>> can be what? >> completed. >> does that mean confused? >> he used interchangeably. >> but he wouldn't phrase it that way? >> the market coverage issue is the more important issue. >> did he prepare this at your request? >> i actually don't remember if he prepared at my request or independently but i do remember receiving it. >> were you aware that -- were you familiar with the fbi reports that cannot in 2004 that set mortgage fraud was becoming more prevalent? ..

>> were you aware that the fbi in 2006 reported that the number of suspicious activity reports around the mortgage fraud rose by 6700%? >> again, is not -- i am not familiar with that report. >> are you familiar with the report on interest only loans? or you aware that there was a large use of interest-only loans during that time? >> i am not sure that i was aware of the amount, but i was aware that there were different types of loans being offered in the marketplace, yes. >> were you aware that there was a substantial growth in interest-only loans during that time? >> but was not aware of the amount. >> for -- the i am asking if you

are aware that there was a substantial growth, not if you knew the percentage. >> yes, i was aware of that. >> i am aware of that. >> 2004 and 2006 do not the silent second hour? >> i do not know. >> were you aware of the second lien? >> and familiar with the term yes. >> , yes. >> there is an e-mail

standard is in poor and e-mail the exhibit 14 from richard got to mr. gutierrez. do you know, who they are? >> no i do not that email says there has been a rampant appraisal of underwriting fraud in the industry for quite some time as pressures mounted to the the origination machine. would you agree there was great pressure to feed the origination machine? >> i am not aware of the specific. >> but in general were you where there is a huge demand for mortgages, the securitized mortgages. >> i was aware of the growth. >> and for that purpose? >> and the demand and would for investors? >> and wall street to securitized? >> yes.

>> were you aware of this exhibit five i don't know if i ask you specifically. version six could have been released months ago i don't know if i ask you specifically about that. they did not have to massage the numbers and all 10 members. did i asked you whether or what your reaction is to that? >> no. i am not familiar the topic you are referring to or the

people they are addressing. >> what is your reaction know that you read that something would have been done otherwise could not have been done because the standard importers employee had to massage the subprime alt a numbers to preserve market share? what is your reaction? >> it is certainly troubling but in a larger context i am not what the subjects might be addressing but to the subjects that might be a concern i would suggest that would be right reviewed and it should have them brought to my attention. >> exhibit number 87 is the subject we talked about with the earlier panel there is a message and exhibit number 87 pleading for resources.

short staffed, analyzed some of overwhelmed exhibit number 91 and numbers show the overwhelming shortage of staff both due to the ratings but also to the review. were you aware of that shortfall of the staff at that time? >> certainly early 2007 the number of securities bregenz starting to show two-tier 18 performance data that the number of employees needed for this particular group needed to be increased and as i understand from the testimony this group did receive the needed resources. >> that is not of the testimony that you and knowledge that they were short of resources and tried to say they were short of

resources. exhibit 90. mr. mcdaniel stake a look at exhibit 90 it is the moody's document from the moody's employee january '06 i think we need full functionality of the model especially if we are to remain short staffed for yet another year. were you short staffed january 2006? >> we had stress on our resources during this point* absolutely. >> you are making a pretty good profit? >> we were profitable, yes. >> toolkit 2007 if you would mr. mcdaniel. >> i apologize? which exhibit? >> 91.

had the analysts are overwhelmed. >> as i remarked to there were definitely resource stresses that this point* in time. people were working longer hours than we wanted to and more-- of the week than we wanted them to. it was not for lack of having open positions but the pace at which the market was growing it was difficult to fill positions as quickly as we would have liked. >> did moody's reevaluate wholesale? or just certain transactions?

>> we monitor all transactions. >> did you evaluate the entire cbo four nds? >> i apologize. >> you have a new metric or a new model they were using to rate new securities, will you go back and use that model on existing securities? >> it would depend. >> did you retests the old deals? >> in many cases we do and some we do not. >> standard emcor? >> there are two different processes. the surveillance group was looking at actual performance data to

determine if there would be any impact to the rating. >> you did not look at the entire rating for the entire issue? >> every issue. in terms of the actual performance data. >> you went back and used the new model or did you grandfather? >> it was a different procedure for existing transactions to look at actual performance data and to the extent the criteria was changed on new shoes, it would always be disclosed to the marketplace to what extent any past transactions meet nea criteria change or modification. >> you did not retest you just disclosed the new rate teeing? >> the new criteria and how it would impact securities to be radiating going forward. >> that is the reason you did not go back and apply

your new model that you new to the old deals because of the shortage of resources? is that the reason? >> no. >> glittery since you did not do that was a shortage of resources? >> there are a number of reasons. >> was that one of them. >> i do not believe it would be. [inaudible conversations] >> this is exhibit 62 the

standard and poor exhibit. at the bottom of page one how we handle existing deals and there are material changes and if you look at the top of the page to with standard emcor i did not know the situation where there were wholesale changes to existing ratings or even institute a new criteria the two major reasons why we have taken this approach is lack of sufficient personnel resources are you familiar with that document. >> no. i just reviewed it this week >> this is not true? >> this is not my a

understanding of how securities were surveiled. >> looking at exhibits 92a mr. mcdaniel, this is a focus group of associates survey and look at page three apparently were there with a series of interviews of focus groups and look at the findings most indicated the business objectives included in increasing market share and coverage. do you see that? >> yes.

[inaudible conversations] >> after your mass downgrades in 2007 during the last six months moody's rated 500 subprime securities and s&p rated over 700 the worse still allowing these dubious mortgages to be put into the market. have your decided they were high risk in july? had you already reached that conclusion? >> now believe there were new transactions. >> not in the last six months? >> not that i recall. >> i actually departed s&p

beginning of september so i am not familiar of the last six months of transactions. >> moody's did rates that. >> i apologize i do not recall that. >> but i guess in july there was the massive downgrade of securities. were you consulted when that happened? >> i was aware of the downgrade. >> were you consulted? >> not from a credit perspective if it should happen or not i was in form seven have an understanding the action they were taking. >> it was not your job to be part of that decision? >> that is correct. >> did you see the impact of the mess downgrades on the market? were you aware of the huge impact it would have a? >> we were observing deterioration of the performance of mortgages.

that is what had the impact on the market i believe. >> the subprime market collapsed. >> we were recognizing the deterioration of the rating and downgrade not causing the deterioration. >> you did it one year earlier when the market was going under if you did that over the year to take your the warning signs seriously and did downgrading then maybe there would not be such a mass downgrading one year later. that this whole issue. i'm sure you will not agree with that but nonetheless factually the case that you had the information and were applying a new model to new securities your reading and did not three rate the old securities according to one of the documents because you did not want to apply the resources to do whatever the reasons but in any event you did not do it and as a

result it was in a massive way that had a huge effect if you would have done it in a different way when you first got affirmation with those storm warnings i think the argument would be much more persuasive that you would not have had this massive downgrading that had such a huge impact july 2007. i'll be happy to have you comment on that but i don't think you'll want to agree with that. >> maybe you do? >> we were managing their rating system to actual performance data what we have seen in the previous recessions when we took our actions. >> july of 2007 david goldstein? do you know, who he is correct. >> no.

>> do you know, -- ? >> no. >> what about david oman. >> no. >> david bawden? >> no. >> and email dated march 20, 2007. [inaudible conversations] aniston p employee rights in a meeting she requested we put together a marketing campaign around the events of the subprime market. this was march 2007 the sooner the better. why would you want to put a

marketing campaign march 2007? >> i would not use the term marketing campaign. i did ask for more responsive communications campaign around the subprime market and the followed along with a teleconference that we put on just about this time thereafter. >> you did not use the terms that they said that you use? >> i don't think i would have used that term it was clearly a communication effort. >> going back to the question of what happened in the last six months of 2007 after the crunch came one of the last deals that was

rated citigroup mortgage loan trust s&p and moody's rated the deal december 2007 i don't have any exhibits 32 look at. december 2007 months after both companies had downgraded thousands of some prime r. nds were you aware that each agency gave a aaa rating to $686 billion citibank subprime deal december 2007? were you aware that? >> no. >> was no longer with the company. >> day press release from your firm mr. mcdaniel, when you rated the city bank deals that you expected heightened losses and it accounted for the structure of the deal a

37% loss they exceeded any expected loss. but does it surprise you you were still retain those subprime rmbs december 2007 after july? >> i am surprised there was a subprime rmbs security issued in the market to to the extent that we have updated the views and felt that those views would be sufficient to provide protection for the ratings assigned. i can understand why the rating committee would do so. >> but may go back again.

a lot of interesting thing is your chief credit officer wrote october 2007 both issues and the weaknesses the organization needs to address after the subprime market collapse. one of the things that he wrote under market share share, paragraph five come ideally competition would be primarily on the basis of ratings of quality that is ideally with a second

component surprise him third of service but unfortunately the three factors is proving the least powerful. >> two lines down he said the real problem by awarding not mandates soloist credit enhancement needed for the highest reading. unchecked competition of this basis place the entire financial system at risk the turns out ratings quality has surprisingly few friends issuers want high ratings and investors to want the downgrades short-sighted bankers want to gain the agency's $0.4 a few basis points and execution. do you agree with that?

>> and that exist now. >> analyzing paragraph seven persisted areas near the top moody's had erected safeguards from solving the market share problem from lowering standards and these protections do help to protect credit quality and ratings are assigned by committee, not individuals however entire committees and entire departments are susceptible to market share

objectives. do you agree with that? >> in terms of financial incentive, the analyst would not be rewarded for market share or penalized for lack of market share. and at management levels, there is more incentive associated with how the overall from does financially so to the extent that there is greater paid market share as opposed to market coverage, that would have some impact on compensation at management levels which is why we need opprobrious safeguards and checks and balances. >> do agree entire committees are susceptible? >> no. i do not agree. >> they are not standing committees they are ad hoc committee is.

methodologies and criteria are published to apply boundaries one discretions but then he says however there is plenty of latitude within those boundaries record do agree with that? >> i am not sure what he means by market influence why do not know if i did three or not. from a credit policy perspective we want to be in a position to just say no to the market opportunity bracket would be imperative to do so from a quality perspective. we have done that in the

past and the have examples and without simplex sitting whole market sectors. would you agree that is the unsolved problem? >> it is two the extent that the market is not clear where it -- rewarding ratings quality if we don't have customers for the highest quality ratings of this is the ongoing problem. >> you have a town meeting at exhibit 98 managing directors september 2007 page 632004 / 2005 with the

subordinated tranche that the s&p went nuts. everything was investment-grade that it did not really matter because the machine kept going. what do you mean by that? >> pretty powerful stuff. >> i was talking about the subordinated tranches of mortgage-backed securities area we had a different opinion from our competitors and we were obviously not being persuasive with the investor community and our more conservative opinion and it was having an impact on our business. we did not have as much coverage as a result. >> as much market share? >> but really i was talking about coverage.

and the reason i keep making the distinction between market share and market coverage is that most people would associate market share with paid coverage and i am talking about the coverage necessary to provide a comparative rating system comparing one security to another. >> you are part of the competition percoset it says as in the went nuts everything was investment-grade. >> i don't know what he is referring to. >> it did not matter nobody cared because the machine kept going. boy is that true. i wish you would just say yes, i stand by that and that got us into trouble. >> this sector i was talking about, i do stand by.

>> ratings kept turning now with four models. i will use your words i think the agencies went overboard. you really went off the deep end. here is the reason. you had four models for the new structures and too few resources you are willing to commit and to much pressure from investment bankers and then with the mass downgrades july 2007 it greater the market. this is what one of the managers are managing directors said that the town meeting. what he or she wrote, what we did not envision was that credit would tighten after being loose and housing prices would fall after rising and all economic events are cyclical baubles inevitably be burst. then what happens and '04 he

asked then to for the leaders to be candid and to acknowledge what the problems are and what had happened. you have a long way to go. and acknowledging what happened to your agency. this is what he is saying and i happen to agree with him, that the moody's franchise value applies to staying ahead of the pack it just happens that you guys had a town meeting i think the truth of the managers applies to both. he said the franchise value is based on staying ahead of the pack but instead a lawyer at the middle of a pact that would like more candor from senior management of how we will address them in the future. >> that is one of the best

comments i have seen and i hope you would see it that way but i can understand that may not be the case. the sec in ascorbate i believe is conducting an investigation of us in the and they found many problems including staffing levels may have been impacted various aspects of the ratings process. is that true? the sec made that finding. >> i don't know. >> they found us and the major changes to the rating criteria without publishing those changes? it like moody's had done documented policies and procedures for reaching rmbs and cdo. >> i am not familiar with that finding.

>> the sec found relative to moody's had inadequate staffing levels which impacted the rating process and using unpublished models and movie analyst could be influenced by the fees charged to the issuers that there were able to find all the records and moody's failed to retain documents certain significant steps of the rating process that made it difficult for the staff to have compliance with policies and procedures and identify the factors considered in developing a particular reading. are you familiar with that? >> i am familiar with the sec examination and overall findings, yes. >> did you agree with them? >> the actions that the sec asked us to take we took so we are complying.

i will complete the panel but i have one very brief statement. the subcommittee has completed three of the four hearings examining some of the causes and consequences of the 2008 financial crisis broke last week on tuesday we looked at the role of high risk mortgages last friday looking at the bank regulators to a real attack point* it ray taye agencies has not been a pretty picture so far i don't think it will improve frankly at the beginning of the senate debate on strong financial reform next week does give us hope.

final hearing of this will be next tuesday when we look at the role of investment banks and goldman sachs being the case history. our investigation and is with investment banks such as goldman sachs were not market makers helping clients they were self interested promoters and risky and complicated schemes and a major part of the 2008 crisis they bundled toxic and dubious mortgages in the complex financial estimates and i got credit rating agencies into top quote -- aaa's securities sold and spread restaurant the financial system and betting against the financial instruments that they sold them profiting at the expense of their clients. i am introducing into the record four exhibits that we will be using at the tuesday hearing to explore the role

of investment banks during the financial crisis. we will be putting those exhibits on the subcommittee's website tonight or tomorrow. we think this panel. we appreciate you being here. we have a great deal of documents and you have cooperated. we stand adjourned. >> thank you, mr. chairman. [inaudible conversations] [inaudible conversations]

the. >> good morning we will start in just a second if you could grab your seats.

good morning. thank you for coming to the american and enterprises to do. my name is alex brill i am a research fellow here at aei we are talking about digital money. before it introduced the keynote speaker like to take a minute to set the stage for the topic. this conference is about a portion of our economy that affects us every day but outside the economist studying the issue and the regulators and lawyers and the executives to lead the industry this topic receives little public attention but in fact, permeates the economy. how we pay for things we buy matters. but naturally we focus more often on the purchases themselves similarly when mayor and a car or on a plane we focus more a sign that the destination to get home than a means of

transportation but just as the road system and rail system and air-traffic control system hour imports and, of vital to our economy, so was the payment system. it too is part of our infrastructure. in the transportation sector technology is used to address to get ourselves and our things efficiently safely and quickly as possible. says the gps system and ultimately has technology that has become popular and affordable to consumers prefer in the payment system technology has also reduced cost, improved convenience cash and check can be thought of as the car and bus and credit cards and debit cards are the high-speed rail but wakashan checks have a place credit

cards have been an improvement but limitations exist as well. of course, we cannot be unaware of the inadequacies of the current transportation sector for rose services come of limitations and mass transit to name a few and as congress delayed action on the highway reauthorization bill, we can ask if the highway trust fund and department of transportation and gas tax are helping your hurting the infrastructure network to modernize. the means of transportation are shifting and becoming more diversified and more digital and electronic. videoconferencing and webinars can be somewhere else without leaving the office the amazon kindle and die pad can transform books into our hands without leaving the home. these means spare us the

inconvenience of physically traveling in the same mood digital money paid out come the bill may later in other new technologies are ways to be saved quickly and efficiently. olick and the technology trends and the associated policies and regulations we're fortunate to have a great group to have a keynote address we have geoffrey gerdes, robert ballen and wayne abernathy. josh is the director from visa inc. and responsible for the executive management team and sits on the

governing operating committee and primary responsibility for uprising management and the board of directors on a global competition that legal and regulatory matters and the company's principal voicing competitive issues and rather than these matters he will take up a few questions and will have another opportunity for q&a after the panelist presentation. josh, is a pleasure to welcome you to aeiismism. [applause] >> it is great to talk about paper based currency to digital currency and what they can do to accelerate the shift. i am proud to say we work with government agencies in many countries around the world to help them drive efficiency and their

operations everything from cutting the cost and purchasing aircraft parts to the issue of child support and route we agree on the importance of digital currency we do not agree on the execution of a reformer go into details of like to take the step back and consider the trade transformative nature of digital currency. >> i admit i am biased but i believe there is a strong case to be made that there are few innovations that have fundamentally changed basic aspects of social and economic behavior that they can truly be called transformative. the emergence of mobile communication as one example the cellphone has affected the lives of the vast majority of people on the planet and people virtually at every income level enabling them to connect secure more reliable than

ever before. of the web has split previously unimaginable quantities that the information at the fingertips of billions and appropriately we as a society dedicated great deal of time and attention to thinking about, discussing, analyzing , debating the future of these technologies. volumes have been written about how mobile technologies and the internet have transformed almost every aspect of human life but i would argue the shift from paper to digital currency has a transformative evolution that has taken place with remarkably little notice. let me take a few minutes to try to amplify what i mean to talked about the chance formative nature digital currency think cal e-commerce has transformed our lives.

