Major Themes from the Conference

A Summary of Closing Remarks by Roger W. Ferguson, Jr.
Vice Chairman, Board of Governors of the Federal Reserve System
October 30, 2003

Introduction | High-level conclusions | Specific points from conference |
Suggested actions by participants | Steps by the Federal Reserve | Closing remarks

Introduction

Vice Chairman Ferguson highlighted the major themes from the conference and noted a number of the suggested action items for payments providers and the Federal Reserve that were raised during the conference. This note provides a summary of the concluding remarks.

High-level conclusions

Five high-level conclusions emerged from the two days of discussion at the conference.

First, from a public policy perspective, the payments system is not currently facing serious fundamental problems. The pace of change in the payments system, however, is accelerating. That change results from factors that include: 1) changing payments habits, 2) new technology, 3) innovation in business practices, and 4) evolving legal and regulatory frameworks. The implications of this accelerating change are significant for payments providers, corporate and consumer users of the payments system, and policy makers.

Second, there was wide agreement among the conference speakers that electronic payments will continue to grow and can provide a solid base for a strong economy. Many speakers also agreed that current electronic services are not fully adequate, but that future products and services are not easily defined, especially as fundamental decisions regarding business strategies and infrastructure remain widely debated. The conference participants heard a variety of views about current opportunities and challenges focused on fraud, security, standards, and information services.

Third, the conference speakers expressed general agreement on the need to address barriers to innovation; but, there was significant variation in what participants believed constitutes a barrier and limited consensus on the appropriate steps to address specific barriers. Some ideas pointed toward whole new payments systems. Others pointed toward enhancements to existing systems and questioned the need for even more infrastructure than already exists.

Fourth, speakers expressed a great deal of interest in opportunities to improve the payments system. At the same time, there were telling comments about the potential costs and difficulties that transition periods would create for the banking industry, the corporate sector, and consumers. These difficulties included managing change strategically across traditional "silos" within the organization of payments providers and across the payments system. Corporate users of the payments system also face organizational challenges in making investments in their back offices to achieve significant efficiency gains from the large-scale use of electronic payments.

Fifth, conference speakers expressed a sense that there is a need for more dialogue between various stakeholders within the payments system. Specifically, there is a need for greater dialogue between corporate users of the payments system and the banking industry. In one sense, discussions between banks and their customers is a natural forum for addressing some of the concerns raised during the conference. The dialogue becomes much more difficult when it involves the banking industry more generally, rather than individual banks and customers. Dialogue is even more complex when broader groups of users, technology vendors, and other parties, all of which may have different perspectives, participate in discussions.

Specific points from conference

Speakers at the conference made a number of points in specific topic areas, including the following:

Checks

Prices, products, and profitability. In the area of checks, some speakers expressed concern about the decline in traditional sources of bank revenue. The longer term impact on prices, products, and profitability as well as the dynamics of adjustment for the banking industry are still unclear.

Infrastructure. Other specific points were made with respect to the industry's check-processing infrastructure in light of the enactment of the Check Clearing for the 21st Century Act (Check 21) and the general transition from checks to electronic payments. Speakers at the conference made clear that the purpose of Check 21 was not to create more paper but rather to facilitate the move toward greater electronic processing of checks. To achieve this end, paying banks will need to accept electronic exchange rather than demanding to receive substitute (paper) checks. The industry may need to consider incentives for paying banks to accept electronic images of checks. The industry will also need to address the issues of managing excess check-processing capacity and modernizing a check infrastructure that was designed primarily to process paper. Many speakers noted that business strategy and infrastructure decisions also need to take into account that billions of checks will be written annually for a long time.

Electronic payments

Security. Overall, speakers observed that electronic payments do not pose significant security or fraud concerns for the vast majority of businesses and consumers. Though rare, the sporadic occurrence of credit and debit card fraud over the Internet or fraud with on-time ACH transactions initiated by telephone or over the Internet has made a small minority of consumers, as well as businesses, wary of some types of electronic payments. While it is important for payments providers to understand these specific concerns and continue to address them, they should not derail further progress or undermine overall confidence in the payments system.

Information integration and standards A key point made at the conference was that large businesses, in particular, want payments system providers to understand that information about transactions (such as invoice numbers and shipping information) is critical to their use of electronic payments, for both domestic and global commerce. Many speakers identified a need for common standards to enable significant operational improvements in integrating payment and related transaction information in order to enable greater straight-through processing of electronic payments and automated reconciliation procedures.

Cross-border payments standards. The conference discussions clearly pointed out that cross-border payments are a concern for many types of firms. These payments are currently too costly and difficult to make, and in some cases these issues may reduce global commerce. The lack of compatible standards, coupled with differing legal, clearing, and other arrangements across countries, compounds the inefficiencies and costs. Industry participants encouraged stronger leadership to facilitate the development of more robust cross-border standards.

