On the domestic front, the United States lacks a universal, near-real-time retail payments option for consumers and businesses. Cash and debit cards are the closest thing to it, but both fall short of fully satisfying business and consumer needs. We have heard from payments stakeholders that there is demand for a better system. At the same time, we are mindful of lessons learned in other countries that implementing a faster payments solution requires years of hard work.

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Businesses and consumers alike have expressed interest in the ability to make last-minute payments of all types. Businesses and governments are drawn to the potential for enhanced cash management afforded by quicker confirmation of good funds. Real-time transactions could reduce fraud losses for banks and businesses. For consumers, a faster and more convenient electronic payments mechanism would be an attractive alternative to checks. As it stands, many consumers today believe that their payments are real-time. Most businesses know all too well that this is not the case.

A real financial stability concern, however, is the potential for malicious disruptions to the payments system in the form of broadly targeted cyberattacks. Just in the last few months, the United States has experienced an escalating incidence of distributed denial of service attacks aimed at our largest banks. The attacks came simultaneously or in rapid succession. They appear to have been executed by sophisticated, well-organized hacking groups who flood bank web servers with junk data, allowing the hackers to target certain web applications and disrupt online services. Nearly all the perpetrators are external to the targeted organizations, and they appear to be operating from all over the globe. Their motives are not always clear. Some are in it for money, while others are in it for what you might call ideological or political reasons.

[A]s the payments system continues to evolve, the Federal Reserve's role will need to change.  In my view, it would not be desirable for the Federal Reserve to scale back its presence in retail payments or even exit retail payments as some might advocate.

While the Federal Reserve could focus more on regulation and oversight to achieve its mandate as many other central banks are doing, I suggest that it should leverage its experience and position as an operator to achieve its objectives {regarding electronic retail payments}.
Historically, the Federal Reserve's role in both checks and ACH reflects a preference to operate within the market rather than as a pure regulator.  We are well aware that industries can - and do - quickly develop methods to exploit any regulatory loopholes and avoid the intended outcome.  By competing with the private sector on a level playing field, the Federal Reserve can encourage efficiency and integrity from an "on the ground" position.
Looking forward, I also suggest that it could do so in the realm of electronic payments more broadly.

Currently, the Federal Reserve relies on a patchwork of authorities, largely derived from our role as a banking supervisor, as well as on moral suasion to help ensure that critical payment and settlement systems have the necessary procedures and controls in place to manage their risks.  By contrast, many major central banks around the world have an explicit statutory basis for their oversight of these systems.  Given how important robust payment and settlement systems are to financial stability, and the functional similarities between many payment and settlement systems, a good case can be made for granting the Federal Reserve explicit oversight authority for systemically important payment and settlement systems.  

More generally, both the operational performance under stress of key payment and settlements systems and their ability to manage counterparty and market risks are critical to the stability of the broader financial system. Currently, the Federal Reserve relies on a patchwork of authorities, largely derived from our role as a banking supervisor, as well as on moral suasion to help ensure that the various payments and settlements systems have the necessary procedures and controls in place to manage their risks. By contrast, most major central banks around the world have an explicit statutory basis for their oversight of payment systems, and in recent years a growing number of central banks have been given statutory authority to oversee securities settlement systems as well. Given how important robust payment and settlement systems are to financial stability, a strong case can be made for granting the Federal Reserve explicit oversight authority for systemically important payment and settlement systems.

The safety and soundness of the U.S. banking and payments systems is critical to achieving economic growth, maximum employment, and general economic stability, and the Federal Reserve works closely with other regulators to achieve this goal. The Federal Reserve also has an important role to play in responding to and mitigating the impact of financial crises and shocks. If confirmed, I would continue to work vigorously to protect and promote the safety and soundness of the system.

Although improving convenience has been an important force behind successful innovation, consumers and businesses have increasingly demanded greater security in their electronic payments, particularly as more information is linked to these payments. In general, there is often a basic tradeoff between security and convenience: the easier a system is to use and access, the less secure it tends to be.

As a result of these trends, the Reserve Banks' check-collection volume has declined. Since 1999, the number of checks collected through the Reserve Banks has fallen by about 30 percent. Consequently, the Reserve Banks have taken major steps to reduce check costs, including reducing the resources devoted to this service by transferring check-processing operations from some offices to more centralized locations. Today, twenty-two offices offer check processing, down from forty-five just three years ago.

Other Reserve Bank services have been undergoing consolidation as well... The Reserve Banks have found it more efficient to have a few central offices perform certain internal support and back-office services--such as managing information technology and payroll--rather than having each Bank conduct them individually. This trend toward consolidation of operations has precipitated significant structural changes at the Reserve Banks. Staff levels have been reduced throughout the System. Several Reserve Bank Branch offices now have, or soon will have, no remaining financial services operations...

Because of these differences, it is incumbent on us from time to time to reexamine our operational role in the payments system.

These assessments have focused in the past, and should continue to focus in the future, on the Federal Reserve’s role as a provider of retail payment services. Large-value payments systems, such as Fedwire, are typically viewed as core, systemically important services, and they are commonly provided by other central banks around the globe. A rationale for the participation of a government-related entity, such as the Federal Reserve, in the retail payments system is harder to formulate.

Doubts that emerged about the soundness of clearing systems were some of the most frightening aspects of the {1987 stock market } crash. The changes to clearing systems have received far less attention than those to trading systems, but their long-term consequences likely are more profound. Such critical parts of the "plumbing" as the agreements between the futures clearing houses and the settlement banks have been clarified and put on a much sounder footing. In addition, many clearing organizations have established back-up liquidity facilities that will enable them to make payments to clearing members in a timely fashion even if a clearing member has defaulted.