The Federal Reserve and retail
payments: a historical review
National University of Singapore, Singapore, Singapore
Purpose –The purpose of this paper is to provide a comprehensive historical review of the role of the
Federal Reservein retail payments in the USA.
Design/methodology/approach –It reviews the literature on the role of the Federal Reserve and
assessmentsof its involvement.
Findings –In addition to its oversight and operational role, the FederalReserve has conducted R&D and
facilitatedtechnology adoption. It has provided effective competitionto the private sector without subsidies.
Research limitations/implications –The Federal Reserve has served the public interest and private
networkshave beneﬁted from the “visible hand”of government.
Practical implications –Migration to electronicpayments will likely change its role from an operator to
setting standardsfor safety and security.
Originality/value –The historical review provides context against which the future strategy of the
Federal Reservemay be assessed.
Keywords Federal Reserve, Par-clearing controversy, Payments oversight, Retail payments,
Paper type General review
Payment systems are critical for the functioning of all economies. Wholesale or large value
systems underpin the liquidity of the economy as central banks use them to implement
monetary policy. Retail systemsallow bank deposits to serve as a medium of exchange, and
these are assumingmore importance as individuals migrate to electronicpayments.
While both systems beneﬁt theeconomy, they also increase risks. Wholesale systemscan
originate and spread systemic risk and operational problems in retail systems can lead to
system-wide risks. Central banks oversee, regulate or operate payment systems to reduce
risk and ensure that payment systems meet the needs of users and the wider economy.The
Federal Reserve is unique among central banks, as it “competes”with the private sector in
providing check clearingand automated clearinghouse (ACH) services.
This paper provides a historical review of the role of the Federal Reserve in the retail
payments in the USA. Much of the historical literature focusses on the non-par clearance of
checks before the institutionof the Federal Reserve in 1913. However, since 1913, the Federal
Reserve has played a variety of roles on the technology front.The empirical literature which
assesses the performance of the Federal Reserve is reviewed next. The ﬁnal contribution of
this paper is to provide context for assessments of the future role of the Federal Reserve in
the payment system.
The author thanks the Lee Kuan Yew School of Public Policy, National University of Singapore for a
research grant and Dr Lawrence Schembri and two anonymous reviewers for helpful comments and
Received16 September 2016
Revised14 December 2016
Accepted18 December 2016
Journalof Financial Regulation
Vol.26 No. 1, 2018
© Emerald Publishing Limited
The current issue and full text archive of this journal is available on Emerald Insight at: