Pay It Forward

Q: You've commented that banks should run payments as a business. Can you elaborate?

Barron: Banks can no longer approach the payments system as an afterthought. It's not that banks have totally neglected payments, but I'm trying to get banks to recognize how fundamentally important the payments system is to every other line of business within the organization, and why it needs a strategy in and of itself. The payments side can be the Achilles heel of the bank, precluding the organization from being successful. Look at the fee income that most major financial institutions earn from their payments systems and you'll see that this amount matches a lot of other revenue buckets. Every organization out there ultimately will rely on the payments systems in some way, shape or form to carry out their business. The payments side of the organization needs to have a critical role in developing the overall strategy for the bank.

Q: Does that mean financial institutions should name a "payments czar"?

Barron: I don't care what the title is—payments czar, executive vice president or whatever. But this person should sit at the executive table and have the authority to represent that huge and critically important function of the organization. They need to make strategic plans for the organization rather than be relegated to a support function that carries out the decisions made by others in the organization. Some institutions have gone as far as to name a payments czar, but they are in the minority.

Q: How would you respond to the assertion that the financial services industry is unable, or perhaps unwilling, to make the leap to fully electronic processes?

Barron: That's a fair assessment. Banks are struggling with whether to get on the Check 21 bandwagon or to follow the ACH [automated clearing house] model. Most organizations, whether they like it or not, are going to have to support both models as we transition from paper to electronics. You are always going to have checks flowing into your organization, so you want to position yourself to convert those to electronics because you can collect them a lot faster and alleviate fraud. At the same time, ACH offers a lot of options, so it makes sense to adopt that model as well.

Right now, we are in a transition period. I really had thought more banks would be taking items electronically by now, but I'm not totally disappointed. We are making substantial progress as an industry, and, eventually, we will see more and more organizations exchanging image files rather than printing IRDs [image replacement documents]. In fact, some small banks have converted their entire operation to electronic. The larger banks have plans to convert, but are struggling to integrate the back-room applications needed to support that transition.

Still, Check 21 works great. During a peak day, we have about 2.7 million items representing about $14.8 billion flowing through the Fed on the Check 21 side.

Q: Will banks rely on the Fed for image exchange?

Barron: Whether they bypass the Fed or not isn't the issue. What's most important to me is that we have the most efficient, effective and sound payments system we can. We can accomplish that with direct exchange, ACH and other electronic alternatives that take us out of the old, traditional paper processing business.

Q: Why is it taking so long for large banks to convert their back offices to fully electronic processing?

Barron: When Check 21 was passed, we all thought that banks would be able to take advantage of the act within 12 months to 18 months. But most of us in the industry underestimated the complexity and the costs of converting our back-office operations from a love of paper checks to electronics. For example, integration with stop payment files and other files is complex and hampers a very rapid transition from paper-based checks to electronic payments.

Due to costs, banks are forced to manage this transition through incremental steps rather than converting the entire back office all at once. The back office can ask for millions of dollars to convert everything to electronics, but because they are not able to provide management with the revenue to offset those costs, other areas—such as lending and deposits—that can show revenues are awarded the budget dollars.

Q: Have you been surprised by the interest in remote deposit capture as a result of the adoption of Check 21?

Barron: Remote deposit capture is wonderful and a good example of what can happen when legislation is passed and creative minds come to play. We all thought that ATMs would be converted to remote capture devices, but I don't think any of us thought down to the level of the professional or retail office and how they may be impacted by Check 21. You can see how the effects of remote deposit capture will magnify over a period of years. This service could provide a more rapid transition from paper to electronics, but probably not in the sense we thought it would.

Q: Are there new applications on the horizon that will build upon the ACH infrastructure that financial institutions should be aware of?

Barron: ACH has stayed on the sidelines, but has been doing a superb job, growing at a rate of 21.1 percent in 2004 and 17.2 percent in 2005, according to NACHA. If everything goes well, NACHA will pass a rule later this year that will enable retail establishments to convert checks to images in the back office rather than having to do the conversion at the point of sale. This makes conversion a much smoother process and will facilitate an even more rapid adoption of ACH.

Q: Are there differences between what is happening in the U.S. payments systems versus what is occurring internationally?

Barron: Not really. I'm urging other countries to skip the step of printing IRDs and instead legislate that the image is the legal representation of the document. This will facilitate a more rapid adoption of Check 21 in those countries because converting back to paper is very expensive, manually labor-intensive and prone to errors. However, I don't want to appear that I'm not concerned about consumer rights. Consumers have the right to request that the check be printed as a paper document.

Q: When will the industry achieve straight-through processing and/or an enterprisewide view of payments?

Barron: I see a point in time, perhaps five years from now, when a lot of financial services organizations will be on a proverbial cliff—paper volumes will decrease so rapidly that institutions will be at a disadvantage if they don't have electronic systems in place. They will need to build them or outsource that function.

Q: What has been your greatest career achievement?

Barron: I'm most proud of the way the Federal Reserve and the team of individuals I work with responded following the events of 9/11, and our ability to work with the financial industry and keep the payments system flowing. And again, during the recent hurricanes, the Fed and its employees throughout the U.S. worked together with the industry to ensure that our financial systems were up and running to support the banks and meet their needs. That's what I consider our organization's finest hours. --Lisa Valentine