in india they can buy a train tickets in a few minutes then standing in line six hours to do it in% we can have your hotel meals and taxis using your card without having to exchange any currency. i am one person does not lamented the passing of traveler's checks. what do these 10 million of other anecdotes bubble up two anne hathaway quantified the broad economic value of digital currency a recent study by moody's economist.com commission by visa concluded that the digital currency the debit and credit card usage contributed the incremental 1.1 trillion dollars to the global economy from 2003 through 2008 incremental 1.1

trillion dollars worth the value come from? essentially three areas. first digital currency means they have more convenient access to resources and it is hard to overstate how transformative and that access is in terms of consumer spending behavior. for those of us who have lived with payment cards most of our lives, it is easy to take for granted the freedom for not having to constantly consider where the you have enough cash in your pocket to pay for a purchase or reconsider a transaction out of the hassle of writing a check. but those limitations have historically been a major source of transaction friction which translated into billions of dollars of losses. digital currency access lubricant for transactions large and small across the economy. for example, in new york city especially manhattan

the iconic yellow cab is a constant sight. there are 13,000 licensed cabs transporting millions of passengers around town every year and taxis are the cornerstone of the city transportation infrastructure making it possible to keep a place as densely populated as manhattan moving efficiently. also the source of employment for thousands of people and a business where constant handling of cash has historically been the only way to earn a living. for drivers, that meant having to carry enough cash at the beginning of each shift in order to make change for passengers but beginning 2004 taxis began installing card readers in the passenger area and a day of 13,000 taxis in the city have the reader's allowing passengers to use digital currency to pay for the ride and a matter of seconds pickens -- and no more side

trips to the bank and more efficiency for taxi drivers and consumers. this is of course, is one small example. but multiplied by hundreds of thousands of cab rides tens of billions of coffees and quick service mailgram book purchases, movie tickets, you get the idea and now add that to the trillions of dollars of transactions that take place on line that are only possible with digital currency. and you begin to understand how access to resources online and off is a profound driver of economic growth. the second key contribution to digital currency makes two efficiency is the reduction of the gray market transactions. the fact is the cash transactions do not leave your record of the merchant chooses to conduct business off the books using cash is a simple means to ensure the

tax collectors will struggle to piece together the evidence. there's a reason shady operations are referred to as cash only businesses. digital currency makes it harder for trans day's transactions to take place off the books and expands legitimate economy and the tax revenues collected on transactions. while this value is relevant to around the world is particularly important in emerging economies with deeply entrenched great economies and also the increasing the rubble meant issue to governments around the world as post recession tax revenue shrinks. bringing those billions of dollars of transactions into the formal economy not only the this to increase tax revenues but also allows for better statistical gathering and improved consumer regulation and a wide post of fundamental benefits that

the developed world may take for granted better vitally important for sustainable development in emerging markets. finally, most importantly, digital currency increases economic efficiency by bolstering confidence for both marchant and consumer it is a little difficult today to recall a time when check balancing was a loss to merchants and banks and consumers alike but that was the case parker and the bounced checks continue to be a source of millions of dollars of losses each and every year. digital currency largely eliminate those problems inherent in the systems is a guaranteed emergence they will receive payment even than the event of consumer defaults on credit and the guaranteed liability protection from purchases of their cars. never was this more

important than and hopefully soon to be ended economic crisis but certainly the ongoing economic crisis. while consumer struggle to get by during the downturn financial restitutions excuse me instruments like credit cards often bridge the gap when times were tough. goods and services were sold merchants got paid. instead of a balanced check they receive a guaranteed payment in return for accepting credit cards the billions of dollars of losses observe during the downturn funded merchant businesses large and small had they been absorbed by the already suffering merchant industry, the results might have been catastrophic and while those losses were painful for the businesses and a significant chalice to the overall

economy imagine the alternative of a breakdown of confidence between buyer and seller. and retrospect there is no doubt the digital currency system proved far more resilient. certainly digital currency cannot eliminate all confidence and in particular fraud and theft are constant concerns that cannot be entirely eliminated but by protecting both buyer and seller from serious personal risk the digital currency system creates a safety net of confidence that allows the country to run more e efficiently so it is clear the shift to digital currency creates value and improve efficiency and makes the economy is more dynamic and more resilient. but what is truly so exciting to me about the digital currency revolution is we have only begun to scratch the surface of that

value and today digital currency represents a low less than one-quarter of all global transaction volume with cash and checks still by far the dominant form of payment worldwide but the trend line is pretty clear. between 2003 and 2008 card based transactions grew by 13% and over that same period cash transactions fell from 50% of all global transactions two about 44%. put simply what this trend represents is a collective choices of hundreds of millions of consumers and merchants in virtually every part of the world making a choice to shift the increasing share of spending on to digital currency platforms. too much the same way as mobile phones are being used in innovative and surprising new ways by businesses and individuals around the world so too is digital currency

unlocking value in unexpected ways around the world. here in washington u.s. federal government is finding realizing digital currency purchasing cards for procurement is leading this savings of 1.7 billion dollars per year according to a study by the g paygo. in states like nebraska the program is limiting the disbursement of crossbred $0.59 per using reloadable cards rather than mailing checks. in developing countries around the world microfinance organizations are partnering with visa to use digital currency to halt the smallest merchants in the most remote areas tap into the global markets and efficient system is. and pakistan in the wake of fighting over 1 million internally displaced persons

digital currency was used to make aid disbursement faster and more accountable. the pakistan national identity agency enlisted the help of the united bank ltd. , one of the largest fall say this stage full-service banks and pakistan to get funds to refugees who have fled the northwest frontier province to escape areas of conflict. united bank ltd. work for the agency to issue visa prepaid cards at convenience sites to allow them to buy food and necessities. in addition to enabling disbursements quickly the choice of visa and the network ensured they could account for every penny of financial aid to make sure went to the right individuals to provide the right benefits. the situation and pakistan represents a true innovation.

and it is just one example in one country and based on one digital currency platform common name the visa but in other markets assimilate challenges such as haiti, cuba visa in discussions with our clients and government entities to establish a similar to restructure to the one in pakistan and we eager to replicate our success so financially under sir people can access their resources quickly, conveniently and securely and while i am hardly modest about visa on ambitions the fact is the digital currency space is rapidly becoming more competitive with new entrants around the world developing smart new tools to transfer value. that competition is a vital and healthy part of the digital currency revolution and it brings me to the issue of what role government can and should play in the future of electronic payments.

protecting fair market based competition is clearly an important role that government should play. enforcing the laws that are on the books and ensuring the environment in which small upstarts and established players can compete on a level playing field ultimately benefits all stakeholders the corollary to the principle is government must resist the urge to put its finger on the scale and the marketplace for the benefit of any particular participant in the system. the cautionary tale is we spend a lot of time in the country last several years speaking with regulators and the central bank and reserve bank and the reserve bank decided to intervene in the marketplace at the behest of merchants and essentially impose government price controls on transaction fees associated with car use. the regulator also freed

merchants to impose surcharges on consumers who use their cards. the intention was to lower prices for consumers on the theory that savings to reduce transaction fees would be passed on to the customer. but the experience has been quite different the unintended consequences the opposite of what the regulator thought to achieve actually occurred. by the regulators on assessment prices have not gone down four australian consumers but annual fees on cards have gone up and benefits have been reduced and many merchants including the flagship airline qantas have impose fees on consumers at checkout for using their card and consumers are not happy. the bottom line is this experiment in government management of digital currency has generally harm consumers while creating no

clear social benefit. the lesson of these experiences is not the government has no role to play but it must recognize the inherent risk of upsetting delicate market forces. in keeping digital currency secure. to be sure, the burden of network security must be born first and foremost by digital currency networks, including visa. we are investing hundreds of millions of dollars to make our networks among the most secure and robust in the world. we are working with merchants and others who handle consumer data to harden their systems, and ensure compliance with industry security standards. and we are constantly seeking to educate consumers about steps they can take to keep themselves secure. but ultimately, criminals, fraudsters, terrorists, hostile powers in other threads will always be there.

and so government and industry must work in close collaboration to ensure that our vital networks, including our digital currency networks, are secure and that cripples are aggressively pursued and brought to justice. in this fight, the stakes simply could not be higher. according to that same movies economies.com study i mentioned are there, everyone% increase in digital currency transaction volume translates to about two and half basis points, 2.4 basis points to be exact, i think increase in local gdp growth. let me say that again. so every 1% increase in digital currency transaction volume translates to about two and half increase in global gdp growth. given the secular trend of the past decade's showing annual average growth of 13% we are

seeing a contribution of 30 basis points in gdp growth just through the increased economic efficiency that comes from expanded use. these trends are the definition of progress. these trends are the statistical expression of men and women around the world who can enjoy a higher quality-of-life who can build a business who can make choices as consumers who can benefit from more responsive transparent government services and who can feel more confident and secure thanks to the technological revolution that is slowly but surely changing the world. so long as stakeholders in the system continue to recognize and appreciate that value and ensure government policies that nurture its expansion than this value will continue to grow. that is a topic that deserves and demands our attention. and it is in that spirit i am so pleased aei is hosting today's

discussion in what i hope will be but one of many such forms in the months and years to come. thank you very much. [applause] >> thank you. we have time for a few minutes if folks could raise their hands who've got a couple of people helping with microphones and when the microphone comes to you don't start until the microphone comes. please state your name and affiliation and please to ask a question. in the back. >> i am a senior scholar at the woodrow wilson center. having been watched this transition i am concerned about and how it affects the consumer and that is what i would like you to address. i have seen the interest of the automatic debits by places you might normally write a check for every month. when you are writing a check you

could decide whether to write that check and to cancel the services you could not write the check but i've seen in a lot cases you give the company permission to do an automatic that it and they do it every month whether you want them to or not if you have the funds available or not or cancel the service or not and i haven't seen protection against that happening. could you address that? >> i would be happy too. even though at these our customers are at financial institutions we are acutely aware that the end users of products that we facilitate our merchants on the one hand and consumers on the other hand so we wake up every day thinking about how our products and services can benefit consumers and enhance their well-being. i think the digital currency has brought incredible value to consumers.

