Risk management and nonbank participation in the U.S. retail payments system

The retail payments system in the United States has changed significantly in recent years. Advances in technology have caused a greater reliance on electronic payment networks. And the industrial structure of the payment services industry has evolved, as more and more nonbanks deliver payment products to end users and supply back-end processing. In general, these changes have made the payments system more efficient and given more choices to consumers and more payment options to merchants and businesses. ; At the same time, however, the rapid pace of change has introduced new risks to the payments system. First, as more and more banks market payment services to nonbanks and outsource payments processing, the differences in information possessed by payments participants can magnify difficulties in managing risk. Second, electronic payments have a significantly different risk profile than paper checks. Third, greater complexity of the payments network potentially reduces incentives to manage risk and may cause difficulties in coordinating risk mitigation. ; Sullivan lays the groundwork for a dialogue on policy to control risk in the U.S. retail payments system. He concludes that a thorough review of supervisory authority relevant to retail payments would be valuable. In particular, the original authority to supervise nonbank payment processors was established over 40 years ago, when the primary reason for establishing that authority was the use of computer technology applied to bank accounting systems. Is that authority adequate given the revolutionary changes in the payments technology seen over the last four decades?