Fed Governor Hedges Bets on Payment Methods

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Federal Reserve Board Vice Chairman Roger W. Ferguson Jr. expects electronic commerce to popularize debit cards and electronic wallets.

Yet the ubiquity of checks, cash, and credit cards sets the stage for a fierce competition.

"There's an entire panoply of different kinds of retail payment options that I think are going to be part of a pretty exciting era of experimentation," Mr. Ferguson said in a recent interview in the Fed's boardroom.

Consumers will need a reason to embrace new technologies.

"Any newer payment system mechanism is going to have to basically convince a critical mass of consumers that it has some characteristics -- some combination of service and price -- that makes it more attractive than the existing" forms of payment, he said. "That's a relatively high hurdle, because we have in many ways optimized and continue to optimize the check capability.

"It will be quite a while before they push this installed base of 68 billion checks out of the system."

In the meantime, the Fed is upgrading its check processing business, centralizing tasks currently done separately by its 12 district banks. By mid-2002, the Fed expects to have one national computer system to track problems in check processing so adjustments can be made faster.

While continuing to modernize check processing, Mr. Ferguson emphasized that the central bank supports emerging payment mechanisms, such as electronic bill presentment and smart cards. The Fed itself is experimenting with new forms of payment processing. To test emerging methods, the Fed has launched a pilot program with banks in Montana using electronic images to present checks to each another.

Mr. Ferguson said the Fed will "work with the industry, in a leadership role, to identify initiatives that the government and private sector could reasonably undertake."

To that end, last summer the Fed set up its Payment System Development Committee, co-chaired by Mr. Ferguson and Federal Reserve Bank of Boston President Cathy E. Minehan. The committee will ensure that the Fed's regulations do not hinder the ability of institutions to experiment. It will also consult with payment system providers on new technology.

Though upstarts initially appear to be competitors of banks, Mr. Ferguson predicted they will work together, especially because banks already have three key ingredients for success: experience, the trust of consumers, and an existing infrastructure, such as automated teller machine networks.

"The financial institutions have a great base to build on. …