imagine the days where you had to walk into a store with only cash or check as resources available to you. cash can be stolen. kashechkin not be enough to support what you intend to purchase once you arrive at the retailer. checks can bounce. you could buy something which is not what you intend and you have no recourse. so with networks like visa they provide a consumer with instant access to credit or instant access to his or her own account. if you buy something that's fraudulent, if you buy something that isn't what you have intended you will not have to pay for it. that in and of itself is an unbelievable enhancement to how things were in the past. if someone steals your car and uses it you will not be liable whatsoever. we think that it also enhances the speed of the process you've probably seen some of our ads

about speeding through the checkout lane has perhaps a bit of hyperbole but you do get the point that increases efficiency. it also increases ability to keep track of your records. with respect to the particular question about automatic dennett systems, those are things you can support your financial institution and with the appropriate merchant. my understanding is in most of the situations if not all of the situations the consumer does have the ability to cancel the automatic deposit or debit. that isn't something that we do. that is something that is between the financial institution and merchant. but we do not eckert visa condone any practice on the part of any of our members or inducers so if there is an instance that is a problem for the particular consumers i suggest he or her contact their

financial institution and make it very clear the instructions regarding any kind of automatic debit program. >> thanks. we will come out to the other side. the gentleman right in front. >> boreman coats, monetary authority. i am a huge fan of all of this and appreciate your comment. i wanted to challenge the first of your three areas of savings which is essentially facilitating people to purchase more, consume more than they would have for an already over leveraged consumer where saving rates are thought to be too low while this does facilitate consumption moving it is questionable whether it belongs in the tough column rather than the negative column. >> thank you for that question. i believe that what we do is we provide a consumer with choices.

among those choices is whether to extend his or her own credit facility beyond what might have been available otherwise. i think in terms of how the consumer uses that option now the is a legitimate question and i think of whether a particular consumer overextends himself or herself is a very serious issue. but i would also say that we are very proud at visa that we pioneer the debt it category. you hear a lot about interest-rate practices, overextension of credit, some of the things you are mentioning, and at visa we were the first to go into the dead in a way and did it is simply access to your own account, funds that you have

so who mitigates the question of over extension of did it come over extension of your own credit. i should say by access to your dda account and a debt that it doesn't carry with it interest rates and the types of fees' you see with credit, so we think that the category of -- is a very important part of the business globally just the past year in fact our volume of the visa transactions in debt it exceeded credit for the first time ever so we used to think of ourselves as a credit card company we no longer do. we are a digital currency company and did it is a huge part of our business. >> the gentleman next to him afterwards. >> banking consultant. i am a great fan of electronic payments. i try to set up as many automated payments as possible. but i run into three instances in of the recent years, which

suggests actually in my case a move back to cash. my question relates to what the credit card companies are doing to deal with these three barriers i see number one since the surcharges of the transactions, when i go to europe now ipod them out of the atm every couple of days rather than subject myself to the 2.8% surcharge. so number one, what's going to be done to get rid of that? number two, the new york taxicab's it takes longer to get out of the cab and you are charging -- i gave up on the credit cards and pay cash like i used to. number three, i'm running into more and more retail outlets particularly small transactions that say -- many of those don't take amex the table to decide and mastercard. but i find a strong preference for currency because of the

expense of a credit card transaction so my question is what are the credit card companies, excuse become a digital currency companies doing to overcome those specific barriers reducing the cards instead of the green stuff? >> thanks for that question. i think that in respect to traveling abroad and getting cash whether it is the year of or what have you that for example using your card at an atm machine is the least expensive way for you to do that. remember the days of traveler's checks, remember the days of exchanging cash people still do that. but digital currency is the least expensive of those options and so we are very optimistic about continued growth in that sector. now there are various that might

be put on by a serious financial institutions and all i can suggest to all of you is to shop around. it's a competitive environment in the united states alone we have something like 10,000 issuers. there are many acquirers if you happen to be a retailer shop around for the best deal. it is a competitive market. now i -- my experience must be different from yours. i just give them my card and a slight and i out of their. so i will have to look into that because i was not aware some of them are slow. i thought they were incredibly fast and then with respect to the merchants imposing surcharges we are extremely adamantly and passionately opposed to that. merchants should bear appropriately some cost for accepting digital currency that drives tremendous benefits to

them. there are some who like a free ride and would rather not pay anything for digital currency. again, this is a competitive market and you have to balance the benefits they receive with the cost to them and make a judgment about whether it is fair. i think it is extremely fair. some merchants try to steer towards cash by imposing surcharges at the point of sale. that actually violates the rules and we have those rules for a very good reason, which is the surcharges harm consumers. we care very much about consumers. we don't want to impede the ability of consumers to use those cards. and again we think the cards deliver tremendous value to the merchants that far exceed their relatively modest cost. >> i want to take two more questions. my own and the gentleman in the

back and let me just ask line and then ask your zandt we can respond to get there. you mentioned the regulatory challenges in australia and what happened there and i am just wondering as a multinational corporation looking at your business activities globally from a market perspective how are things here in terms of the penetration rates of digital money and activities and forces elsewhere in the world, where is there amount of digital money and fastest growth and how were we stacking up? but needed the other question. since i am with african development center. thank you for coming. my question, i am originally from nigeria. if you are in the continent of africa it is difficult to use credit cards. that's create a blockade if we looking at the global rate over a quarter of the expansion into the virtual industry how do we

in africa able to offer this kind of systems we can give them to the global economy? >> thank you for both of the questions. let me try to answer yours and then i will answer his. by far the biggest penetration and the most widespread use of the products is here in the united states. this is where we were born. we can out of the bank of america card and we've been at it the longest here and have the largest product suite. however call our growth places where we are growing the fastest tends to be places like asia pacific, latin america. so when you look at something like australia where the regulators took in my view an extremely ill-conceived course. thus far they've refused to back down and you look at the empirical data.

with the reserve bank of australia thought was that by artificially suppressing interchange it would somehow benefit consumers and they were also hearing from the very few because in australia the merchant population is fairly concentrated. merchants who said what we would like you to artificially lower our costs. they did artificially lower the cost of the retailers. so the retailers and the austral the rpf was for digital currency and retailers elsewhere in the world. but not surprisingly those retailers didn't lower their retail crisis. they didn't provide extra coupons. they didn't provide a trip peter or anything of the kind for consumers so consumers in australia to get in the short one-way fuel and then secondly the rewards portion of the cards were rolled back that these were increased so that consumers got

his second wave in australia. so i am very hopeful that over time we will be able to reach some accommodation with the reserve bank to step back from the regulation. they've indicated at one time they were interested in that although i haven't seen a lot of progress over the last couple of years but returned to the gentleman's question in the back about nigeria and africa. it's true in many parts of the world particularly in developing countries the card is mostly a cash access device. it's mostly an atm device to get cash. it is in its infancy. the gentleman here elude it to some of the positive and negative aspects of credit particularly for people who are not of great means and don't want to get in a situation they overextended credit. did it is a perfect means of

driving growth and engine for growth in places like africa and places like central europe and places like latin america. so we at visa are committed to growing that the infrastructure in africa we are now a global public company, so we look at everywhere around the world and we try to allocate resources and i can tell you that africa is a big priority for us. >> josh, fix for joining us. [applause] reflect her right away to our distinguished panel with us this morning. i asked each of the panelists to speak for 12 to 15 minutes and we have a nice diversity and i will adjust interest in quickly and we can begin. jeff is a senior economist in the payment system studies section of the federal reserve

board. economists and several studies conducted by the board, she is the primary responsibility for analyzing trends in the mall and cash payments in the united states. in the middle is the founder of the law firm. he represents major banks, thrifts and insurance companies and securities firms. at the firm and advises clients and financial-services law and regulation. previously in the early 80's, bob was in the general counsel's office of the federal reserve board and responsible for the counseling of the board on legal issues a rising in connection with payment activities including the fed wire, check collection and the automated clearinghouse services. and bobbit is the pasture and of the payment subcommittee. to my immediate right, wane has been the vice president for the regulatory affairs at the american bankers association since february of 2005.

at the aba he oversees the groups to deal with policy developments regulatory issues and bank general counsel economics security investment and risk management. before coming to be aba, wayne served as assistant treasury secretary for financial institutions made before that served in a number of positions of the senate banking committee. we are going to start with jeff to get a little bit of the economics overview and we are going to proceed down the line. jeff, thanks. >> good morning. i would like to thank alex and aei and the organizers of the conference for inviting me and a very distinguished panel. i am going to step back a little bit from the discussion that we did from joshua and give us some background on the u.s. economy and the way the payment system fits into the u.s. economy.

