold’’ on the funds for 
three or four days before releasing them to the 
originator. While this practice may be effective in 
managing risk, it does not appear to be particularly 
efficient from the perspectives of funds and systems 
management. 

Interviewee Recommendations and Discussion 

• The Federal Reserve should create a same-day ACH 
product. (two organizations) 

The Federal Reserve Banks are exploring the possibility 
of offering a same-day ACH product. Progress, 
however, depends on the willingness and ability 
of banks and processors to change their current 
business practices and make technology investments 
in faster back-end processing and posting systems. 
In the meantime, the Reserve Banks are working 
with several banks to develop a limited-scope pilot 
project. The project is expected to begin during 2003 
and to run for several months. 

• To improve posting to demand deposit account systems, 
the Federal Reserve should increase the number of times 
per day banks must pick up files from their ACH 
operator. (one organization) 

The Federal Reserve Banks are exploring file-pickup 
issues related to a same-day ACH product. The 
Reserve Banks’ ACH system has the capability 
of distributing and allowing banks to pick up files 
multiple times a day, and beginning in September 
2003, the Reserve Banks will be distributing files 
four times a day. The new distribution schedule, 
however, may not change the practice of most banks 
of picking up files only at the end-of-day cycle 
(generally between 3 a.m. and 6 a.m. ET). As part 
of this new schedule, the Reserve Banks will not also 
require more-frequent pickups (though at least one 
private-sector operator does require pickups more 
frequently). The reasons banks continue once-a-day 
pickups include system limitations at banks, the 
application of additional processing fees from service 
providers, resource constraints, and traditional 
business practices. Although they recognized these 
inhibiting considerations, some interviewees cited 
once-a-day pickups as an immediate concern that 
hinders the industrywide evolution of the ACH. 
In its paper ‘‘The Future Vision of the ACH 

Network,’’ NACHA recommends examining the 
business case for receiving banks to pick up files 
more often and suggests working with ACH 
operators to explore a potential rule change 
to require an improvement in current business 
practices for picking up (and posting) files. 

• The financial industry should develop a uniform deposit 
directory or some other means of verifying account 
numbers, account status, and relevant information so 
that a business can verify the existence of a customer’s 
account. (six organizations) 

Several companies, such as Thomson Financial 
Publishing, have developed databases with a limited 
set of the information desired by those that made 
this recommendation. The premise of the suggestion 
is that more-comprehensive directories could reduce 
the risks, particularly the fraud risks, of initiating 
ACH payments, especially one-time transactions. 
Some processors believe that they could reduce or 
eliminate the hold period on funds received from 
ACH debits using such a system. The cost of developing 
and maintaining such a database, however, 
might negate the savings for corporate end users 
and processors gained by using ACH payments 
as an alternative to credit and debit card payments. 
Such a system also raises privacy and consumer-
protection issues. That said, the management 
of fraud risk in on-line transactions continues 
to be an important issue. 

• The financial industry should shorten the return time 
for ACH debit payments to reduce the risks associated 
with debit transactions. Alternatively, the industry 
should create a means of confirming good funds. (four 
organizations) 

The average return time for an ACH payment is less 
than the average return time for a check payment of 
5.5 days following the day of deposit. [Begin Footnote 28. 

The average return time for check payments is based 
on a survey conducted by the Federal Reserve Board (see ‘‘Report 
to the Congress on Funds Availability Schedules and Check Fraud 
at Depository Institutions,’’ October 1996). End Footnote 28.] Several of 
those interviewed, however, found this time frame 
excessive for an electronic payment. NACHA operating 
rules govern the ACH return time frame, and 
therefore NACHA would be the appropriate organization 
to review this issue. 

• The financial industry should create a time stamp on 
ACH items to help track a payment through the ACH 
process. (one organization) 


The Future of Retail Electronic Payments Systems: Industry Interviews and Analysis 15 

One merchant processor expressed the belief that 
a portion of the return time for ACH debit transactions, 
which in its case exceeded the time permitted, 
was attributable to delays by either the receiving 
banks or its own bank. This processor suggested 
that a time stamp be included on ACH items 
to help track the return of an ACH transaction. 
The time stamp would enable the end user 
to determine whether banks involved in the 
transaction had complied with return time 
frames set forth under NACHA operating rules. 
To accommodate a time stamp, NACHA would 
need to modify its operating rules, and software 
providers and operators would need to change 
their ACH software. 

• The financial industry should explore means to reduce 
administrative ACH returns generated as a result 

of payable-through arrangements for check collection. 
(one organization) 

Some banks, generally credit unions, use payable-
through arrangements for processing their check 
payments. In such arrangements, the bank uses 
the routing number of the payable-through bank 
rather than its own routing number on the MICR 
(magnetic ink character recognition) line of its 
checks. Consequently, when the bank’s customers 
use the routing number printed on their checks for 
ACH transactions (for example, for check conversion), 
the transaction is routed to the payable-
through bank, whose systems will not recognize 
the customer information and will return the 
transaction. These returns limit the usefulness 
of check conversion programs. In its paper 
‘‘The Future Vision of the ACH Network,’’ 
NACHA highlights addressing this issue 
as a high priority for future action. 

• The financial industry should develop a central 
directory for routing electronic payments. (two 
organizations) 

A central directory would provide an electronic 
payments ‘‘address’’ or allow payments system 
participants to access information on end users 
for the purpose of routing payments. Such a directory 
could reduce the number of transactions 
routed incorrectly and could lower some risks 
of initiating ACH payments. The cost of developing 
and maintaining such a database or of purchasing 
access to it, however, could reduce the savings from 
using the ACH. The Clearing House, in its UPIC 
project, is currently experimenting with a version 
of such a directory to support business-to-business 
payments. 

Information Related to Electronic Payments 

Many interviewees—including software vendors, 
infrastructure providers, and one bank—expressed 
the opinion that the ability to communicate and 
manipulate information about an underlying transaction 
is of greater value to a business than the 
potential savings from making or receiving electronic 
payments. The electronic transmission of information 
could enable firms to automate the reconciliation of 
the payment and other transaction information, 
thereby reducing manual intervention and permitting 
the wider integration of information resources within 
and across businesses. If the data are to be processed 
electronically, however, the information must be in 
an electronic format that enables the firm’s software 
and hardware to process it straight through. 

Straight-through Processing 

System constraints and the lack of integration affect 
both corporations’ and banks’ ability to use payments 
information services. For example, corporations’ 
accounts payable, accounts receivable, payments, 
and reconcilement systems continue to be less 
integrated than necessary for seamless handling of 
invoice and electronic payments information. Firms 
traditionally built reconcilement and related systems 
around checks and paperwork flows, and, therefore, 
legacy systems are generally not structured to handle 
electronic payments. In addition, larger banks tend 
to have separate deposit-accounting systems for 
consumers and corporate customers and may have 
multiple systems within these categories because 
of product segmentation or mergers and acquisitions. 
Some banks have linked systems, but others have not 
progressed very far in integrating their internal 
payments systems. This situation is not likely to be 
overcome quickly, and system and organizational 
changes may be necessary before significant progress 
is made. 

