FROM THE OFFICE OF PUBLIC AFFAIRS

Technology is rapidly changing the world of finance. Advances in technology and electronic commerce are leading to expanded access, more innovation, and greater efficiency and competition. This will lead to changes in the financial services industry even more dramatic than those brought about by the enactment of financial modernization legislation.

There may be no part of our economy that is more suited to delivery in electronic form than financial services. Indeed, Americans began receiving banking services electronically, through ATMs and by telephone, long before the rise of the Internet. Today, however, it is the Internet that is rapidly changing the way Americans borrow money, the way they get insurance, the way they save and invest their money.

Using the Internet, Americans can now make their most important financial decisions - decisions about mortgages, insurance, auto loans, investing their savings - with a better understanding of the products and options available to them in the comfort of their own home. Consumers are rapidly moving from using the Internet as an information-gathering tool to conducting transactions on line. Today, more than seven million Americans have on-line accounts to invest in the stock markets. Though most other areas of Internet finance remain relatively small, they have great potential.

The Changing Environment for Financial Services

These developments represent enormous opportunities for financial service providers. They bring significant challenges, as well. History tells us that, in periods of rapidly changing technology, there is a premium on adaptation. Firms that can adapt their business models can often succeed. But history also tells us that many will fail -- sometimes by experimenting and adapting poorly, but often by adapting too slowly or not at all.

Lessons can be drawn from the nation's transition from the Agricultural Age to the Industrial Age. A look at the automobile industry is instructive. Who among the old buggy companies were successful in producing the new motor cars? One of the largest carriage makers in the United States at the time, the Durant-Dort Carriage Works, worked successfully with the inventors of the day and ultimately became the core of General Motors. The Fisher Brothers carriage company became Fisher Body, another part of GM. We also know, however, that most buggy companies went out of business. There were also many new start-ups that had never been in the carriage business. Most failed. A few, such as Henry Ford's start-up, survived.

As we move today from the Industrial Age to the Information Age, new business models and new players will most definitely emerge in the financial services industry. On-line brokerage services, Internet banks, and electronic trading systems and exchanges are just some of the new models for delivery of financial services. On-line brokerage services, whether offered by traditional brokerage firms or Internet start-ups, have already proven popular. We have also seen an on-line brokerage firm purchase one of the largest Internet-only banks and the largest independent ATM owner in the U.S. The operator of a screen-based trading system for stocks announced that it would purchase a regional stock exchange in order to establish a fully electronic stock exchange. Just this week, the London and Frankfurt stock exchanges unveiled plans for a merger that would create a pan-European exchange, coupled with a joint venture with a U.S. market. These are just a few of the many new strategies.

For consumers, advances in technology in the financial services industry will result in greater access and innovation, leading to more and better choices. Gains in efficiency brought on by these advances should bring great benefits to consumers, as a wider variety of products can be made available in more cost-effective ways.

For financial services firms, greater efficiency and competition will present the challenge of dealing with legacy systems, sales forces, and physical assets. In addition, advances in technology may push our financial system in the direction of greater disintermediation. The Internet potentially enables borrowers, investors, and other consumers of financial products to meet directly in a "virtual" marketplace. In this environment, financial institutions will have to look very carefully at where they add value.

One should be very cautious about trying to predict the future, especially in such a rapidly changing environment. There will be some traditional financial institutions that, like that very small group of carriage companies, adapt successfully. Some start-ups, like Henry Ford's company, will survive. Other firms, however, will inevitably struggle. If history is any guide, many of the current players may not survive in their current form. Others may not be here at all.

Financial Privacy>

Advances in technology also have challenged American's personal sense of privacy in ways we might never have imagined possible just a few years ago. Historically, consumers had a confidential relationship with their local banker, broker, or insurance agent. The rapid growth of technology and industry consolidation, however, have weakened that relationship. As important as privacy is to the American consumer, it is equally important to financial institutions to get this right. At the core of a financial institution's franchise is its relationships with its customers.