and first d-tn overview of what we are doing. and alex has done a good job telling you about me, so i will follow-up with his comments and point out that my opinions are my yonah today and don't reflect the opinions of the federal reserve board. moving on to the key messages as i figured out how to use this device. first is pretty clear that technological innovation has dramatically changed the u.s. payment system over the years. we have new ways to initiate a payment and new ways to initiate them coming on line all the time. each of these instruments have different properties. the properties of the instruments affect choices and

as new instruments get introduced it's important to keep in mind that the convenience and risk trade-offs associated with them change. there are factors that affect all of this obviously and i've listed technology clearly as an important thing and digital money conference. but the preference is the users to read today we are talking about what we had to fit call retail payments. we are not really talking about in our bank payments or large payments. preferences of merchants and users are important. there's also a person-to-person payment options available today. beyond flood traditional checks and cash the people have always been able to use. and regulations policies industry practices, just what people are used to will have an

affect on where we can go when we get up in the morning and what we can do next. it may not be an immediate transformation to a whole new world and also one of the major points i want to bring up is that the infrastructure, the electronics infrastructure of the world we've come into the computer age, the payment system is falling our ability to use computers and all sorts of different ways and it is in trouble to become integral to that transformation of the digital age. okay. and on the next slide, is going to step that on the central bank economist. i would point out a couple of things about money but there's a lot that could be said and i think i will not spend a lot of time on it, but reminding people

money is a medium of exchange. it is a unit of account, historic value. there's a lot of different functions of money and of course we are talking about currency everybody is used to the currency and claims that the of different properties. for a long time economists have recognized bank deposits can be considered money as well, and today i will be talking about non-cash payments which almost universal the access some kind of deposit account. there is also a concept of electronic money or some kind of digital token that could exist on a card and if the card is lost the digital money could disappear and that is a technological issue that we may overcome as has been discussed for some time and we will see how things go in that area.

but for now, i think we are still pretty much accessing the count or some liability of fame on the bank when we are using the payment systems. so, i am going to move on to the idea of a payment instrument and talk about the payment instrument that we use to access these deposit accounts. and give you an overview now of, and it's great to be difficult to read and i am sorry to say. but these are the results of the most recent federal reserve payment study. we do this study every three years. we have done one in 2000, 2003, and these are the results for 2006. and in the studies we devoted a lot of effort to get complete national picture of what is going on in the u.s. payment

system. so, to start off with, the total number of checks written in the united states was about 33 billion, and that is out of about 93 billion payments overall non-cash payments. so, even in 2006 we were talking about a third of all payments made by check. second, it is pretty clear the debit card has been the huge success story as josh pointed out by 2006. and they've overtaken credit cards as the most used by electronic instruments and cards collectively when you come the credit cards and debit cards actually amounted to the largest

payment instrument used in the u.s. economy. but by value, checks were the largest payment instrument when you exclude the inquires and it's about $42 trillion worth payments that went through the check system and by comparison the electronic payment system was about 34 trillion when you add in not only credit cards and debit cards but also the automated clearinghouse system which is a replacement for the check that was introduced back in the 60's which provides a check like clearing system in between banks and it is what people are used to using for

example if they receive a payroll check that is directly deposited to their bank account. and there are other uses of it as well that are driven the growth of ach. so this chart here just shows that more detail about the changes. i think next time i do this i will probably narrow and to some larger font. [laughter] began, during -- >> [inaudible] [laughter] >> that's right. and this is a table on line. the debit card from 2003 to 2006 was responsible for more than half of the growth in the mullen cash payment system so that is another way to look at how influential the debit card has been in the recent past. now just to step back a little bit more to take a longer view

of the transformation of the payment system since the checks and cash were the predominant kind of way of making payments this chart sows from 1970 and on each more represents when we have done a comprehensive study of how many payments were being made in the economy during those years. so what you see there is the orange far portion of the bar is checked by volume per capita in the united states and to see that it shows it peaks around 1995 and has declined a person's. in the meantime, you see that electronic payments have grown and by 2006 electronic payments by a member are about two-thirds

of non-cash payments. so much of the credit card growth and debit card growth and automated clearing house growth has been driven by the replacement checks during this time but there are other affects you can see going on in this charge. first come on cash payments are going to double. there are lots of reasons. the most intuitive reason i think for this audience would be that perhaps the cash has been replaced. that is a reasonable expectation i will have more on cash in a minute. but i believe that there are a number of other factors that have driven the use of the payment system, the mullen cash payment system clearly rising wealth and income has made people richer, changing processing methods may have

caused some transactions to generate other transactions for example when people use their credit card then they expect to receive a bill at the end of the month and they are going to have to pay that bill or, you know, over time, either way, they are going to be paying that bill with probably a check or using the ach system. another point is payments may have simply risen because we have more opportunities to outsource the household production function back in the old days, reading a little house in the prairie with my son and back in the old days people used to churn their own butter. these days we probably purchase it. people use to solve their own clothes, they might buy them in an open market now you have to use the payment system to do that.

so okay, moving on to the next slide. a little bit more of a focus on what we know about cash. and one point it is clear as we use cash it is anonymous and did the distributed nature of the cash payment system there is no way to be able to measure all of the cash payments sooner rather than display the flow like i have done on the other charts this chart is showing the stock of currency. this is not all currency and this is on a per-capita basis, dollars per capita real value over time since 1960. and these are what i call the transactional denominations excluding the fifties and hundreds in the united states typically people do not use these for transactions. focusing on this as we see there was a decline in the stock of

currency influenced by the use of checks followed by additional use of cards. but then more or less the stock of currency per capita has been flat. you see that little blip during the millennium bug period there was concern that the electronic systems would experience a problem and for that reason banks held extra stock of currency to facilitate commerce in case something happened. it turned out nothing did happen and if they return to the currency to the fed no problem. in any case it is pretty clear the replacement of cash is occurring. the federal reserve is the issuer of currency and has to print money and replace it as it wears out. we have ways of tracking the wear and tear of currency.

there is evidence that small-denomination currency is lasting longer than it used to. there's a variety of factors that affected to some of them could be just the simple wear and tear of conducting transactions. it's possible but not conclusive but this time that individuals may be holding steady inventory of currency but replenishing it less often. but again i think the jury is still out and we need to learn more to be clear on how much currency is actually being replaced. >> next i want to talk about a case study of debit cards stepping back again for a longer view. debit cards were issued first in the form of atm cards and essentially they were a network but they were thought of as a

bank's own a network of atms and this was for the customers to access currency. this was free leave the first and only payment system and i will go into more detail on that in the next slide that has been purely electronic from the beginning. ultimately merchants started installing terminals to be able to accept the cards but for many years even though some options to use these were available they were not very broadly available to the general public. and it wasn't really until i think mastercard and visa came in with their branding and getting into the debit card seen around 1993 when we saw the number of terminals start to

increase and when the number of terminals started to increase card payments followed so i think a number of us felt quite surprised when they solve the surge of debit cards initially and the use of debit cards and i think this chart seems to display -- it had to do with whether they were available to people to use. and i think that some work that i have done has shown that it spread from network to network kind of from the west coast to the east coast as people saw that they could use the so-called check card they started using it. so messages from history the first existing payment types evolved. all of these electronic payments that we have today used to have

some component of physical processing except perhaps for dennett cards. the ach began, the federal reserve was heavily involved in the initial startup of the electronic ach replacement for checks back in the 60's. partially this was because the fed was able to organize and facilitate the movement or collaboration and also because the big computers and could process things. but still the local ach association was within the local fed and then the computer tapes were sent between the federal offices on airplanes along with checks as they were being flown around the country. but i think that was was available time and it was an incremental change worth doing.

credit cards of course had been around actually since the turn of the century and i don't know if, you know, the largest major or first major retailer that has issued a credit card with montgomery ward we back at turn of the 19th century but of course the credit cards were an alternative to keeping the books and some other way of issuing store credit and the general purpose credit cards and has become the big transformative type of credit card. i won't go into a love details how those were introduced is a very interesting story. but essentially the general purpose of the card replaced merchant credit with bank issued credit. this is what banks do. the finance things and the

merchants don't necessarily have the cash to do it. it was a great deal for the merchants when it first started out as an option if you didn't have the ability to issue credit to your customers. in any case, in the 70's that was around when the visa began to electronic by the systems initially some folks in the audience may remember that credit cards were run through paper and print machine and then the merchants would actually stuff envelopes and mail them to the banks and got sent through the postal mail and it wasn't a very efficient system. they asked the fed which utterly efficient check here system to bring the credit cards into the system and the fed refused and that spurred private-sector

development through the electronic payment system and even so it took a long time for that system to get dispersed throughout the economy and there are many merchants that were still at last model of connecting the merchant to electronic because the system was still difficult at the time get the cards were out there. it was in the 1980's when the electronic or the credit cards became a fully electronic system i was afraid i would spend too much time on these bob as we did the check clearing system and the fact that that has become electronic. i'm going to step back a little bit. people are thinking about the financial crisis and we are -- foster would be useful to take a look at some and it's difficult

to read again perhaps for some in the back and on tv will be available on the web site but this shows public information on quarterly volumes with -- identified the recession began so that would have been about third quarter 2007, and to see that pretty much all payments have experienced a drop in growth. this is the growth rate so when you see the drop below zero all of those payment instruments have started into negative growth rates meaning people have retracted their spending. what is clear here if you can read the chart is it sounds like

pearl necklaces are the debit card and they don't get below zero the state in a positive growth. but you will see that by the end of 2009 all of them seem to be showing some kind of recovery in terms of spending. finally, except for a couple of points i will and pointing out about with our international balance of electronic payments and paper clearing and developed countries and i have japan, the european monetary unit, united kingdom, canada and the united states largely japan shows high electronic payments. this again is in per-capita.

the u.s. has a very high additional number of long cash payments being made through the check system and this can be explained i think by the relative obviously maybe there are well the difference is that it's also because perhaps higher who use of cash in other countries as well particularly japan that has had very high the use of currency historic kleeb. i just figured i would end with a little bit of a question. the u.s. card infrastructure is currently a magnetic stripe. there are various technologies being touted as a possible replacement and the replacement is difficult. there are lots of issues to consider but all of us should be thinking in the future like the magnetic stripe, like paper we will probably be replaced.