Challenges of creating net benefits. Conference participants made clear that consumers and businesses need incentives to invest in, or experiment with, new payment instruments or services. While experts observe problems and frustrations, most payments system users view the existing systems and processes as smoothly functioning and, especially for consumers, as relatively inexpensive.

In addition, many corporate speakers noted that in some cases investments in payments-related improvements are a very low priority for their organizations because the benefits are not easily quantified or do not achieve sufficient return in the short run. Most corporations do not focus on the overall benefits from reengineering enterprise-wide payments and information-related processes; rather they evaluate investments in specific payments and information systems separately. Lessons learned from the 1990s emphasize that the lack of a "value proposition" for consumers or businesses can also undermine the success of many products and potential investments. Unexpected growth, however, in new consumer products and services such as gift cards shows that reengineered products can be successful when they provide significant perceived benefits.

Suggested actions by participants

Three high priority steps for payments providers:

Risk. Recently there have been a number of challenges for payments systems in the area of risk and risk management. Several speakers raised the issue of appropriate risk designs and risk management practices, as well as the need to evaluate the design implications for the next generation of payments systems. One prominent speaker, for instance, suggested that there should be a personal identification number (PIN) for all electronic payments. Risk issues were also discussed during the Growth in Electronic Payments and Risk and Security Issues panels. The private sector should think clearly about how to measure and manage risk. Indeed, payments systems providers need to manage risk to a low level and be vigilant to maintain confidence in the soundness of the payments system.

Payment alternatives for the web. . Credit cards are currently the dominant form of payment for transactions over the Internet. Businesses and governments, in particular, are seeking a lower-cost payment alternative that would permit consumers and businesses to make real-time interbank funds transfers for the purpose of conducting electronic commerce. One prominent speaker specifically identified the need for such an alternative payment instrument in his presentation.

Information standards. During the panels on Corporate Priorities and Business Implications for Process Improvements, large businesses noted the importance of receiving electronic payments and associated information in such a way that the payment and information can be processed "straight through" within their internal systems. This effort will have cost implications for these businesses. One means of mitigating these costs is to develop common processing standards across the industry. Standards development to facilitate payments and information processes, however, will require cooperation by multiple industry segments, including providers, technology vendors, and end users.

Steps by the Federal Reserve

Legal and regulatory. The Federal Reserve Board is developing implementing regulations for Check 21. The Board will be requesting public comment on these regulations later this year.

The Board will continue to look for and address, when appropriate, legal and regulatory barriers to increased payments system efficiency. The Board has a track record for addressing regulatory barriers raised by the industry as exemplified by Check 21 and clarifications to the Commentary of Regulation E. It is also important for the industry to identify specific regulatory issues that may create barriers to innovation when these issues arise in the course of business projects or research.

Research. The Federal Reserve is continuing to conduct key payments research. A survey of check use similar to the one in 2001 will be conducted in the spring of 2004. It will be important for banks to participate in the upcoming study. The data will provide new quantitative information about the direction and rate of change in payment instrument usage. This data should help the banking industry and the public, generally, to understand and plan for the ongoing transition from paper to electronic payments.

Standards. The Reserve Banks will continue to participate actively in standards activities related to payments. For example, they have been working with others over the past several years on standards related to image exchange and substitute checks. The Federal Reserve must also be cautious in its work on standards. Most standards should emerge from the work and business needs of the private sector. The Federal Reserve will continue to pay close attention to standards activities and will participate when it is appropriate. In general, speakers noted that standards-setting groups should strive to be more inclusive and transparent to better ensure that the results are broadly beneficial to the economy.

Dialogue. There was some discussion at the conference about creating new groups to discuss issues such as standards, security, and infrastructure. It is important to note that a number of these groups already exist. In addition, new groups may have practical limitations in addressing societal concerns in an effective way. An alternative approach would be to encourage existing groups not only to be more inclusive but also to be more transparent in their future discussions. The Federal Reserve will continue to engage in dialogue with different stakeholders in the payments system and welcomes input and suggestions beyond the conference. The Federal Reserve also encourages open channels of communication between the Federal Reserve and all payments stakeholders on emerging payments system issues. The Payments System Development Committee is a forum for such dialogue.

Federal Reserve's role. At the conference there have been different suggestions about the future role of the Federal Reserve in the retail payments system. The Federal Reserve has responsibilities in the payments system both as an overseer and as a participant. Over time, the Federal Reserve's role will change, but its goal to foster safe and efficient means to conduct commerce will not change.

Closing remarks

At all levels, the conference highlighted the need for payments system participants to continue searching for safe and efficient means of conducting transactions. This is particularly important in addressing highly complex problems involving electronic business payments and in supporting the transition of the check system.