A Federal Reserve Board committee has recommended that the central bank keep a strong hand in retail payment systems and promote further efficiencies in electronic check presentment and automated clearing house operations.
Releasing its conclusions Monday after a 14-month review of the Fed's role, the panel headed by Vice Chairman Alice M. Rivlin rejected the privatization of Fed operations that large-bank interests have been calling for.
The Fed "should stay in the check-clearing and ACH markets and continue to provide services with the explicit goal of enhancing efficiency and convenience," said Ms. Rivlin.
"We will work with other parties to see if electronic presentment of checks makes sense and is cost-effective," she added. "For ACH, we will make it more effective and user friendly."
The report was a hit with Independent Bankers Association of America activists who feared the Fed would pull out of the market.
"We are very happy with the report," said Thomas Sheehan, president of Grafton (Wis.) State Bank and the IBAA's delegate to the Bankers Roundtable's payment-system initiative, the Banking Industry Technology Secretariat.
"The Fed is a stabilizer in many markets that are not served aggressively by correspondent banks," he said. "You need to have an alternative to noncompetitive pricing from other providers."
"It is imperative that the Federal Reserve stay in this business forever," said IBAA president-elect Bill McQuillan, who is president of City National Bank, Greenley, Neb. "If they don't, customers will lose their ability to deal with the local bank to get fairly priced payment services."
But William M. Randle, senior vice president at Huntington Bancshares, and one of several large-bank executives on the BITS Advisory Group, said he was disappointed the Fed decided against privatizing.
"This is status quo," said Mr. Randle. "There is nothing new here."
The Rivlin committee contended that the Fed's withdrawal would disrupt the system in the short run without a long-term payback. It said privatization would force rural banks to pay more, slow the migration toward electronic check presentment, and result in greater regulation of the system.
It viewed automation of check presentment as a priority that should be encouraged through lowering of prices, offering enhanced imaging services, and initiating pilot projects with large and small banks.
"The substitution of electronic information for the paper check during the collection process could significantly reduce check processing costs and allow paying banks to identify return items more quickly," the committee said in its 41-page report.
It said the Fed should work with banks to revamp automated clearing house rules to encourage more consumer and business usage of direct deposits and other paperless payments. It also called for price incentives to use the ACH and said the Fed should develop software that would reduce the cost of receiving the transactions.
To stimulate competition between the Fed and the private sector, the committee said the central bank should consider eliminating a quirk in the rules that requires private firms to present checks by 8 a.m. for same-day credit while the reserve banks have until 2 p.m.
Ms. Rivlin said the Fed will create task forces to implement the committee's recommendations, some of which will require the Board of Governors' approval.