Also, depending on the required investment, 
corporations may not have the necessary incentives 
to integrate widely their systems supporting payments 
and other operations. Interviewees noted that 
improved management of transaction-related information 
would need to provide the business with net 
benefits to justify the investment decisions. Some 
businesses are trying to automate and integrate their 
internal systems to improve business-to-business 
transactions, but not all companies are looking to, 
or investing to, improve integration. To put these 
issues in perspective, it is important to recognize 
that checks are still widely used by businesses 
to make vendor payments. 


16 Staff Study 175 

Information Flows 

Interviewees differed on whether payment-related 
information should flow with an electronic payment 
or be matched up at the end of the process. Some, 
mostly current or former bankers, favor sending the 
information along with the payment, such as with 
financial EDI (electronic data interchange), because 
the transmission would use existing network infra-
structure. [Begin Footnote 29. EDI is the 
electronic transmission of data in a standard 
format for documents typically exchanged between trading 
partners, including purchase orders, invoices, and remittance 
advices. When a payment instruction and electronic data are 
combined, the transaction is called a financial EDI. While EDI 
and financial EDI are used in certain industries, they have not 
been widely adopted. End Footnote 29.] Others believe that 
such an approach would increase the 
number of parties handling the data 
and threaten the integrity of the information. 
For example, data might be truncated because many 
banks—even fairly large banks—are not equipped 
to deliver data unrelated to payments effectively. 
Timeliness of receiving the information was also 
an issue for interviewees, as was the possibility that 
banks would impose charges for handling nonpayment 
data. In addition, one corporate interviewee 
supported the continued use of existing general-
purpose electronic information systems to share 
information related to payments between counterparties. 
Payment-related information can flow 
through these systems and be matched with the 
payment in the receiver’s systems. This interviewee 
also believed that having a separate information 
system specifically for payment-related information 
would lead to inefficiencies in business processes. 

Interviewee Recommendations and Discussion 

Several firms interviewed—including technology 
firms, financial services providers, and other service 
providers—currently offer a variety of means 
of reconciling payments and related information 
at the originating and receiving ends of transactions. 
In general, while the interviewees discussed the 
value of payments-related information at some 
length, they did not make specific suggestions for 
action by the Federal Reserve or the financial industry. 
It may be that concerns regarding payments-
related information did not rise to the same level 
of concern as other issues identified by the interviewees. 
Corporate end users frequently pointed out 
that payments information is a critical but small part 
of the information these businesses must manage. 

Standards 

The discussion of standards tended to revolve 
around the desirability of broad interoperability 
across payments systems and payment instruments. 
Representatives of several firms—software providers, 
processors, and banks—expressed frustration about 
the divergent standards and the lack of cooperation 
on the part of certain industry segments. They perceived 
the lack of agreed-upon message standards 
and the resulting lack of interoperability as the 
greatest problem for the financial industry. 

Cooperation 

Concerns about interoperability and standards arose 
in several discussions. They were largely directed 
at software vendors that are creating proprietary 
formats for software that are not compatible with the 
formats used by other vendors. A number of interviewees 
believe that when they choose to use particular 
software, they become locked into a format 
that limits interoperability. Small banks, for example, 
expressed concerns about the inconsistency of 
formats deployed by third-party payments processors. 
They also noted their inability to get service 
and software providers to make software changes 
unless those changes were mandated by larger 
players (for example, a change in a regulation or 
a NACHA rule). More than ever, software vendors 
play a key role in the development of payments 
systems and can influence the adoption of electronic 
payments capabilities by both banks and businesses. 

Universal Format 

Some interviewees discussed the concept of a universal 
payment-message format, one that uses a 
common format for several types of electronic 
payments but might maintain separate clearing 
channels or business rules for each type. The existence 
of multiple payment-message formats, such 
as the formats for ACH, wire transfers, and other 
electronic payments, increases the cost and complexity 
of payments processing; a universal payment-
message format, in contrast, could in theory improve 
efficiency and reduce cost. For example, costs attributable 
to maintaining separate operational support 
and business staffs for each distinct system could be 
reduced. Interviewees discussed using XML to define 
a universal format, because the use of a common set 
of XML message tags would allow inconsistent 
message formats to be understood and processed. 
Interviewees noted that although XML is becoming 


The Future of Retail Electronic Payments Systems: Industry Interviews and Analysis 17 

more widely used, there are important questions 
to be addressed. These include how to transmit data 
efficiently and how to reach agreement on a common 
set of tags. In particular, the fact that some organizations 
have already developed internal XML standards 
would likely make agreement on an industry standard 
difficult. In addition, as one technology firm 
noted, during a transition period, the universal 
format would simply be one more standard among 
many. On balance, however, the interviewees recognized 
that further work on XML-based payments 
standards could yield benefits. One possible 
approach mentioned by interviewees would be for 
larger payments organizations to work together, 
as appropriate, to review XML-based payment-
message standards and seek areas of agreement 
on common standards. 

Channel Migration 

Other firms expressed a desire for a single operational 
channel through which all payments transactions 
would flow regardless of the format or rules 
that govern different types of payments. For instance, 
the single channel could carry payments flows from 
the end user to a third party that would translate 
the payments information into the relevant formats 
for submission to a bank. Some software providers 
are exploring (and a few have built) such a channel 
for end users. In addition, some banks like the idea 
of a single channel through which payment instructions 
would flow into multiple payments systems 
(such as Fedwire, Clearing House Inter-Bank Payments 
System (CHIPS), CLS Bank International, 
and ACH). These banks also expressed interest 
in the possibility of a unified settlement system 
that processes payments through a single channel 
in various modes (real-time, end-of-day, queuing, 
timed, conditional, and so on) according to the 
sender’s instructions. 

By contrast, interviewees suggested that other 
banks, particularly those with large payments operations, 
may not be interested in a single channel, 
a unified settlement system, or a universal format. 
They have sufficient volumes to recover the fixed 
costs (including the cost of communication links) 
of participating in several payments systems and 
have built up payments services around these 
separate systems. For this reason, some banks and 
service providers stated that the existence of several 
standards is not a problem and that banks (often 
supported by nonbanks) are in the business of 
converting messages among formats when necessary. 
In addition, the organizational complexity of banks 

(which have traditionally segmented payments 
processing by payment type) may, as a practical 
matter, slow the development of simplified forms 
of clearing and settlement. 

