The Federal Reserve System has formed a task force to study the implications of rapidly evolving electronic payment technologies.
Organized by the Financial Services Policy Committee, which is based at the Federal Reserve Bank of St. Louis, the panel of Fed bank staff members has been dubbed the Financial Services Research Group.
It will coordinate research initiatives among the 12 district banks, carrying out assignments they request and tapping them for resources and staff.
The announcement comes at a time of heightened interest in payment- related issues, in both banking and policymaking circles, concerning both emerging technologies and new forms of competition.
The American Bankers Association this month held the first meeting of a task force of senior bank executives, taking what ABA president James M. Culberson Jr. called "a broad look at the future payment system and the cooperative action banks need to focus on to provide secure, convenient payments for our customers."
The ABA hired former Fed governor John P. LaWare, vice chairman of Secura Group, as a consultant to the task force.
Comptroller of the Currency Eugene A. Ludwig is closely monitoring emerging technology developments such as smart cards and Internet banking. And a House Banking subcommittee on March 7 will continue a series of payment technology hearings begun last year to seek the views of bankers and trade groups.
Kristi Short, senior vice president of the Federal Reserve Bank of St. Louis, speaking for the Fed's policy committee, said the moves reflect a "sense of urgency over where technology is taking us and what the ramifications will be."
"We are bringing all the strengths of the Federal Reserve as one entity to bear on these public policy issues," she said.
The Fed research group's head is James Thomson, a 10-year veteran of the Federal Reserve system who is vice president and economist at the Cleveland Fed.
He said the panel will complement regional Fed studies in progress and "give the (policy) committee and the (regional) product offices a dedicated research function."
Fed officials have not yet set the research group's priorities, but it will have a mandate to study national payment and policy issues from economic, technical, and regulatory standpoints.
Stored-value smart cards and their potential impact on the money supply and currency demand are likely to get early attention, beginning with such basic questions as whether the cards are equivalent to deposits or bank notes. The answers could have "major safety-net implications," Mr. Thomson said.
If the stored-value cards are determined to be more like bank notes, they will affect seigniorage - the money that the central bank makes as a byproduct of its currency and coin production.
The $20 billion annually that the Treasury gets from seigniorage could be in jeopardy if smart cards replace cash, in effect privatizing part of the money supply, Mr. Thomson said.
When consumers do not spend money that they have transferred into their chip cards, banks could have a float and investment opportunity that did not exist before. But this value would not appear on balance sheets, meaning "it does not have reserve requirements, nor anything else backing it," Mr. Thomson said.
Gerald Stuber, an assistant chief of research for the Bank of Canada, who has investigated differences among stored-value and smart card initiatives globally, agreed with Mr. Thomson's assessments.
"It could impact central banks to the extent that electronic purses replace the use of bank notes and coins as retail payment instruments," Mr. Stuber said. "If there is a reduced demand for bank notes, then balance sheets would be adversely affected."
Yet another hot topic is the continued growth and cost of paper checks. In the late 1980s, Fed economists estimated that the printing, mailing, and bank operations associated with checks amounted to between 0.5% and 1% of gross domestic product.
With more than 60 billion checks written each year, that would amount to some $40 billion today. The Fed is interested in getting a more exact figure.
Further, it would like to compare the use of paper with electronic alternatives such as the automated clearing house network, home banking programs, and electronic bill payment services.
Paul Connolly, first vice president of the Federal Reserve Bank of Boston, said the new research is needed to "help us be able to do some good economic analysis of payment systems issues."
Mr. Connolly, who is also the Federal Reserve's director of retail payment systems, said the research group may also investigate lowering automated clearing house prices to spur volume. It will consider whether changes in pricing "automatically translate into changes in what a bank offers its customers," Mr. Connolly said.
"We will look at this from the demand side - at really what happens to Fed services when the prices are changed," Mr. Thomson said.
Another Fed service that may be up for a pricing review is the Fed Wire network for large funds transfers. The Fed's charging for daylight overdrafts - a type of financial exposure seen as a potential threat to the banking system if a bank were to fail - has resulted in a shift of volume to the New York Clearing House's Interbank Payment System, known as Chips, Mr. Thomson said.
The Fed research group could also explore how the central bank might help ensure access to emerging payment systems. Mr. Thomson noted that many members of the Independent Bankers Association of America "are upset they are being cut out" of electronic benefits transfer systems, which are designed to deliver welfare, food stamps, and other government payments through electronic terminals instead of the mails.