how will that be replaced and when and then i would point out also internet commerce is pretty small although clearly for airplane tickets you are going to make a purchase online but it is actually a pretty small segment of the economy still despite me and my friends and everybody i know using the internet most of us are still using brick and mortar to mekouar purchases. and it's pretty clear if that continues to expand the electronic masses will grow along with. >> thank you. there was very interesting. we are going to pull what your slide and then the floor is yours. >> thank you. thank you to you and the aei for inviting me and putting this conference together. i am going to discuss the regulation and the law governing all of this in ten minutes or less because i know we want to keep the time for the open

discussion so i'm going to cover all of this at a very high level and if anything piques your interest we can jump back into it and drill down leader in the session. certainly josh and jeff have laid the groundwork for indicating to us all the tremendous impact that technology has had on the payment system and i'm going to talk about the regulatory challenges that have resulted from that technological impact. this is a very timely discussion because few blocks from here congress is considering many of these very issues in the context of the financial reform legislation that's currently being actively considered. very good timing on the conference here. i am going to talk about two things today. product regulation, how one regulates particular products and then into the regulation and that is how one would regulate

the particular entities providing in whole or in part those products and i'm going to look at recent past experience again added to the high level jeff lu did to it the process by which banks collect a paper check you all right. it's basically the last five years been converted from a paper process where at 1.60 billion checks a year were being flown around the country to now almost completely electronic process. i'm going to talk very quickly about how we got there and what the lessons i think of the process are going forward and then i'm going to talk a little bit about new technology of internet, mobile and with that is doing for the payment process and the challenges of regulating the that area. so here we go. quickly. okay, the picture tells a pulse and words or maybe more.

here is a chart and i would like to think david walker of the clearing house organization which is a nationwide bank clearing house organization that basically in part middle of this happen for the slides. thank you, david. but i think this shows the average number of check images and the need of the electronic transmissions of the paper check sent between the banks instead of the paper check each day and i don't know if the folks on tv can see this? yes? good. okay. but basically, you see here on this chart that the average daily volume of images transmitted in the first quarter of 2005 with a grand total of about 80,000 a day and in the last quarter of 08 you could see or i guess the first quarter of the naim about 59.57 million images of checks are transmitted

between banks each and every day. here is a comparable chart that shows the dollar volume, the dollar value of the checks again at the top bar the annual fourth quarter to thousand 9-dollar amount of the checks being collected by electronic images transmitted between the banks instead of the paper. 17.2 trillion per year. that is about five times the sum all that card and credit card payments. sorry about that, paul. look at that as a business opportunity. and if not, it's just a few banks that are participating. here is a chart that shows the number of routing transit numbers and the transit numbers are the numbers each bank has been identified them in the check collection system that received these electronic images and you can see about 21,500

transit numbers currently receiving these images. here is a summary of what i went through. i but only highlight here that the federal reserve and jeff made these estimates that the proportion of the checks the b.c. from the banks that sending them checks electronically through these images i'm talking about will exceed 90% of their total check deposits by the year and 2,009 and the estimate 99% by the year end of 2010. and again, for the federal reserve spending the checks down to the banks usually if they are drawn on the checks they expect about 90% of those checks will be done electronically by the year and 2,009 and 97% by the year 2010. and again, five years ago the numbers were like zero. okay so bill law that made all

of this happened was as jeff mentioned check 21 enacted in 2003. basically a little history because i think it is interesting the banking industry had been looking for some time before that at the cost of the data storage and transmission as dropping. the cost savings they could result for themselves sending electronic information instead of the paper around the country and then 9/11 came along and no paper checks moving. payment system basically went into gridlock and that i think with a cost savings resulting from the advances in technology got everybody together to work on the check 21 law. it was a very collaborative effort with federal reserve, the banking industry, stakeholders and would like to call out then

vice chairman roger ferguson and then and still director of the division of the reserve bank operations and pen systems your boss louise rhodes men for working cooperatively with the industry and i think it resulted in a great success that happened in the roughly five, six, seven years since the act was passed and i don't want to go into all of the details of the act we don't have time but the lessons learned are very important. what check 21 did was almost as important as what it didn't do and one thing it didn't do, it didn't mandate for anybody banks, customers, consumers to use this process. it facilitated and put a legal framework in place to facilitate but it lifted up to all the people of josh was talking about in terms of consumers and banks and customers and businesses to

make their own decisions as to whether for them this process made sense. second, it provided baseline projections to consumers which in my view was a very valid and appropriate responsibility for statute and wall but what it didn't do is it did not dictate the specifics of the interbank exchange, the interbank dealings, the bank to bank dealings. that was left to the industry to worked out for themselves and i think that was an extremely brilliant decision because if that had been drafted into the statute at that time in 2003i don't think we would have had the success we have had and let me give you an example. everybody felt at the time that all the banks were going to do is exchange the information electronically and then the paper check would be retained or miti would follow later but would be retained somewhere if

people need it and indeed all of the initial dinner bank rules are written based on that assumption. but then as more technology developed and costs came down and more fault was given to the process the lot that we developed was no, the image of the actual physical check is what is transmitted between the banks, not just information about the check. and all of the rules then had to be rewritten and they could be done very quickly and if we had to then go back and read write the statute if the statute had written a process into the statute and that had to be everything stopped and go back and get the congress to rewrite the statute none of the success that use all from those slides would have occurred. everything would have been delayed while everybody went back to congress and through the whole legislative process all

over again so the genius i think of check 21 in part and this is an important lesson as the congress looks forward in terms of how to regulate new payment products is consumer protection, customer protections, absolutely. but as to the interbank process for how all of this is going to be done and joshing sure you would agree knowing how often you change the visa rules that should be left to the industry to work out how the flexibility can try things, experiment and move quickly to accommodate new opportunities, technology and not have to go back to the congress or the regulators each time to change the rules of the game. that is my thought there. by the mechem check 21 was a win-win for everybody. not only did we have great hundreds of millions of dollars of cost savings for the banking industry not having to fly the checks, paper checks around, the customers are getting faster availability now for the check's deposit. literally all checks now because

they can collect electronically are collected faster, they are all considered local under the law and subject to faster availability requirements than the old mullen local checks that had to have time built into the availability process for the paper to get across the country. new products and services for customers. i don't know if you do this but i do all the time you can go to your bank on line and see a picture of your check right away, copyediting needed for some purpose, not available in the old peter process. obviously less susceptible to terrorist attack not dependent on planes flying over the country every night moving this paper around giving a great success. how am i doing on time? >> [inaudible] >> okay. >> [inaudible] >> i can cover all of this in three minutes. no problem. so the was the product regulation. now i want to talk about participant regulation. as josh and jeff explained the

technologies in communication channels that are enabling payments we are talking internet, mobile, value and many new non-bank payment participants have entered this market. paid -- paypal, amazon, another example of a paypal type of product coming that content and payment segregators and i give as an example of that others that provide facilities for if you are into online gaming as my kids are to purchase a whole panoply of online gaming. the products from the various merchants through their sights, you've got internet marketplace is, google, amazon, ebay, you may have heard of, cell phone carriers are now providing to somebody for you to charge

things, not your phone bill with your telephone service, but to charge things to your phone bill, jen verizon, at&t for example many others. all sorts of new types of payments that are related services are being facilitated by this new technology, person-to-person, merchant purchases, itunes, prepay the transactions, there was a question earlier about bill payments if you could come back to. social network of online gaming, digital currencies. okay. no banks. banks we know are regulated. congress is working on doing that clearly they will be regulated. what about the new entrances? ten or 15 of which i listed in the last minute. i could multiply that by ten if i had more time. how should they be regulated? at all and if so how?

do we worry about consumer protection than the customer? do we worry about whether they go away? certainly many of the startups have flamed out. should we worry about money laundering and of other an anti-terrorism issues? should we worry about what they do with their data? they get all sorts of robust customer data in connection with payment activities. is that a concern? should we worry about whether they are facilitating payments to what the u.s. considers to be that person's such as people on the prohibited list, terrorist activities organizations, unlawful gambling? now the current regulation for these nonbanks if there is any is mostly under the state transmitter wall. virtually all of the state's license from thegenerically andd accept funds from consumer

customers for the instruction of the customer. the requirements of the state statute vary from state to state you see there on the chart typically require licensing entity to post a bond and favor the state and specify the amount of often as not very high profile periodic reports with the state to maintain certain books and records to maintain specified capital and limit their investments to the permissible asset types to undergo state examinations paying annual assessments and sometimes special assistance to the states. is that the right regime to regulate these mom banks in the payment system? i just ask the questions. i don't have the answers. the something the congress is considering right now and we can talk about more in the open session. but i just wanted to raise that because i think that is a key regulatory challenge that the

new technology that we have been talking about will be raising today and going forward for with federal and state legislators and regulators. that's it. nd our third speaker, wayne abernathy. thanks. >> thank you very much. i certainly want to thank you for inviting me for being on the panel but especially i want to thank aei for demonstrating today being at the forefront of the public policy discussion and debate. and bringing scholarly tools to bear. all these important financial issues that affect everybody. but that need to have some real good scholarly thinking behind them before we make these public policies. i'd like to introduce a couple of sets of evidence, if you wi >> this is a dollar coin.

