Chairman Michael N. Castle
Opening Statement for Payment Systems Oversight Hearing
Rayburn 2128, September 16, 1997
The subject matter of our hearing today is the Federal Reserve and its involvement with the payment system. The paperless payment system that has been predicted for many years, while check writing has steadily grown, may now be visible on the horizon. This Subcommittee has been studying the development of the, mainly electronic, technologies that threaten the preeminence of the paper check. Our hearings on the Future of Money and Vice Chairman Rivlins Committee on the Federal Reserve in the Payments Mechanism have both covered a bit of the same ground. Her committee studied five scenarios ranging from liquidation of the Feds roles and withdrawal from the payment system to a future with electronic payments as the norm. This latter scenario intrigues me even though I understand that the working groups spent little time on either of these out lying positions. Part of the basic problems with the current payment system is that actual costs are not reflected in the products. Most people who prefer to use paper checks, do so in the belief that they are "free." Every time a "free" check is written and cleared through the system it costs upwards of $2.50. Rather than assess everyone the actual cost of writing a check, the system buries this cost in a "prime" lending rate that is higher than it otherwise might be and a savings interest rate that is lower. It may also be showing up in odd places like ATM fees, which, with Alice in Wonderland logic, subsidize "free" checks and other services. Under the 5th scenario, the Fed would serve as a catalyst for moving the payment system rapidly toward its seemingly inevitable electronic future.
Whatever happens, the Federal Reserve System is bound to retain a major role, as bankers and consumers look to it to assure the safety and soundness of the system, and ultimately the value of the money that enables the economy. Even though explosive growth is projected for emerging payment technologies such as stored value cards, electronic banking and financial transactions made over the Internet, Americans still wrote an estimated 64 billion paper checks last year. The Federal Reserve both oversees and competes with private companies as a service provider. It clears and transports checks and regulates the safety and soundness of the other participants. As the Fed is the dominant player in the Payment System, it is especially important that this Subcommittee and the full Committee should periodically examine its various roles.
Today, we will concentrate primarily on the retail sector. The traditional retail payments sector is made up of small-value, large-volume payments, such as paper checks for consumer purchases, paychecks, Social Security fund transfers, and other payments made via an automated clearing house (ACH). Much of the controversy about the Fed and the Payment System derives from the anomalous position they occupy in the area of clearing and transporting canceled paper checks. There, they are simultaneously contractor and service provider, competitor with the private sector and regulator of the safety and soundness of the payment system. Congress has placed them in this position and Congress may someday relieve them from the problems that have resulted. More probably, technology will ride to the rescue. Electronic presentment and electronic banking may permit even the most rural and isolated small bank to offer their customers services that rival the largest banks. In the meantime, and this might take the rest of this generation, we will have to make due with a compromise system that has served the public pretty well. Both the Credit Union National Association and the Independent Bankers Association of America have served notice that they will be submitting testimony for the record that supports the present Fed roles.
We now will have three panels of witnesses before the Subcommittee.
Senator Harry Reid of Nevada was to have testified, but he will be occupied on the floor this afternoon and will submit his testimony for the Record.
First, we will hear from the Vice Chairman of the Board of Governors of the Federal Reserve System, Alice Rivlin. She will tell us about a project she has directed for the Board over the past year that has been looking into the future roles that new technology and new competitive realities may hold for the Federal Reserve System.
The second panel will have three members. Gerard F. Milano is Executive Director of the California Bankers Clearing House (CBCH). Eric Roy is the Chairman, Association of Bank Couriers, and Elliott McEntee is the President and CEO of the National Automated Clearing House Association (NACHA). Each has a wealth of experience and a particular point of view regarding the Fed and the Payment System to share with us today.
Finally, at the request of the minority members, we will hear from three employees of the Interdistrict Transportation System, a Federal Reserve entity that operates out of the Federal Reserve Bank of Boston to arrange for the transportation of an average of $10 billion in canceled paper checks across the country each night, Monday through Thursday. ITS planes make about 200 flights each night and ITS also contracts with freight forwarders who transport checks during the day using commercial airlines and private air freight carriers. The Federal Reserve is required by the Monetary Control Act of 1980 (MCA) to match its revenues with its costs over the long run so that the prices for the services it sells are not subsidized. Mrs. Maloney and Mr. Metcalf with others, have sponsored H.R. 2119, The Efficient Check Clearing Act of 1997, that would require cost-revenue matching for a specific Fed-provided service. There is some dispute about Fed pricing of check transportation and this panel should help to focus that dispute.
The ITS employees are:
Thomas MacFarland, Manager, Transportation Operations ITS, Federal Reserve Bank of Boston; Thomas Hunt, Senior Systems Analyst, ITS FRBB, and Charles Fazio, ITS Transportation Analyst.