Cross-border Issues 

The lack of standards, particularly in payment-
message formats, contributes significantly to the cost 
and difficulty of cross-border electronic payments. 
Several interviewees—banks, financial services 
providers, infrastructure providers, and others— 
pointed to a need to harmonize the message formats 
for file and wire transfers across countries or 
regions. [Begin Footnote 30. Wire transfers 
have only one payment instruction per transfer, 
while file transfers can include multiple payment 
instructions. End Footnote 30.] Correspondent 
banks currently supply format-translation 
services. Greater standardization of 
formats has the potential to reduce costs for 
correspondent banks, increase straight-through 
processing, and improve service for their customers. 
One bank also mentioned that as a global bank, 
it faces additional cost and complexity from accommodating 
and then translating for internal use 
different wire transfer formats for different countries. 
For example, the euro area generally uses SWIFT 
standards, while the United States continues to use 
proprietary standards for wire transfers (and 
NACHA standards for the ACH). [Begin Footnote 31. 
The Federal Reserve Banks’ and the Clearing House Inter-
Bank Payments System’s (CHIPS’s) proprietary message formats 
for wire transfers are, however, SWIFT-compatible. In other words, 
the wire transfer and SWIFT formats have the same essential 
fields, which enables banks to map the information required to 
process the transaction from one format to the other. The Federal 
Reserve first adopted a SWIFT-compatible format (but not a 
SWIFT format itself) in 1997 (60 FR 111, January 3, 1995). 
End Footnote 31.] Such banks are generally 
encouraging greater uniformity among 
central banks’ wire transfer formats. 

Interviewee Recommendations and Discussion 

• The Federal Reserve should help develop cross-border 
standards for file transfers. (three organizations) 

The Federal Reserve Banks have arranged to work 
with SWIFT, which operates an international interbank 
messaging service, on its efforts to develop an 
XML-based standard for file transfers. Also, a group 
sponsored by NACHA, the Global Payments Forum, 
has formed a format work group to address the 
matter of interoperability of ACH transfers globally. 
A Reserve Bank staff member participates in and 
serves as vice chair of the forum’s steering com-


18 Staff Study 175 

mittee. These efforts may be first steps in the development 
of a more global approach to cross-border 
standards for file transfers. 

• The Federal Reserve should facilitate the development of 
standards for electronic payments and should work with 
vendors to promote those standards. (two organizations) 

The Federal Reserve Banks have dedicated, and will 
continue to dedicate, staff to work with payments 
and standards organizations, as appropriate, to set 
standards for electronic payments and processes. 
For instance, the Reserve Banks and other industry 
experts serve on an Accredited Standards Committee 
X9 work group focused on modifying the ECP 
standard. [Begin Footnote 32. The Accredited 
Standards Committee X9 works with the 
financial services industry to develop, maintain, and promote 
standards for financial products and services and is accredited by 
the American National Standards Institute. End Footnote 32.] 
The Reserve Banks are planning to work 
with vendors to ensure that banking software is, 
by 2005, compliant with the revised standard. 

Cross-border Payments 

Several interviewees, especially representatives of 
corporate end users and financial services providers, 
characterized cross-border payments as quite costly 
and cumbersome. [Begin Footnote 33. Very 
little systematic information is currently available about 
the volume of cross-border payments between the United States 
and other countries. End Footnote 33.] 
Cross-border payments include business 
and personal payments, such as money 
transfers by U.S. residents to family members in 
foreign countries. These payments, especially personal 
payments, typically involve an explicit fee 
in addition to implicit or explicit charges for foreign 
exchange conversions; the principal amount of the 
payment may also be subject to deductions by parties 
to the transaction. [Begin Footnote 34. In 
response to concerns about the cost of remittance payments, 
President George W. Bush and President Vicente Fox of 
Mexico have endorsed a joint effort between the United States and 
Mexico, Partnership for Prosperity, that has as one item in its 
action plan the reduction of the cost of remittance payments 
between the United States and Mexico. End Footnote 34.] 
Interchange fees for cross-border credit card 
payments are also perceived to be costly, 
and some retailers and financial services providers 
suggested that alternatives to credit card payments 
would be helpful in international on-line commerce, 
particularly when it involves countries in which the 
use of credit cards is not widespread. 

Several interviewees—representatives of end users, 
financial services providers, infrastructure providers, 
and other organizations—believe that the banking 
and technology industries do not have the financial 
incentive to create a faster and lower-cost cross-

border payments process, even when pressured by 
government intervention. They point to the fact that 
in 1997, the Commission of the European Communities 
(European Commission) issued a directive that 
the private sector improve the conditions for making 
payments across the borders of countries in the 
European Union. In September 2001, the commission 
then issued a regulation that requires the price for 
a cross-border payment to be no greater than that 
for a domestic payment. [Begin Footntoe 35. 
In addition to credit transfers, the regulation covers 
cross-border card payments and ATM transactions. See 
http://europa.eu.int/comm/internal_market/en/finances/ 
payment/area/ec01-2560_en.pdf. End 
Footnote 35.] The commission found 
that the cost of a €100 cross-border credit transfer 
had increased slightly from 1999 to 2001. [Begin 
Footnote 36. A subsequent, but not completely comparable, survey 
published by the Commission of the European Communities 
indicates that the average total cost for a credit transfer of €100 
was €24.09 (comprising €22.70 charged to the originator, €1.19 
charged to the beneficiary, and a foreign exchange loss of €0.20). 
See ‘‘Study on the Verification of a Common and Coherent Application 
of Directive 97/5/EC on Cross-Border Credit Transfers in 
the 15 Member States: Transfer Exercise,’’ by the Commission of 
the European Communities (September 17, 2001). End Footnote 36.] 

Notwithstanding the lack of financial incentives 
to create a faster and lower-cost cross-border payments 
process, banks may incur high costs in 
making these payments. Many cross-border payments 
depend on multiple correspondent banks 
and may involve significant manual processing and 
multiple format translations to deliver payments. 
The processing of returns can be even more cumbersome 
and time consuming. 

Interviewee Recommendations and Discussion 

• The Federal Reserve should begin a central bank 
initiative on cross-border payments. (two organizations) 

In 1998, the Federal Reserve System’s Committee 
on the Federal Reserve in the Payments Mechanism 
(also referred to as the Rivlin Committee) recommended 
that the Federal Reserve support cross-
border ACH transactions and work with the industry 
to develop cross-border ACH capabilities. Since then, 
the Federal Reserve Banks have begun providing 
cross-border ACH services to Canada and have 
explored opportunities to expand their commercial 
international ACH service to other countries. 
For example, the Federal Reserve and the Banco 
de Mexico have agreed to explore the possibility 
of establishing a connection between ACH systems 
that would provide an efficient mechanism for the 
interbank exchange of file transfers between the 
United States and Mexico and would be widely 
accessible to banks. In general, the Reserve Banks 


The Future of Retail Electronic Payments Systems: Industry Interviews and Analysis 19 

are increasingly focusing on cross-border arrangements 
to support the exchange of both commercial 
and government ACH transactions. 

Laws, Regulations, and Private-sector Rules 

Most interviewees appeared to take regulations as a 
given, something to be worked with or around, not 
changed (although, clearly, some organizations do 
pursue regulatory changes). Many viewed payment-
related laws and regulations as complex, confusing, 
and causing uncertainty. Private-sector rules pose 
similar problems. At the same time, few interviewees 
made specific suggestions for improving the legal 
and regulatory environment to foster greater 
innovation. 