it is plastic because it is done circulated and has been since given to me one year ago and will remain uncirculated as i pass it down to my children. but this is first exhibit. second, is this piece. it is supposed to replace this one but a few talk to the men they will give you enormously persuasive arguments why this is a much better instrument then this but nobody buys it. they still like the paper dollar. the second set of instruments proprietary this, my checkbook. my wallet. and this item here and all of these contain a payment mechanism would then be one of these are all of them together i can make payments for a variety of different

things are if i was willing to break this out of plastic. [laughter] these are important exhibits and i want us to keep these in mind as we think about electronic payments because what we're talking about is the payment system. electronic happens to be the latest innovation of the payment system. digital is one of the most recent day and it will not be the last. what will be the next one? i don't know but nobody thought years ago we would use this to make appointment little loan send messages to remind people the exterminator is coming by today. as we look at the payment system, if we need to remind ourselves, what is it that people are expecting? there are four key things

that people are and have always expected when two people got together decided they wanted to exchange something of value. those four #1 security. people are looking for security. we don't want the payment to be robbed or the money to be siphoned off. number two, the integrity. that is different from security. it is related. we want to make sure the value that is received is the value that we expect. we want to make sure it gets to the people we are intending to make the payments two and we want to make sure it is as free from fraud and deception and six could possibly be and i the theft is particularly an assault on this part of the payment system. on the integrity of the payment system. number three.

e efficiency. safety, integrity and efficiency. they want payments fast and they wanted to cost as little as possible. i would also consider convenience to be part of the element of the payment system. many people would say this is why does not catching on it does not meet many of the convenience test. it is part of efficiency and it also includes some of the ancillary cost per q2 say it means almost nothing to send something electronically by have to buy the electronic device that ancillary costs is built into efficiency and number four is reliability. if these systems can continued to perform more made the security come integrity and efficiency test time after time, they will not become part of the system. reliability is to meet it

again and again. none of these are absolute for repayment system today has security come into a gray, efficiency and reliability problems and risks and costs associated with them but i will say that over time, our payment systems have been performing better and better in all for categories. digital payments or any other payment mechanism will be judged against those four criteria. how the proposed new mechanism meets those will judge whether it is accepted first succeeds or not. as the basis of discussion let me turn to the development of electronic payment mechanisms and with the observation number one, any new payment mechanism poses questions as well as offering answers and that is true for the various

the payment systems. we need to keep that in mind these time i have meant with the ball electronic or otherwise they are focused on what they're offering. what they may not adequately mean is it answering the question? observation #2. we have seen recently is growth and variety that i can have all of these different things and i use them all today. use all of these different payment mechanisms. friday has grown and increases competition each new mechanism has to compete against all of that what people are already using so that is important because it is widening the payments choices that are available. despite the predictions by some advocates.

no new mechanism at least in recent years has entirely replaced any other significant payment mechanism already existed. not that they want but so far have not. the most successful at most will have succeeded in increasing market share. plastic credit card is still popular. checks are still written despite frequent predictions of the rise americans still way to use cash including the $1 bill. not even archer has disappeared. but the market share will change and a just as they meet the four criteria in people's taste and technology your change. are a tribute the growth of the variety to the fact that all of the payment systems today meet these criteria. there are some we don't use any more.

with the card on the stick the old ancient payment system it was deficient but all of those today meet the four criteria for successful payment system for observation number three. very little record of success in predicting at the outset which new payment mechanism will succeed perhaps have done with people over 30 years in policy positions and here they're wonderful ideas how successful the new mechanism would be and it never caught on and many are that way. it is hard to predict what will succeed but will decide will be billions of payments choices tabulated and reflected in market results if we let them and those choices will likely give is the answer to a will succeed in what will not and what is the best answer to what should be in the payment system including not only

one particular item but each selection of items will succeed and sweep of choices customers like. we need to let the market worked its magic bought may 10 excellent point* we were far too prescriptive check 21 would have been what people were predicting we thought there'd be serious dislocation trying to get people to adjust to this and because of hard work a lot of people but because the legislation was not prescriptive we were able to make the adjustments than they did not realize it was going number reaped the benefits. we will create the conditions here at -- fair credit clay that one will fall short of the security integrity efficiency or reliability criteria for a payment system.

and many more ideas for a new payment platforms will fail than succeed. now about risk, they cannot forget we're also talking about a very risky business. dynamite was created to replace nitroglycerine but it could still make a big bang. at this moment it is appropriate to ask what is he talking about? banks are robbery targets because of you can get into the bank you can get into the vaults and it is a lot easier to rob your neighbors that way then each of their house is. what is true of banks and houses is true about payment systems and banks and you can break into a payment system in is a lot easier to rob through the payment system than two robbed several banks individually

because you are into the flow of the cash. because of that and the recognition of that that the banks have for years been devoting enormous resources to protect the payment system and those types of risks organized crime is not aware of this fact they have increased their efforts to break into the payment system unfortunately this effort that the banks have put forth to protect the payment system have not been reflected in all participants of the payment system. many participants have been focusing on some elements of the efficiency but not focused on protecting the integrity of the flow of in permission. because of that some very major debtor breaches have been the result the rate could go down the list of them and in nearly every case those are people who got into the payment system without the adequate

protection needed to preserve the integrity and a significant participant regardless how attractive or revolutionary the new platform must have a rigorous program for protecting the integrity of the payment system. how do you do that? bob was very effective in pointing out many of the new participants of the payments system and not subject too any significant system of standards nobody looking over their shoulder or if you to make sure they're doing what they need to do particularly in the integrity space-bar crow in our view, we believe perhaps that is the role for the federal reserve for two reasons. it is a major participant in the payment systems and i have a stake that is inherent to what they do to make sure the payment system works well. secondly, they have a global

perspective on all of the different elements of the payment system so we believe it is not all inappropriate for the federal reserve to other responsibility to set the standards and make sure they are enforced. again an important point*, the standards should be careful they don't inhibits innovation representative focus on integrity without being prescriptive on what new systems should look like and picking winners or losers. better an attractive to customers safety security integrity and efficiency which often governmental rules for get and reliability. they do that, we all benefit because we can rely upon these new innovations actually making things better and increasing competition kevin making things easier for customers

and we all benefit from that parker customers benefit from a commercial as was individual and bad is how we can harvest the benefits of the technology and as well as the keenly competitive area. thank you. [applause] >> just to make one comment to pick up on your remarks of the security and integrity issue and the comments about well constructed check 21 and the flexibility that created it seems there is a trade-off that on the one hand a lot of the integrity issues are not regulated from the new entities and your right we were all aware from just reading the news of the data breaches that have occurred in those hour cost to consumers and the structure as a whole bunch of upside

being that if we go forward with our regulatory or legislative framework to create a system to impose security standards on these players i cannot agree more about the importance of doing that in a way to preserve innovation it seems the solutions the way to improve security in a manner that does not distract or create unnecessary rigidity would be through new companies and technologies and mechanisms and new forms of software and that is as an important part of the payment system as any other and we went to bring those forward in some way and in my view of these consumers should be demanding the security procedures and protectors as well as should the merchants. it is a fascinating issue may be for another eight e.i. event to think what is the role of government to

guide your create that opportunity for more integrity or will the market evolves by itself without creating those structures that you are suggesting? you can comment on better go to q&a. >> briefly the banking industry is very proud how we have been leaders of innovation but also recognize we did not come up with all the innovation. i think banks were behind the development of general-purpose credit cards but there are new innovations we did not do benefit from but we want to make sure you don't open up an avenue because you can have a tight security system but if you create an avenue for the crux to get then they can get in the back door and 40 o the best security systems and a banker can put in place. >> the integrity of the data is critical for both

existing and new innovative payment systems and it might make sense to take a moment and step back say where are we in the end of regulation of that? the federal statute imposes general requirements for banks implemented in very detailed fashion by the banking regulators to the friend -- the council the grouping of all the federal banking regulators that put out very detailed annual san i think those have all served the banking industry as wayne indicated not categorically but i am not aware of any data breach of the magnitude that wayne was describing that has occurred at a bank and they are subject to the regime of

visa also subject to an complies with this regime as well below lot of the other nonbank players not subject to this regime some question as to whether they are subject to the act at all to the extent they are as implemented by the ftc which is not implemented a detailed regime might the banking regulators have for the banking industry so we need to look at this and drill down and look at the question both for the banking industry and visa of the world that are heavily regulated not many problems than the other interests that may year may not be subject too any regulation with the problem we have seen that has occurred. >> briefly the federal reserve has always work closely with banks and consumer agencies and other stakeholders and has looked

toward collaborative efforts to remove barriers to innovation where they have existed and serve as a catalyst for discussion with these matters i think our will stop there. >> i will just finish that thought i have spent time navajo and at one point requesting a study of the gao issues shutting down the air-traffic control system but it did some nice work on the electronic structure not on the consumer side but the bank side where for all of the terror and consequences in new york city those wires and systems were preserved and continue to function

there is a lot of integrity that needs to be protected. are one to turn to the floor to have a little bit of dialogue as the individual or group but do not feel obligated to respond to every question. >> thom brown. thank you for putting on a wonderful conference broker question picking up on the thread that bob introduced i do a fair amount of work with various payment systems and as we have discussed another context the paulson blueprint identify the loophole in the regulatory structure of the payments basis between big providers and nonbank providers and it seems that has been lost in the discussion never good to reformist mayor distracted by discussions of cfpaduc

anything that will address the oddity of telling nonbanks to get 48 state licenses to operate eight international or national business? >> yes and no. the cfp a that you mentioned does have within the scope, potentially, we don't know how the ultimate legislation is drafted it does have jurisdiction over the types of entities we have been discussing but i don't think in the context of preemption and that there has been any discussion of replacing the current state system with a federal system if anything it would be additive and some type of a federal overlay on top of the state system of the state money transmitters.

