In 1974 the Federal Reserve Board made a fateful decision: It would not get involved in building and operating a fully electronic funds transfer system for consumer payments in the United States.
The reasons for the Fed's denial have been lost in a haze of political disputes, recriminations, and revisionism. Not lost is the fact that a consistent, nationwide method for the efficient transfer of funds from consumers to retail merchants has never been implemented.
Quite the contrary. The technology for handling massive volumes of consumer payments has advanced more quickly than bankers' ability to assimilate it. Fragmented in its very structure, the banking industry has approached its payment-systems opportunities in a confused and incoherent way.
Consumers, the bulk of whose transactions must flow through any payment system in order for it to achieve maximum efficiency, simply haven't been educated in the benefits and advantages of electronic funds transfer. A banking industry unable to agree within itself as to the nature and promise of EFT cannot be expected to transmit the necessary messages to the marketplace.
Into the breach have stepped a number of outside firms who are expert in the technology and its capabilities, which even bankers agree can exceed anything that has yet appeared on the scene.
These corporations -- units of General Electric Co., Automatic Data Processing Inc., the Tymshare subsidiary of McDonnell Douglas, and perhaps eventually AT&T -- individually or together have demonstrated that they can wrest at least a measure of control over payment systems from the depository institutions who once owned them exclusively.
The rivalry for payment system access and control has been intensifying for almost as long as the theoretical "cashless" or "checkless" society has been part of banking visionaries' vocabulary.
In other words, for almost two full decades, the banks have been losing their grip of payment systems, hence technology, hence their future. They have been told so by officials of the Federal Reserve System, by their trade associations, by outside experts such as Arthur D. Little Inc., and by internal critics such as Dee W. Hock, the outspoken, recently retired president of Visa International.
To this day, the power within the banking establishment rests not with individuals well versed in electronic technology and its implications, but with people who rose through the ranks of commercial lending -- banking's traditional bread-and-butter. Slowly this is changing: A technologist, John Reed, became chairman of Citicorp, and an avowed payment-systems enthusiast, James G. Cairns, was elected president of the American Bankers Association, both in 1984.
But the banking business remains dominated by the old intermediary function, and most of its profits still come from the net interest margin. So on a Saturday in October at the start of the ABA's annual convention in New York, less than 200 of the 10,000 visiting bankers attended a seminar arranged by Mr. Cairns to enlighten them on the dangers posed by fragmentation in the payment systems.
Clearly, those who run the vast majority of the nation's financial institutions would rather not be bothered with payment-system and technology matters. "Our business is still fundamentally a people-to-people business," they argue, and they are right.
But new entrants into the once protected domain of banking have financial and technological resources that banks acting individually or in groups have been unable or unwilling to confront directly. For example, Sears, Roebuck and American Express are the two biggest financial service industry advertisers. They benefit from national name recognition and from nationwide delivery systems that afford them economies of scale.
In contrast, there are 15,000 entities competing in commercial banking …