Clarity and Certainty 

One bank and service provider stated that they 
believed that current regulations related to payments 
and other matters are too complex and confusing, 
not only for consumers but also for banks and 
businesses. This view is not necessarily a new one, 
but it has been strengthened by the introduction 
of hybrid payments products that can cross regulatory 
boundaries. Laws, regulations, and private-
sector rules often reflect, and are shaped by, the 
technology underlying the payment, for example, 
whether the payment is based on paper or electronic 
media. As payments systems have evolved, however, 
the distinction has become less clear-cut. An example 
is point-of-sale check conversion: Initially, service 
providers and participants had not fully worked out 
the legal framework that applied to checks converted 
to ACH or retail electronic funds transfers at the 
point of sale or at lockbox processors. In response to 
concerns about which laws and regulations governed 
check conversion, the Federal Reserve Board in 
March 2001 published revisions to the staff commentary 
to Regulation E to provide guidance on electronic 
check conversion transactions when a consumer 
authorizes the use of a check to capture 
information for initiating an electronic debit from the 
consumer’s account. [Begin Footnote 37. 
The revised staff commentary also provides guidance on 
electronic authorizations permitting recurring debits from a 
consumer’s account and other matters. End 
Footnote 37.] The development of hybrid 
products also raised concerns about differing regulatory 
treatment that depends on the nature of the 
transactions. For instance, when a check is used 
directly as a payment instrument, the transaction 

is covered under check laws (such as articles 3 and 4 
of the Uniform Commercial Code), but if a check is 
used merely as a source of information to create an 
ACH (or other electronic) debit, the transaction is 
covered by electronic fund transfer laws (such as 
Regulation E). 

Infrastructure providers and one bank also cited 
uncertainty regarding the effects of state or federal 
privacy restrictions on the ability to authenticate 
payors and payees, as well as related concerns 
regarding interpretations of money laundering laws 
and restrictions imposed by the U.S. Department 
of the Treasury’s Office of Financial Assets Control. 
Some interviewees—a bank, a service provider, and 
an infrastructure provider—also expressed the belief 
that these laws and directives, as interpreted, were 
more burdensome than intended and that they 
adversely affected the development of payment 
instruments and systems, especially those crossing 
borders. Finally, the service provider and one of the 
private-sector rule-making organizations noted that 
the disparity in laws, rules, and practices among 
countries make cross-border payments arrangements 
much more difficult to address. It was suggested that 
a more global perspective on the part of U.S. policymakers 
when enacting laws might help overcome 
some of these difficulties. 

Periodic Assessments 

The interviewees encouraged the periodic assessment 
of laws and regulations in light of changing market 
developments to allow for innovation and improvements 
in the payments system. They also encouraged 
the Federal Reserve to continue to foster open dialog 
and to adjust the regulatory structure to accommodate 
reasonable change. [Begin Footnote 38. 
Federal agencies are required by statute to conduct periodic 
reviews of their regulations (5 U.S.C. §610). The Board’s policy is 
to review its regulations at least every five years with a view 
toward eliminating or simplifying them and easing burdens 
imposed by them (Federal Reserve Bulletin, vol. 65 (January 1979), 
p. 137; Federal Reserve Regulatory Service ¶ 8-040). End 
Footnote 38.] Several interviewees raised 
similar concerns about private-sector rules and 
encouraged their examination periodically to ensure 
that the rules keep pace with technology and the 
market. Further, two interviewees expressed concern 
that in their view, payments regulations can be used 
inappropriately, for example, by restricting legitimate 
electronic or other commerce through limitations 
on payments systems designed to address social 
concerns such as cross-border gambling over the 
Internet. 


20 Staff Study 175 

Regulation versus Self-regulation 

Generally, the interviewees believe that there is a 
delicate balance between public-sector regulation and 
private-sector self-regulation. One service provider 
expressed the view that regulations, such as Regulations 
E and Z (which cover electronic fund transfers 
and truth in lending, respectively), create a national 
standard for consumer protection that otherwise 
would have to be developed by individual players 
or groups on a case-by-case basis, saving individual 
firms that are developing innovations considerable 
development costs and time. A number of interviewees 
also believe that premature regulation can 
hamper innovation in the market. One law firm 
noted that even the possibility of regulation can 
have a chilling effect and can have unintended 
consequences for the design of financial products 
and services. [Begin Footnote 39. For a 
discussion of these issues in the context of the application 
of Regulation E to stored-value products, see the Report 

to the Congress on the Application of the Electronic Fund Transfer 
Act to Electronic Stored-Value Products (March 1997), available at 
www.federalreserve.gov/boarddocs/rptcongress/efta_rpt.pdf. 
End Footnote 39.] 

The interviewees generally believe that private-
sector rules can establish minimum requirements 
for the parties to covered transactions, providing an 
often-effective form of self-regulation. Private-sector 
organizations that create these rules can determine 
such things as how risk will be allocated to the 
participants, the technical specifications for processing, 
and the business standards for involvement with 
the network, thereby affecting all aspects of direct, 
and in some cases indirect, participants’ interaction 
with the network, such as formats, technical standards, 
and fees. [Begin Footnote 40. 
Private-sector rule-making organizations include entities that 
operate the network to which the rules apply (such as credit card 
associations) as well as entities that bind the parties to the rules 
through agreements but do not operate the network (such as 
NACHA). End Footnote 40.] Several service providers believe 
that establishing agreed-upon rules is considerably 
more difficult and more costly than resolving the 
technical issues that arise in new projects. Yet the 
effort may be just as important, perhaps more so. 

At the same time, several interviewees described 
their frustration with the rule-making process 
employed by some organizations. For example, 
some organizations are said to focus too much 
on the details and lose sight of broader objectives 
when developing technical standards. It is believed 
that the current process does not allow for sufficient 
input from the business areas of banks and other 
firms in the writing of technical specifications. 
Further, one interviewee suggested that the 
development of these standards is much too slow 
for a technologically advanced society. 

Interviewee Recommendations and Discussion 

• The Federal Reserve should evaluate and, if possible, 
simplify payments law. The Federal Reserve should 
consider creating a unified structure for all payments 
methods, which would avoid the difficulties associated 
with hybrid forms of payments. (two organizations) 

Many of the laws that govern payments, especially 
articles 3 and 4 of the Uniform Commercial Code 
(UCC) governing checks and other negotiable instruments 
and article 4A governing payment orders, 
have historically been (and continue to be) written 
and revised in response to commercial practices. 
In essence, rules tend to follow rather than lead 
payments practices. This process has also meant that 
heterogeneous payment instruments have resulted 
in heterogeneous laws—laws that may be confusing 
at times but may also provide differentiation among 
payment instruments with respect to their allocation 
of various types of obligations and liabilities that is 
of value to end users. 