>> david mills from the federal reserve board per car want to talk about the security and integrity and may repackage assets trust. there are a number of ways one could get trust of the payment instrument certainly those standards may help facilitate that. but also reputation can facilitate the so it is hard to envision some startup without established reputation to be able to enter the payment instrument space than just happen and be able to loosely provide services without enough security or integrity because the need to establish a trust to get consumers to carry this in a wide and broad scale.

the other thing is once you establish something in the payment space the trust is still very important in the sense of security and changes are threats are evolving in a dynamic process the cops and robbers story you may secure one end of our risk and then the new one begins and the importance of establishing that trust is the ongoing battle and i think one of the things that is important to think about as issuers are regulators are the incentives align properly to maintain that level of trust? >> i agree confidence and trust is what underlies supposedly what causes you or me to take several thousand dollars and give it to somebody we don't know that they will give it to somebody i wish the point* was correct the people would

not do that unless it already established confidence in people and to some degree they do but they will transfer trusts. trust in one area they may think transfers to something else and we have seen that in the retail space. i have confidence in this retailer because what i buy because they offer to take my money but i have no idea was system they have. and it turns out many retailers that have earned your trust of the retailer did not deserve your trust as a participant in the payment system of that is why you need something like the federal reserve to have a set of national standards of you have access on your own you have to meet at least a certain minimum the reason you need to do that rather than build up the trust because as soon as somebody can break into the system they potential have access to other individuals

that are now getting into the back door. >> i was bad in our experience in the u.s. i think successful payment system so far have typically found themselves partner in with the banking system or a recognizable branded payment network that is what has worked so far in the era of facebook and twitter people are willing to share lots of information but probably still quite conservative with their payment information. i don't know if there will pay a question if a new brand can into the market and how that would have been this interesting and worth continue discussion. >> reassume a new survey

recently conducted not yet published? >> is triannual? >> we have a survey in the field right now thank you for letting me pitch at. [laughter] and we expect preliminary results by the end of the year so we look forward to sharing that with the public and we can see how the trends are changing. we have time for one last question. >> thank you. the question addressed to both to do is somehow don't you think that people that we're not aware of that are controlling the system in doing weird things against

the u.s.? i can have this disappear i can see the financial crisis but don't you think the question needs to be looked at more closely? thank you. >> i will make one comment on that is very difficult to control something as part fall as the payment system. it is so fiercely competitive that no one particular party could control all aspects of it there are other people trying to break into a? people tried to defraud others? absolutely. we have seen the growth of identity theft over the late 1990's reach something in the neighborhood of millions

of people per year but in one way or another pretend to be somebody they are not. but if anybody is a master mind that is pretty difficult to do because it is an incredibly competitive system. >> riyal time for one last question. >> have the uniform law commissioners one is the potential for being a haven state south dakota delaware type to gather business over that kind of haven state or many transmitter? >> that is a great question. some number of years ago, the federal congress

adopted a statute to encourage the states to become more uniform in their regulation of many transmitters and up to that point* in time it was all over the map. there was an effort as a result of a federal statute to develop a uniform and a state transmitter lot and many states have adopted that law with some inevitable state variation but not all states. there is some uniformity but it is not uniform and there are a couple states that don't have a statute but to the other piece of the question that virtually every state takes the view that if you are providing what i as the state of view a license money transmitter service regardless of whether not you're actually located in my state you have to be subject to my state

regimes who there is no exportation mike interest rates in the states that are favorable to interest rates that you refer to. it would be very difficult for an entity engaged in the am i and many transmitter business to establish a state with no money transmission but then all the offer services in that state wants it offered services to new york it would take the position that you have to come in and license and be subject to our state so it is an excellent question the answer is yes and no. >> extraterritorial? i am glad you follow up that is a very good question it is jurisdictional while the

state may take the view that a foreign company located abroad providing money transmission services to residents of the state is subject to that state's regime the state may well not be able to assert any jurisdiction over that company particulate bid is located in the country that does not have reciprocity arrangements with the united states. so that would potentially be a loophole in the existing regulatory structure in terms of a foreign company through the internet for example, offering services through the united states. >> your question raises one of the cardinal virtues of the american financial systems a dual banking system we have national banks with national roles and state banks with state rules when the most successful payment

mechanisms came about because of the dual banking system. prior to the civil war every bank had its own currency which is crazy so they invented the national currency but then put the state banks out of business almost but now they issued checks we had a brand new very successful payment mechanism but bottom-line is we need to have some basic national standards for do not eliminate the opportunity to various states and other jurisdictions because we will find some of the better future innovations be established in one of those jurisdictions then become widely popular. >> fantastic and innovation is the key to of all. a couple of things are really important and one of them is sending on time. we have one minute left. i want to think everybody on

the panel for coming here and think you to josh for his remarks and think everyone in the audience as well. [applause] [inaudible conversations] [inaudible conversations]

[inaudible conversations]

>> [inaudible conversations] >> ladies and gentlemen,, the president of the united states. [applause] >> good morning everybody. how're you? this is a good-looking crowd. thank you so much everybody for coming. today we celebrate 40 years of earth day. obviously the years has been around longer than that. [laughter] we have been celebrating 40 years. there was a bright moment in our nation's history and a milestone in the ongoing fight to protect our environment.

many know the history in 1970 gaylord nelson the senator from was sponsored hired a young graduate students named denis hayes was with us today. where is the? [applause] he still looks like a young graduate student. [laughter] he helped to coordinate the first birthday and they raised their voices to call-in every american to take action on behalf of our environment and the four decades since millions of americans heeded the call in joined together to protect the planet and we made immense progress since that day from a landmark legislation of the clean air and water act of the '70s to conservation of america's precious landscapes. many of you have played an

important role in these victories and the impact can be felt today and will be felt tomorrow and as a parent i am grateful for the good fight that so many of you thought because it means i can pass on to malia and sasha and maybe grandchildren down the line the incredible bounty not only of the united states of america but the world as a coal. along the way, earth day has become much more than one day on the calendar. it has represented the simple truth the challenge comes opportunity to make the world a better place but since taking office. we have seized that opportunity with your help made historic investment and clean energy that will not only create the jobs of tomorrow but way the groundwork for economic growth and invest and entrepreneurs who want to unleash the next wave of

clean energy and to the air we breathe the watery drink the parks and public spaces that we enjoy together we have also renewed our commitment to passing a comprehensive energy climb a bill that will save the o climate and spur innovation to help us compete in the 21st century. [applause] looking into the rose garden today we see a lot of people who will help us achieve these goals. the business owners to know protecting our environment is good for business. members of congress to help to carry us along in the house and senate and members of my green cabinet helping to shape the policies and environmental leaders fighting each and every day because the interest and what is at stake see represent what is most inspiring about earth day that is the believe that each of us individually from

different backgrounds and walks of life have the capacity to make any vermis difference. understand that the work ahead is not going to be easier happen overnight it will take your leadership and your ideas and all of us coming together in the spirit of birthday every day to make the dream of clean energy economy and a clean world a reality but i am confident we can do it didn't want to thank all of you for your support, your counsel and occasional grumbling. [laughter] and your dedication because without you we could not accomplish everything that needs to be accomplished. thank you. enjoy the rose garden. [applause]

. . ♪ ♪ ♪

♪ ♪ ♪ ♪

♪ ♪ ♪ ♪

♪ ♪

♪ ♪ ♪ ♪

♪ ♪ ♪ ♪

♪ ♪ ♪ ♪

♪ ♪ ♪ ♪

♪ ♪ ♪

♪ ♪

♪ ♪ ♪ ♪

♪ ♪

♪ ♪ ♪ ♪

♪ ♪ ♪ ♪

♪ ♪ ♪ ♪ ♪ ♪

>> ipo the constitution is the issue we come from many different backgrounds from various tribes we are male and female and black and white and brown and english

and spanish speaking and all of the other things but unlike every other nation that for started on unearth. >> guaranteed by the bill of rights the right to speak your mind precluded an amendment the right to free speech along with the free press comer freedom of religion and assembly and right to petitioner such a part of the character it is difficult to imagine america without these rights but as history has taught us they're not to be taken for granted but to defended and defined from generation to generation our concepts change from time to time and new challenges to the extent of the freedom is always on the horizon. >> the first amendment is essential to the american way of life and it guarantees freedoms to express ourselves prepaid many people feel the freedom of speech is more than just the strength of the nation's >> it is what we're all

about to protect our freedoms and we would not be where we are today without it. >> i think the fact that the constitution really form say fundamental framework for providing us freedoms in terms of freedom of speech, freedom of expression not only those but also a solid framework for how to go about changing our government if you want to change the government. >> of first amendment guarantees five basic rates breed religion, speech, press, ass embly and petitioned or protest. >>