Electrifying Electronic Check Payments

By Newkirk, Kristine M. | Independent Banker, March 2001 | Go to article overview

Electrifying Electronic Check Payments


Newkirk, Kristine M., Independent Banker


Re-engineering the Retail Payment System Remains a Long-Term Federal Reserve Goal

Camden Fine, president of the Midwest Independent Bank, Jefferson City, Mo., stays on top of emerging payment system issues by staying up with the Federal Reserve. As a dominant player in today's payment system, the Federal Reserve is actively pursuing initiatives, experiments and studies of its own as well as working closely with the private sector to move paper out of the system.

Last year, Fine participated in a Boston Federal Reserve forum for private- and public-sector participants and other stakeholders to discuss the move to electronic payments. There he formally shared the community bank perspective on technologies like imaging, check truncation and electronic check presentment. He also sits on the Customer Advisory Council for the loth Federal Reserve district, which recently drafted a white paper containing suggestions about the Federal Reserve's role in the payment system going forward. He has just been appointed to the prestigous Federal Advisory Council, which meets four times a year with the full Board of Governors on the hottest financial issues of the day.

As head of a banker's bank whose key constituency is community banks, Fine says what affects community banks affects his business. Without the Federal Reserve, he says, community banks have few options for check services. Community bankers feel strongly that the Federal Reserve should continue to be an active provider of check collection and Automated Clearing House services.

A more electronic format for payments generally has raised the specter that a handful of megabanks could be in a position to dominate the emerging payment system. Fine says this could disenfranchise small and midsize community banks without the volume or telecommunications infrastructure to process payments themselves. This threat has mobilized him and other industry participants to speak up in the ongoing dialogue on payment developments. "The one equalizer that has kept this from happening in the paper world is the Federal Reserve," Fine says.

The Federal Reserve treats all transactions equally, putting small banks on the same footing as large banks by providing equal accessibility to all institutions. It is not clear what role the Federal Reserve will play as new payment mechanisms mature.

The Federal Reserve is striking out to define that future role, while working in the trenches to improve the current check and ACH systems we now have in hand. Both the Federal Reserve and private-sector groups are actively pursuing experiments to find those electronic instruments that will move the payment system to the next generation. In a series of small steps, the Federal Reserve is taking a proactive role in convening the players and spearheading initiatives that over the long-term are expected to reshape the payment system.

Committed to the Payment System

The Federal Reserve's participation in the payment system is one of its primary roles. The Federal Reserve's rules and principles are aimed at promoting the efficiency and integrity of the payment system and ensuring access for all depository institutions.

The central bank's commitment to these goals was reinforced by the Committee on the Federal Reserve in the Payments Mechanism, better known as the Rivlin Committee. The committee wrapped up its work in 1998, concluding that the case for the Federal Reserve staying in the market was stronger than the case for getting out. The committee recommended that the Federal Reserve continue in its current role to promote efficiency, integrity and open access while actively working with providers and users of the payment system to remove barriers and create a strategy to move toward end-to-end electronic payments.

"The committee confirmed that the Federal Reserve should remain a provider of both check collection and ACH services," says Jeffrey Marquardt, assistant director for payment system studies with the Board of Governors of the Federal Reserve System in Washington, D. …

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