Adoption of a unified structure of payments law 
is significantly beyond the jurisdiction and role 
of the Federal Reserve. State legislatures and Congress 
play fundamental roles in writing payments 
law. For instance, the UCC is modified and adopted 
by state legislatures. In the past, there have been 
attempts to create unified payments law, but these 
have encountered problems. [Begin Footnote 41. 
In the 1970s, the Permanent Editorial Board for the Uniform 
Commercial Code formed a committee, which included representatives 
of the Federal Reserve, to examine UCC articles 3, 4, and 8 
in light of recent technological developments. The committee’s 
mission was to determine if these articles should be revised to 
reflect the new technological environment. By the early 1980s, 
however, the committee had dropped the effort because of a 
dearth of support from the banking industry and payments service 
providers for a uniform payments code. The committee instead 
focused on a code for electronic funds transfers, which became 
article 4A of the UCC. End Footnote 41.] To the extent that 
the Federal Reserve Board has responsibility for 
payments-related regulations, it intends to work with 
the private sector to identify and address, when 
appropriate, barriers to innovation, and to revise 
its rules and recommend legislative changes when 
appropriate. For example, in March 2001, the Federal 
Reserve Board revised its staff commentary to 
Regulation E to provide guidance on electronic check 
conversion services and other matters. 

• The Federal Reserve should assess and modify, if 
appropriate, the limitations on withdrawals imposed on 
savings deposits by Regulation D. (one organization) 

One bank noted that Regulation D’s monthly limits 
on transfers from savings accounts using electronic 
access devices, such as ATM cards, may constrain 


The Future of Retail Electronic Payments Systems: Industry Interviews and Analysis 21 

product innovation. The Federal Reserve does not 
believe that the Regulation D limitation on transfers 
from savings accounts is a significant deterrent 
to payments product innovation, given that those 
limitations do not apply to transaction accounts, 
which are widely used to make customer payments. 
Nevertheless, the Federal Reserve Board 
is currently reviewing Regulation D to determine 
whether its transfer limitation provisions can be 
streamlined. 

• The Federal Reserve should explore whether the commentary 
to Regulation E should be revised to clarify the 
technical implications of the stop-payment provision. 
(one organization) 

A law firm questioned how the staff commentary 
in Regulation E, section 205.10 (c), on stop-payment 
orders for recurring payments should be interpreted 
and suggested that this provision may be too prescriptive. 
The Federal Reserve Board staff is reviewing 
the staff commentary on this matter. 

• If the proposed Check Truncation Act, or some variant, 
is enacted, the Federal Reserve should again consider 
eliminating the Federal Reserve’s ‘six-hour monopoly ’ 
on check presentment. (one organization) 

Under the Uniform Commercial Code, the Federal 
Reserve Banks may present checks to a paying bank 
by 2 p.m. local time and receive settlement in same-
day funds. All other presenting banks must present 
checks by 8 a.m. local time (under the same-day 
settlement provisions of Regulation CC) to receive 
similar settlement that day [Begin Footnote 42. 
12 CFR part 229.36(f ). End Footnote 42.] Some industry 
observers have referred to this difference as a ‘‘six-hour 
monopoly.’’ In 1998, the Federal Reserve Board 
requested public comment on whether it should 
modify Regulation CC to reduce or eliminate the 
difference. The response was strong that the Board 
should not change Regulation CC, and the Board 
took no action at that time. [Begin Footnote 43. 
57 FR 46956, October 14, 1992; 63 FR 68701, December 14, 
1998. End Footnote 43.] Most commenters did 
not believe that the six-hour monopoly was a significant 
impediment to the ability of private-sector 
collecting banks to compete with the Reserve Banks. 
Seventy-five percent of all commenters favored not 
changing Regulation CC primarily because the 
additional costs incurred by paying banks outweighed 
the benefits gained by collecting banks. 
As the check environment changes, however, the 
Board could once again request comment on reducing 
or eliminating this legal disparity between the 
Reserve Banks and private-sector banks. 

• Public authorities should clarify privacy laws, in part 
to provide better guidance in light of the current focus 
on stopping funding for terrorist organizations. (three 
organizations) 

Congress determines privacy laws and the extent 
of the agencies’ regulatory authority related to 
consumer privacy. Congress has historically 
approached privacy matters in terms of specific 
situations and information that raised concerns. 
Where Congress has given multiple federal agencies 
rule-writing authority the agencies have worked 
together to develop common rules and interpretations 
to minimize confusion and level the playing 
field for affected institutions. For example, the 
Financial Services Modernization Act (Gramm– 
Leach-Bliley Act) addressed the protection of consumer 
financial information. [Begin Footnote 44. 
Public Law 106-102, Title V (1999), codified at 15 U.S.C. 
§6801 et seq. End Footnote 44.] After this law was 
enacted, the Federal Reserve Board and other federal 
regulatory agencies promulgated regulations for 
financial institutions relating to the privacy of consumers’ 
financial information. The agencies worked 
closely to write consistent rules and continue to work 
together to achieve consistent interpretations of 
various issues that arise under the rules. In addition, 
the Federal Reserve Board and other federal regulatory 
agencies are working with the Treasury Department 
to develop consistent regulations to implement 
the customer identification and verification requirements 
of the USA PATRIOT Act. [Begin Footnote 45. 
Pubic Law 107-56, §326 (2001). End Footnote 45.] 

If specific provisions of these or other regulations 
create confusion, questions and comments should be 
sent to the appropriate authority for consideration. 
Undoubtedly, additional time will be needed to work 
through and test these relatively new regulations 
before the effects on the private sector are better 
understood. 

• The card associations should establish a merchant 
advisory group or some other means of providing 
merchant input into the credit card associations’ 
rule-making process. (two organizations) 

Private-sector rules typically determine the rights, 
responsibilities, and other key aspects of participation 
in a particular private payments system or network. 
It is for this reason that merchants want a greater 
role in setting the policies and rules for the card 
associations, particularly when fees and other matters 
that affect them are being considered. A particular 
concern is that the levels, structure, and distribution 
of fees can significantly influence business expenses 
in conducting electronic commerce. At least one card 


22 Staff Study 175 

association has taken limited steps to have an officer 
represent merchant views more fully within the 
organization. 

Federal Reserve Services 
and Miscellaneous Topics 

Some interviewees made recommendations concerning 
the Federal Reserve’s financial services. Some 
of the recommendations addressed perceived 
barriers to future innovation. Others involved 
service enhancements that the interviewee would 
find beneficial. These recommendations, as well as 
recommendations on other topics, are discussed 
below. 