Privacy protections can only strengthen those relationships. In this new environment for financial services, it may be more important than ever to instill consumer confidence and trust in our financial institutions.

One year ago today, the President first laid out his Plan for Financial Privacy and Consumer Protection in the 21^st Century. At that time, few thought that financial privacy legislation would be enacted this Congress. Just a few short months later, significant progress was made in the financial modernization bill toward the President's goal of stronger financial privacy protections. The President and the American people recognized then, however, that more needed to be done.

That is why the President has announced a new legislative proposal to protect the financial privacy of consumers. As the President said this week "[i]n this Information Age, we can't let new opportunities erode fundamental rights. We can't let breakthroughs in technology break down walls of privacy." Today, Secretary Summers transmitted the Consumer Financial Privacy Act to Congress. It will be introduced in the Senate by Senator Leahy and a number of senators and in the House by Representative LaFalce and many other members.

The President's proposal builds on last year's financial modernization legislation to give consumers a meaningful choice before their private financial data can be shared with anyone. The legislation is structured in a balanced way so as to preserve the benefits that flow from the growing integration of the financial services industry. The bill preserves the ability of financial firms to share the information they need to develop new products, process transactions, check for fraud, manage risks, and for other important functions, subject to appropriate confidentiality and reuse limitations. Financial firms will continue to be able to provide consolidated statements across affiliates. Consumers, however, will get notice and will have the ability to opt-out of sharing their financial information for other purposes.

The legislation builds in enhanced protections in two areas of particular sensitivity. First, the bill would require a consumer to affirmatively "opt-in" before any financial firm receives medical information from another company, such as a life insurance company. Second, a financial firm performing a payment service through a checking, credit card, or debit card account will not be permitted to transfer information on your individualized, personal spending habits unless you affirmatively consent. Enhanced protections in these particularly sensitive areas are appropriate due to the lack of clear benefits from the sharing of such information and due to consumers' strong interest in being able to make a choice prior to sharing such information.

The bill also expands on existing protections provided for credit reports to provide consumers the ability to access their records and correct mistakes. The legislation would make these various provisions fully enforceable against all financial firms, including those not subject to banking, securities, or insurance regulation.

Taken together, we believe that the provisions of this legislation will enhance consumer confidence in the financial services industry. The legislation is balanced in such a way that consumers and financial firms will be able to benefit from advancing technology and appropriate information sharing. Thus, this legislation will benefit both consumers and the financial services industry.

Additionally, ensuring consumer financial privacy may help promote use of the mainstream financial system. Surveys of people who do not maintain bank accounts suggest that one important reason is a desire for anonymity. Access to mainstream financial services, however, will rapidly become as essential in the early 21^st Century as access to electricity became in the early 20^th Century. This is just one more reason to ensure that consumers have confidence in the privacy of their financial information.

Payments and E-Commerce

The financial industry can play a critical role in promoting electronic commerce throughout the economy -- through providing efficient and effective electronic payment services. Electronic payments today remain largely tied to the same institutions and systems that existed before the Internet. The challenge for the industry is to find ways to move payments securely and efficiently on line.

The technology exists to permit safe, secure on-line movement of money. Transferring money over the Internet could be paperless and efficient. It could eliminate fraud through authentication. It could eliminate credit risk through real-time funds transfer. The challenge is how to get there. Payment systems need to be adapted to the medium in which they are to be used. There have been many efforts, but none have yet gained acceptance. To date, the development of a true electronic equivalent of cash has been hampered by a lack of infrastructure and standards.

Today, only a limited amount of electronic commerce is actually being paid for on line. In 1999, purchases of more than $140 billion were browsed or ordered on-line. Less than $20 billion of those purchases, however, were paid for on-line.

