Impact on US Banking of Payment System Changes

Banks will have to adapt product offerings and pricing as well as back-office processing to reflect these payment system changes. Since more electronic transactions are cheaper to process, as is the conversion or truncation (or both) of checks, banks that do not explicitly charge for transaction services on a per-item basis will see a reduction in costs. For banks that have explicit fees for each service (mainly banks that supply cash management services), it will be necessary to ensure that the profit margins on the electronic transaction services are commensurate with those on the paper transaction services. Banks of all sizes should be able to continue to serve their customers with a mix of capabilities, including ATMs, on and off-line debit cards, credit cards, and other services.

Bank regulators must be aware of the risk implications of the changes in payment systems and must adapt their approaches accordingly. Operational risk is obviously an important issue. In this regard, the ownership of funds transfer networks has changed dramatically as the number and proportion owned and operated by non-bank entities has increased, while those owned by joint ventures of banks have declined. Because the operation of these networks has a direct effect on the risk exposure of the banks, the risk management practices of the network providers may have important implications for the banking industry and the bank regulatory community. Additionally, further consolidation among network providers—especially those for ATMs, debit cards, and credit cards—raises concerns about pricing, service quality, and product innovation in a market for which bank regulators have no direct responsibility.