Interviewee Recommendations and Discussion 

• The Federal Reserve should explore options for nonbank 
access to Federal Reserve information, clearing, and 
settlement services. (four organizations) 

Nonbank infrastructure providers and merchants 
raised questions about the laws and policies that 
generally limit to banks direct access to Federal 
Reserve Bank services. They believe that direct access 
to information, clearing, and settlement services 
provided by the Reserve Banks would enable them 
to expand their services and to process payments 
more efficiently and at a lower cost. [Begin Footnote 46. 
One financial services provider complained that the added 
step of sending its ACH payments through an intermediary 
significantly decreases the window for submitting payments for 
ACH processing. Another provider reported experiencing delays 
in ACH payments returns, in part because of the internal processes 
of its banking intermediary. In addition, one infrastructure provider 
wanted access to an account at a Federal Reserve Bank to 
conduct settlements rather than having to use a bank to conduct 
such operations. Several banks, however, expressed concerns 
regarding increased risk to the payments system and greater 
fragmentation in the U.S. market should nonbanks be granted 
access to central bank services. Some acknowledged that their 
views are influenced by the competitive advantages they enjoy 

by having such access. End Footnote 46.] Recently, 
several central banks have considered granting, and 
some are granting, account services to nonbanks, 
provided specific conditions are met (the conditions 
vary from central bank to central bank). [Begin Footnote 47. Two G-10 countries as well as Australia have changed 
the criteria for access to central bank account services. 

As far back as March 1999, the Reserve Bank of Australia 
widened its eligibility for exchange settlement accounts 
(www.rba.gov.au/MediaReleases/1999/mr_99_02.html). More 
recently, the Canadian Payments Act was amended to open 
membership in the Canadian Payments Association to life 
insurance companies, securities dealers, and money market 
mutual fund companies (www.bankofcanada.ca/en/ and 
www.cdnpay.ca/home/home.asp). In November 2002 the 
Bank of England published its policy for providing payments 
systems and their members access to settlement accounts 
(www.bankofengland.co.uk/financialstability/paymentsystems/ 
boesettleaccs021128.pdf). End Footnote 47.] While the 
Reserve Banks provide direct access to payments 
services and Federal Reserve accounts only to banks 
and certain other organizations as provided by law, 

some of the Reserve Banks’ information, clearing, 
and settlement services are intended to foster efficiencies 
resulting from nonbank participation in the 
payments system. For example, the Reserve Banks 
offer a national settlement service that allows settlement 
agents (both nonbanks and banks) acting on 
behalf of the agents’ participating banks to submit 
settlement information electronically for processing 
and automatic posting to the banks’ Federal Reserve 
accounts. 

• The Federal Reserve should remain in the ACH business 
and keep its prices low to ensure that the ACH 
continues to be a low-cost payment option. (two 
organizations) 

As recently as 1998, the Federal Reserve, through 
the Rivlin Committee, assessed its check and 
ACH services to determine if it should remain 
in these businesses and concluded that it should 
(www.federalreserve.gov/boarddocs/press/general/ 
1998/19980105). Each year, the Reserve Banks 
propose the prices of these services for approval 
by the Federal Reserve Board in an annual repricing 
exercise conducted to comply with the Monetary 
Control Act of 1980. Prices are posted publicly at the 
end of the exercise, as are any changes throughout 
the year, at www.frbservices.org. 

• The Federal Reserve should continue to create greater 
uniformity among the Federal Reserve Banks in their 
prices and the products and services they offer. (one 
organization) 

The Federal Reserve Banks are working on and will 
continue to strive toward greater uniformity in their 
pricing and the products and services they provide, 
where appropriate. Several initiatives are under way 
to increase the uniformity of priced services, particularly 
check processing. [Begin Footnote 48. 
The Federal Reserve Banks have undertaken a check modernization 
initiative to standardize and reengineer their infrastructure 
for processing checks over the next several years. The initiative 
consists of four key projects, each addressing a critical aspect 
of the check-clearing process: converting separate processing 
platforms to a standard, centrally managed platform; establishing 
a standard, centrally managed image platform that has a national 
image archive; moving check adjustments to a common platform 
that uses shared data; and offering over the Internet check products 
that are now available on DOS FedLine. End Footnote 48.] 
The electronic priced services—Fedwire Fedwire Securities, National Settlement, ACH—are already uniform across the Reserve 
Banks in terms of prices and 


The Future of Retail Electronic Payments Systems: Industry Interviews and Analysis 23 

service offerings. In 2001, the Reserve Banks established 
a national office for customer-related initiatives, 
the Customer Relations and Support Office, 
charged with promoting uniform services across 
all product delivery channels and communications 
vehicles. 

• The Federal Reserve should establish longer Fedwire 
hours in the evening to support later internal settlement 
cutoff times for banks. (one organization) 

One credit card association expressed interest in 
longer hours for Fedwire funds transfer processing 
to enable the association to settle more of its transactions 
for the day. The current hours—12:30 a.m. to 
6:30 p.m. (ET) Monday through Friday—limit the 
number of credit card transactions the association is 
able to clear and settle on the same day. The Federal 
Reserve Banks have been exploring with the private 
sector the possibility of extending hours both at the 
beginning and the end of the day. Current industry 
interest appears to indicate a preference for opening 
earlier to accommodate business dealings in different 
time zones, specifically the Asian markets. Earlier 
hours will not, however, address the card association’s 
desire to settle more transactions later in the 
day. The Federal Reserve issued a request for 
comment on extended hours in December 2002. 

• The Federal Reserve should establish weekend electronic 
payments services to support weekend banking. (one 
organization) 

An on-line merchant expressed interest in weekend 
processing of Fedwire transactions so that it could 
receive funds for orders taken on nonbanking days. 
Weekend processing of Fedwire transactions would 
require that the financial industry have full access 
to deposited funds and investment mechanisms. 
Numerous entities (including the Federal Reserve 
Banks, commercial banks, and financial markets) 
would need to expand their hours. Such an extension 
would increase operating costs and could significantly 
burden banks, infrastructure providers, and 
others. In September 2002, the General Accounting 
Office issued a report, ‘‘Weekend Settlement: Potential 
Benefits, Costs, and Legal Issues,’’ that examined 
the weekend settlement of financial transactions. 
The report concluded that the ‘‘weekend settlement 
of financial transactions would provide small benefits 
to retailers and consumers, and little, if any, benefit 
to the economy as a whole.’’ [Begin Footnote 49. 
General Accounting Office, ‘‘Weekend Settlement: Potential 
Benefits, Costs, and Legal Issues,’’ Report GAO-02-938 (September 
2002). A copy of the report is available at www.gao.gov/. 
End Footnote 49.] 

• The Federal Reserve Banks should use their network 
to enable others to deliver images. (one organization) 

One firm—a processor—expressed the belief that the 
Federal Reserve could facilitate a reduction in paper 
processing by permitting (presumably for an appropriate 
fee) others to use its network to transmit 
images of checks for clearing and settlement. The 
recommendation was based on the fact that the 
Federal Reserve Banks’ electronic network touches 
more bank endpoints than that of any other organization 
that conducts clearing and settlement operations. 
The Federal Reserve has not considered assuming 
such a role. The Reserve Banks’ imaging services 
are part of its overall check collection service, which 
is available only to banks and certain other organizations 
as provided by law. 

• The financial industry should evaluate options for 
making deposit account information at banks (or similar 
accounts at other institutions) portable. (two 
organizations) 

Portability would allow a bank customer to switch 
banks without updating information that facilitates 
payments flows, such as information related to 
recurring ACH transactions. One ongoing initiative 
is the Clearing House’s UPIC project, whereby a 
business is permanently assigned a unique electronic 
payment address, called a UPIC number. This 
number remains with the business even when it 
changes its banking relationships and could be a first 
step toward making deposit account information 
portable. This project, however, is still at a relatively 
early stage of development. 