Virtually all of those payments that do occur on line are conducted using credit cards. Credit cards have drawbacks, however, that limit their use for broad Internet e-commerce. Credit cards were developed for face-to-face merchant use. They can be an expensive payment mechanism, with transaction costs of 2-6% charged to the seller. Credit card use remains limited to consumer retail transactions and small corporate purchases. Although various new programs have been announced, credit cards have not yet become accepted for most business-to-business payments or for person-to-person payments. Many consumers continue to be reluctant to use their cards on-line. Privacy concerns may be an important part of this reluctance.

The lack of a viable Internet-based payment tool for business-to-business commerce is one of the most important issues today. In the business-to-business world, the number of paper invoices and paper checks continues to grow at a steady pace in spite of the growth of electronic commerce. Part of the reason for the continued reliance on paper may be that no Internet payment mechanism has been developed to date that is both safe and secure and that can carry related transaction information along with the payment.

The growth of electronic bill presentment and payment also has been slow for consumers. Estimates indicate that close to eight percent of all households used some form of on-line banking service last year, but less than one percent of consumer bills currently are viewed and paid on-line. Although several high profile efforts to develop consumer electronic bill payment systems have been launched, the market has not yet found a viable model that meets the needs of both billers and consumers.

The challenge to the existing financial services industry is to stay relevant in the midst of innovation. Finding solutions to the various challenges of moving payments securely and efficiently on-line will make a significant contribution to the growth of e-commerce and the economy as a whole. The financial services industry could play an important role in finding these solutions.

Treasury Success at E-Commerce

Before I close, I would like to take a moment to discuss Treasury's own experience with electronic payments and e-commerce. As the primary point of collection and disbursement of funds for the federal government, Treasury runs one of the largest payment collection systems in the world. Two out of every three dollars of U.S. government revenue, more than $1.3 trillion, now is collected electronically. More than three-quarters of all government benefit payments are now made electronically. So are almost sixty percent of payments to vendors.

There are still many challenges. For example, during the April filing season this year, from April 1^st through May 3^rd, we received deposits of individual taxes totaling nearly $190 billion. Over 99 percent of these dollars were received in the form of paper checks. Clearly, much can still be done.

In addition to conducting the day-to-day business of the government, Treasury also has sought to use the efficiency and low cost of electronic payments to expand access to financial services. Treasury developed the Electronic Transfer Account to provide recipients of federal benefit payments with access to low-cost electronic accounts at mainstream financial institutions. We are still in the early stages of implementing this product, but we are pleased that over 550 institutions have agreed to offer the accounts. The success of this program could represent an important step in bringing "unbanked" individuals into the financial mainstream.

It also may surprise you to learn that Treasury is the world's largest issuer of smart cards. This year we will issue close to a quarter of a million smart cards at U.S. military installations throughout the world. Treasury also is developing or testing a variety of new programs, including digital cash, secure Internet e-mail for the delivery of digital checks to vendors, and 0ACH debit authorizations over the Internet.

Sales of Treasury debt, both retail and institutional, also take advantage of new technologies. Auctions of Treasury securities are now entirely electronic, as the last paper bidders were recently moved to an Internet-based system. Consumers holding Treasury securities through the Treasury Direct program can make purchases or reinvest on line or through an automated phone system. Even Savings Bonds can now be purchased over the Internet.

Conclusion

New technologies have the potential to dramatically change the financial industry though greater access, more efficiency, and increased competition and innovation Many firms will adapt well and prosper. No doubt, some firms will adapt poorly and may not survive.

For the financial industry as a whole to achieve the full potential of new technologies and of electronic commerce, however, we must ensure that consumers do not feel that their privacy is jeopardized by this new environment. In addition, the financial industry itself can contribute significantly to the economy by finding ways to move payments securely and efficiently on line.

Technology will lead to significant changes in the financial industry over time. Today, the U.S. financial industry is the strongest in the world. I am confident that it will find ways to innovate and adapt in this new environment.