I would like to share some information with you about innovation at the Federal Reserve Bank of Boston, and address it in two dimensions.

First, some innovations that you will be seeing in our services to your banks. And second, just a bit about innovation itself, and why it is more important to us now than ever.

This year, and into 2002, you will be seeing several innovations in our financial services to you. The area where you will be seeing the most significant changes, and certainly changes for the better, will be in your electronic access to our payment and information services.

We are replacing the older version of Fedline we have used with you for many years, with two new means of electronic access: Fedline for Windows, and Fedline for the Web. We will begin to introduce these new services this summer, we will be in high gear by the fall, and we will be working with our customers through 2002 to replace all the old Fedline connections with these new services.

Fedline for Windows will be what the name implies: a PC using a Windows NT platform to enable the people in your banks to access our services - particularly our payment services such as Fedwire funds transfer, the Automated Clearing House or ACH, and others - using the same Windows point-and-click approach that they may be familiar with for your other computer work. Fedline for Windows will provide a highly secure environment for your payments.

Some current services, as well as new services, will be brought to you through the second new electronic access tool, Fedline for the Web. As this name implies, it provides access to our services over the Internet. This means more flexibility for the people in your banks. They do not have to use a special, dedicated PC, as they do with the current Fedline and as they will with Fedline for Windows.

This new Fedline for the Web service will include as its initial applications Cash Ordering, Savings Bonds orders for your customers, and several check services. Later on we will be adding more services to Fedline for the Web, including accounting inquiries and statements. Over time we would like to use the Internet as much as possible to deliver as many of our services as possible.

Here again, though, security is essential to us at the Federal Reserve. In that spirit, we will have security for the applications we put on Fedline for the Web. We will be using digital certificates that we will help you to set up, so that only the people you authorize in your bank will be able to access our services. This form of security will serve you and us well for the informational sorts of services we are putting onto the Web.

For awhile to come, we will try to use Fedline for the Web for lots of informational services, and use Fedline for Windows to support the secure transfer of money in our several payment services. Meanwhile, we will be working with other interested parties to find the solutions we will need to enable safe and secure payment services over the Internet.

We will be offering training sessions for your people on both of these new services, beginning in May and continuing through next year. We have published a training schedule for the next several months, and if your people need additional help, please just call us.

While Fedline for Windows and Fedline for the Web are most prominent on our agenda for innovation right now, there are some other innovative activities I want to mention to you.

One of our strategic goals is to work with you to make the check collection process less paper-bound and more electronic. As an important step in that direction, we believe Internet access really can make our check image services convenient and economical for you. We can capture images of the checks we present to your bank each day, and then let your people look up any image of any check from a PC in your bank. Of course we can deliver a file of images to your bank if you prefer, but you might find it easier just to look at particular images by accessing the file we can keep for you on our premises.

Once you get used to images of checks, and how reliable they are, you might even want to try the next step of not having to receive the paper checks from us. We can send you an electronic file with all the check payment information, and you can look at, or print, images of any checks you or your customers want to see.

In another area where we are innovating, some of your banks use what we call "four party callback" to transfer funds or securities for your customers. This is a manual process requiring two telephone calls. One call goes from a person in your bank to a person in our wholesale payment operations, to order a transfer. Then, before we make the transfer, a different person in our operation calls back to a different person in your bank, to verify that the order is authentic. This process works, but is time-consuming, and subject to error with information being copied down from phone calls. You can do these transfers electronically, over Fedline, and we really recommend that. However, our Bank also is working with the Federal Reserve's national product office for wholesale payments in New York to explore using the Internet to replace at least half of this manual process.

You could order the transfer you want with an electronic message over the Internet. We still would have to contact you to verify the order, and we would have to make sure the Internet message had adequate security, but potentially this innovation could take some time and error out of the current process.

I want to encourage you, and your people, to visit our public web site frequently. In case you do not know, we are at www.Bos.Frb.Org.

More and more we are using our web site, and Internet communications, to get information to you faster, and to invite more feedback from you. You can find all of the current information about our services, as well as what the national Federal Reserve System is doing in financial services; you can find our telephone numbers; you can find schedules of training seminars; you can find the forms you might need to do business with us; and you can find on-line calculators to help you figure out clearing balance levels, for instance.

Besides these Internet-oriented new products and features, we see more innovation coming in our check operations. By 2004 all Reserve Banks and their 45 check processing locations will be sharing one common platform for check processing. The computers will be in one or two central locations to drive the check sorters in all 45 offices, including Boston and Windsor Locks. The software will be standard. We expect two important benefits for you from this huge change. Our operating costs will be lower than they would be otherwise, and so will our prices. Just as importantly, we will be able to bring new products to you faster, and offer you any product or service that is developed for other customers anywhere in the country.

Boston is playing the leading role in another national initiative for check. We are building a common archive for storage and retrieval of check images. Eventually all of those 45 offices will capture images of checks and feed them into this archive, from which your people can retrieve them, with Web access.

Here again we look forward to lower costs for a shared archive in place of individual archival systems at the various Reserve Banks; and faster provision of new services to you, supported by a standard national platform.

Now, let me offer a few thoughts about innovation itself.

We are working to make the Bank a more innovative and creative enterprise. It is not that we have not been innovative in financial services and in our other business lines. We have been. It is more that in the current environment, and for the future as best we can anticipate it, innovation has become more important.

A big reason for the successful economy we have had these past several years has been strong growth in productivity.

Much of that productivity has arisen from the constant efforts of businesses, large and small, to innovate; to innovate because of the pressures of competition; to innovate with the application of new technologies to their activities; and, more broadly, to innovate by looking all the time for ways to get a little more cost out, or a little more product made, or a little higher quality into a process.

We have been in an era of innovation. The Internet has been the symbol for this innovative era, although my guess is that most of what has been achieved thus far is not entirely related to the Internet, as the Internet itself is so young and its growth is yet to be measured. It is more about that constant competitive pressure to find creative ways to get a little better all the time.

For the Federal Reserve Bank as a whole, in all business areas, the rapidly changing environment for financial institutions - your banks and our Bank - also requires more and faster innovation. Need I say more than "Gramm Leach Bliley" to evoke your awareness of how much is changing, and how much new thinking and action is required of all of us.

So, to stay ahead of competition, and to respond effectively to the rapidly changing environment, we must improve what we do constantly, with lots of little daily improvements and major innovations whenever we can make them happen. This requires creativity on the part of more people at all levels in the Bank.

I wonder if some of you can identify with what we see as an agenda for change. Our Bank always has been a place where people work hard to do things well. We have been careful and reliable, and we have performed effectively. We want all that is good about that tradition to continue. At the same time, we want to get more creative spark going. Sometimes being careful and cautious can get in the way of innovation and improvement. We are thinking now about how to become a place where everyone comes to work thinking, "How can I make an improvement today?"

Conclusion

As a final thought on innovation, a compelling reason to push for ongoing improvement is to create an environment where people have the opportunity to act on their creative ideas, providing a more dynamic atmosphere for good people to work. We want that for the people working with us now, and for the people we want to hire in the future.