• The financial industry should expand the field for the 
dollar amount in the ACH message format to accommodate 
larger-value payments on the ACH. (one 
organization) 

A processor of tax payments reported that the dollar 
limitation on ACH messages, $99,999,999.99, made it 
necessary for several taxpaying businesses to break 
up their payments. The advantages and risks of 
large-value ACH payments have been discussed for 
many years, but no concrete conclusions have been 
reached. Increasing the limit would require a format 
change under NACHA operating rules as well as 
ACH software modifications. 


24 Staff Study 175 

Appendix A: 

Contributing Federal Reserve Staff Members 

Authors and Interviewers 

Edward J. Green (co-lead) 
Emerging Payments and Policy 
Federal Reserve Bank of Chicago 

Jeffrey C. Marquardt (co-lead) 

Division of Reserve Bank Operations and 

Payment Systems 
Board of Governors 

Michele Braun 

Division of Reserve Bank Operations and 

Payment Systems 
Board of Governors 

Susan V. Foley 

Division of Reserve Bank Operations and 

Payment Systems 
Board of Governors 

Lawrence J. Radecki 

Research and Market Analysis Group 

Federal Reserve Bank of New York 

Douglas J. MacDougall 

Federal Reserve Information Technology 

Federal Reserve Bank of Richmond 

Brian J. Mantel 

Customer Relations and Support Office 
[Begin Footnote 50. At the time of 
the interviews, Mr. Mantel was a member 
of the Emerging Payment Studies Department. 
End Footnote 50.] 

Federal Reserve Bank of Chicago 

Advisory Group 

Om P. Bagaria 

Electronic Payments and Markets Systems 

Development Function 
Federal Reserve Bank of New York 

Dara Hunt 

Wholesale Product Office 

Federal Reserve Bank of New York 

Stephanie Heller 

Legal 

Federal Reserve Bank of New York 

Mark S. Sniderman 

Research, Corporate Communications, 

and Community Affairs 
Federal Reserve Bank of Cleveland 

V.H. (Sonny) Rosson, Jr. 
E-business Strategy Office 
Federal Reserve Bank of Richmond 

Vicki Anderson 

Retail Payments Office 

Federal Reserve Bank of Atlanta 

Richard R. Oliver 

Retail Payments Office 

Federal Reserve Bank of Atlanta 

Carl E. Vander Wilt 
Administrative/Finance 
Federal Reserve Bank of Chicago 

Peter J. Gavin 

FedACH Support Services 

Federal Reserve Bank of Minneapolis 


The Future of Retail Electronic Payments Systems: Industry Interviews and Analysis 25 

Appendix B: 

Interview Process and Potential Limitations 

From October 2001 through March 2002, members of 
the Federal Reserve staff met separately with representatives 
of forty-nine organizations to seek their 
views on payments system developments and key 
issues that will shape the future of clearing and 
settlement for retail electronic payments. The organizations 
chosen for interviews represent a wide range 
of perspectives, although clearly they are only a 
sample. They fall roughly into eight categories of 
payments system participants: corporate end users, 
software providers, financial services providers, 
other service providers, payments processors, banks, 
infrastructure providers, and other interested 
parties. [Begin Footnote 51. The 
individuals interviewed and the organizations they 
represent are not identified by name in this report, though the 
organizations are often referred to by category. The identities 

of the individuals and organizations are confidential information. 
Whenever a company name is used, the information is already 
in the public domain. End Footnote 51.] 
Interviews were conducted with six to 
eight organizations in each category except other 
service providers (two organizations) and processors 
(four organizations). Table 1 (in the text) provides 
a brief description of each category. 

The represented organizations interact in various 
ways with the payments system, and their experiences 
have taught them a variety of lessons. In each 
interview, Federal Reserve staff asked about the 
organization’s efforts to provide new payments or 
payments-related services and about barriers to 
change encountered by the organization. Although 
the interviewers asked about barriers to innovation 
in general and for recommendations related to all 
aspects of the payments system, they most strongly 
encouraged interviewees to talk about the areas with 
which they were most familiar. 

Almost all the interviews involved face-to-face 
meetings at which, on average, three members of a 
Federal Reserve staff interview team were present. 
The interview team was composed of seven staff 
members from around the Federal Reserve System 
(see appendix A). The backgrounds of these individuals 
were largely in the areas of payments system 
policy and economic research. 

In advance of the interviews, a short discussion 
paper intended to help frame the discussions was 
sent to interviewees. [Begin Footnote 52. 
To obtain a copy of the discussion paper, Discussion Note 
on the Future of Clearing and Settlement Systems for Payments,’’ 
contact the Federal Reserve Board via mail at Board of Governors 
of the Federal Reserve System, Publications Fulfillment, Mail Stop 
127, Washington, DC 20551; via phone at (202) 452-3245; or via 
e-mail at publications-bog@frbog.frb.gov. End 
Footnote 52.] The paper outlined issues 
initially identified by the interviewers relating 

to the future of payments systems and posed a 
number of questions intended to spark broader 
comment and discussion. The major topics covered 
by the paper included the desirable characteristics 
of payments systems, potential limitations of core 
systems, opportunities and challenges in technology, 
and future payments system design. 

The interviews typically began with Federal 
Reserve staff explaining the context for the interviews 
generally. The explanation included a description 
of the Payments System Development Committee 
and its project concerning the future of clearing 
and settlement systems. The interviewees then 
generally described their organization’s services and 
any new initiatives. The remainder of the discussion 
varied by organization and the issues or barriers 
each wanted to bring to the Federal Reserve’s attention. 
The interview team specifically inquired about 
barriers to innovation throughout and at the conclusion 
of each interview. In some cases, the interviewee 
had prepared in advance a list of issues and concerns 
he or she wanted to discuss. Each interview lasted 
two to three hours. 

Design and circumstances somewhat affected the 
interviews. Because of time and resource constraints, 
the number of organizations interviewed had to be 
limited. Although forty-nine was a substantial 
number and these organizations provided considerable 
information, the interviews should be seen as 
providing a range of views but not as constituting 
a scientific survey of opinions about the future of 
retail electronic payments for clearing and settlement. 
One unforeseen complication was the timing of the 
interviews. Most of the interviews had initially been 
planned for a period including September 11, 2001. 
A number of interviews, including those with representatives 
of organizations located in New York City, 
were postponed, and a few were not ultimately 
completed. 

Notwithstanding the limitations described, the 
interviews were very informative and should help 
give the financial industry and the public insights 
into the challenges and opportunities for the future 
development of retail electronic payments, clearing, 
and settlement systems. 


