NONBANKS IN THE PAYMENTS SYSTEM : INNOVATION , COMPETITION , AND RISK — A Conference

A Conference Summary By Richard J. Sullivan and Zhu Wang From the early days of automated card sorting to the more recent times of the Internet and check imaging, payments and payments processing have continually embraced new technology. At the same time, the industry has been shaped by its share of entry and exit, through startups, mergers, and the reorganization of businesses seeking the proper scope of horizontal and vertical integration. Many of these changes have introduced new risks to payments. In response, public policy has evolved to help manage these risks. These changes have enabled nonbank organizations to play a larger role in the payments system. Nonbanks have followed a number of pathways to more prominence: purchasing bank payment processing subsidiaries, carving out niches in the payments market through innovation, and taking advantage of economies of scale made possible by shifting to electronic forms of payment. The contributions of nonbanks are undeniable. They have introduced some of the most far-reaching innovations to the payments system in recent years, leading to greater efficiencies in payments processing. At the same time, nonbanks have changed the dynamics of competition in payments, leading to a significant change in the system’s risk profile. The Federal Reserve Bank of Kansas City sponsored a conference on nonbanks in the payments system in Santa Fe, N.M., on May 2-4, 2007. The conference addressed many of the key questions raised by the growing presence of nonbanks in payments. Have recent payments innovations been more likely to come from nonbanks? Have nonbanks improved or harmed competition in payments? Have nonbanks increased risk or helped to develop tools to manage it?