Stern, Gary H., Independent Banker
Federal Reserve financial services in a changing payments environment
For the Federal Reserve and the payments industry as a whole, the Retail Payments Study provides information needed to better understand market preferences and respond appropriately. The Study analyzed the number and dollar value of non-cash retail payments made in 2003-a follow-up to similar research published in 2000. The Federal Reserve uses this market data to guide our efforts to assure that the size, reliability, and capabilities of our check and ACH infrastructures correspond to market demand and contribute to a competitive marketplace. Because the Federal Reserve exists to further the public interest, this outcome is fundamental to our role as a service provider and has been of particular importance to community banks.
The study found that the number of electronic payments now exceeds the number of paper check payments. The decline in paper check volume that contributed to this finding has led to overcapacity for us and for the paper check processing industry overall, an industry which is generally characterized by numerous participants and competitive pricing. In response to this development and concern about resource utilization, we are reducing our check-processing infrastructure. Restructuring and other cost-cutting actions have been undertaken to return us to full cost recovery in check in 2005.
Our actions to downsize check infrastructure have spawned some concerns about reduced access to processing services at competitive prices, particularly for small financial institutions in relatively remote locations. But the forces propelling the increased use of electronic payments, as well as implementation of Check 21, might mitigate concerns about access rather rapidly. Why? Previously, it was a costly proposition for a check processor to enter a remote location if that processor did not have a network already in place to transport physical items. This barrier to entering the paper check processing market limited competition and potentially carried the risk of monopolistic pricing. Federal Reserve check processing services are offered as one means of addressing such concerns.
With the need to pick up and transport the physical check diminishing-and perhaps eventually becoming eliminate-in the new retail payments landscape, banks located in remote areas may see many more service providers entering their markets to provide electronic check services. The Federal Reserve would not have to provide check processing services directly to ensure fair access to such services in this environment, although we might continue to do so for other reasons.
It is possible that this vision of more competition may not come to fruition. …