26 Staff Study 175 

Appendix C: 

A Summary of Recommendations from the Interviews 

Innovations in the market environment 

• The Federal Reserve should encourage innovation 
in electronic payments and support innovative 
private-sector payments projects through its 
operations or other means. (Recommended by 
eight organizations) 

• The financial industry should work with vendors 
of bank software and other service providers to 
facilitate greater use of electronic payments. (two 
organizations) 

• The Federal Reserve Banks should set a dollar 
limit on checks that they process. Payees would 
need to arrange for alternative, electronic payments 
for amounts above the limit. (two 
organizations) 

On-line payments from deposit accounts 

• The financial industry should facilitate the on-line 
transfer of funds from deposit accounts. (six 
organizations) 

• The Federal Reserve should support the creation 
of authentication techniques and should require 
the authentication of consumers in on-line transactions. 
(one organization) 

• The Federal Reserve should support the creation 
of an authority that certifies that a payments 
product or service is safe and protects the privacy 
of end users. (one organization) 

• The Federal Reserve should help promote digital 
certificates and perhaps serve as a root authority 
that would issue and certify digital certificates. 
(one organization) 

Transition of check payments 
from paper to electronic 

• The Federal Reserve Banks should support the 
initiation and transmission of image and electronic 
check presentment (ECP) files from the Reserve 
Bank of first deposit. (one organization) 

• The Federal Reserve Banks should support efforts 
to make image archives interoperable. (one 
organization) 

Real-time transaction processing, 
clearing, and settlement 

• The Federal Reserve should create a same-day 
ACH product. (two organizations) 

• To improve posting to demand deposit account 

systems, the Federal Reserve should increase the 
number of times per day banks must pick up files 
from their ACH operator. (one organization) 

• The financial industry should develop a uniform 
deposit directory or some other means of verifying 
account numbers, account status, and relevant 
information so that a business can verify the 
existence of a customer’s account. (six organizations) 


• The financial industry should shorten the return 
time for ACH debit payments to reduce the risks 
associated with debit transactions. Alternatively, 
the industry should create a means of confirming 
good funds. (four organizations) 

• The financial industry should create a time stamp 
on ACH items to help track a payment through 
the ACH process. (one organization) 

• The financial industry should explore means to 
reduce administrative ACH returns generated as a 
result of payable-through arrangements for check 
collection. (one organization) 

• The financial industry should develop a central 
directory for routing electronic payments. (two 
organizations) 

Information related to electronic payments 

• None. 

Standards 

• The Federal Reserve should help develop cross-
border standards for file transfers. (three 
organizations) 

• The Federal Reserve should facilitate the development 
of standards for electronic payments and 
should work with vendors to promote those 
standards. (two organizations) 

Cross-border payments 

• The Federal Reserve should begin a central bank 
initiative on cross-border payments. (two 
organizations) 

Laws, regulations, and private-sector rules 

• The Federal Reserve should evaluate and, if 
possible, simplify payments law. The Federal 
Reserve should consider creating a unified structure 
for all payments methods, which would avoid 


The Future of Retail Electronic Payments Systems: Industry Interviews and Analysis 27 

the difficulties associated with hybrid forms of 
payments. (two organizations) 

• The Federal Reserve should assess and modify, 
if appropriate, the limitations on withdrawals 
imposed on savings deposits by Regulation D. 
(one organization) 

• The Federal Reserve should explore whether the 
commentary to Regulation E should be revised 
to clarify the technical implications of the stop-
payment provision. (one organization) 

• If the proposed Check Truncation Act, or some 
variant, is enacted, the Federal Reserve should 
again consider eliminating the Federal Reserve’s 
‘‘six-hour monopoly’’ on check presentment. (one 
organization) 

• Public authorities should clarify privacy laws, 
in part to provide better guidance in light of the 
current focus on stopping funding for terrorist 
organizations. (three organizations) 

• The card associations should establish a merchant 
advisory group or some other means of providing 
merchant input into the credit card associations’ 
rule-making process. (two organizations) 

Federal Reserve services 
and miscellaneous topics 

• The Federal Reserve should explore options for 
nonbank access to Federal Reserve information, 
clearing, and settlement services. (four 
organizations) 

• The Federal Reserve should remain in the ACH 
business and keep its prices low to ensure that the 
ACH continues to be a low-cost payment option. 
(two organizations) 

• The Federal Reserve should continue to create 
greater uniformity among the Federal Reserve 
Banks in their prices and the products and services 
they offer. (one organization) 

• The Federal Reserve should establish longer 
Fedwire hours in the evening to support later 
internal settlement cutoff times for banks. (one 
organization) 

• The Federal Reserve should establish weekend 
electronic payments services to support weekend 
banking. (one organization) 

• The Federal Reserve Banks should use their 
network to enable others to deliver images. (one 
organization) 

• The financial industry should evaluate options for 
making deposit account information at banks (or 
similar accounts at other institutions) portable. 
(two organizations) 

• The financial industry should expand the field for 
the dollar amount in the ACH message format to 
accommodate larger-value payments on the ACH. 
(one organization) 

FRB1-1000-1202 


The following list includes all the staff studies published 
since November 1995. Single copies are available free of 
charge from Publications Fulfillment, Board of Governors 
of the Federal Reserve System, Washington, DC 20551. To 
be added to the mailing list or to obtain a list of earlier 
staff studies, please contact Publications Fulfillment. 

168. The Economics of the Private Equity Market, by 
George W. Fenn, Nellie Liang, and Stephen Prowse. 
November 1995. 69 pp. 

169. Bank Mergers and Industrywide Structure, 1980-94, 
by Stephen A. Rhoades. January 1996. 29 pp. 

170. The Cost of Implementing Consumer Financial Regulations: 
An Analysis of Experience with the Truth in Savings 
Act, by Gregory Elliehausen and Barbara R. Lowrey 
December 1997. 17 pp. 

171. The Cost of Bank Regulation: A Review of the Evidence, 
by Gregory Elliehausen. April 1998. 35 pp. 

172. Using Subordinated Debt as an Instrument of Market 
Discipline, by Federal Reserve System Study Group on 
Subordinated Notes and Debentures. December 1999. 
69 pp. 

173. Improving Public Disclosure in Banking, by Federal 
Reserve System Study Group on Disclosure. 
March 2000. 35 pp. 

174. Bank Mergers and Banking Structure in the United States, 
1980-98, by Stephen A. Rhoades. August 2000. 33 pp. 

175. The Future of Retail Electronic Payments Systems: Industry 
Interviews and Analysis, by Federal Reserve Staff, 
for the Payments System Development Committee, 
Federal Reserve System. December 2002. 27 pp. 

The staff members of the Board of Governors of the 
Federal Reserve System and of the Federal Reserve Banks 
undertake studies that cover a wide range of economic and 
financial subjects. From time to time, the studies that are 
of general interest are published in the Staff Studies series 
and summarized in the Federal Reserve Bulletin. 

The following paper is summarized in the Bulletin 
for January 2003. The analyses and conclusions set forth 
are those of the authors and do not necessarily indicate 
concurrence by the Board of Governors, the Federal 
Reserve Banks, or members of their staffs.