Full text of Paul A. Volcker Papers : Pricing Policy Committee : February 5, 1979, Box 20, Item c245

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Federal Reserve Bank of St. Louis

Collection: Paul A. Volcker Papers
Call Number: MC279

Box 20

Preferred Citation: Pricing Policy Committee, 1979 February 5; Paul A. Volcker Papers, Box 20;
Public Policy Papers, Department of Rare Books and Special Collections, Princeton University
Library
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Federal Reserve Bank of St. Louis

Monday, February 5, 1979

4:00 p.m.

•

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Federal Reserve Bank of St. Louis

Meeting of the Pricing Committee
-- at Board of Governors
-- Dining Room F

f
MISC 96 (10/77)

FfDERAL RESERVE BANK OF NEW YORK
Me
To

2/2/79

Mr. Volcker

Of
From

Whitney R. Irwin

The attached table presents this
District's "market share" of System item
volume for key PACS activities which are
part of the pricing exercise. It should
be noted that within the securities
business, this District's "market share"
in terms of value is significantly higher
than the rest of the System. In 1978
this Bank handled 76.4 percent and 79.9
percent of marketable and nonmarketable
Treasury financing, respectively.
We hope this information provides
adequate support for New York's representation on the Subcommittee on Pricing
'
Securities Services. As a practical
matter we should chair that Subcomm
Attached is a copy of Mr. Powers' m
to Mr. Sloane on this matter.
AL:ERP:WRI/jeb
Attachments
cc:

Messrs. Sloane
Henderson
Powers

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Federal Reserve Bank of St. Louis

SECOND DISTRICT'S "MARKET SHARE" OF
SYSTEM VOLUME AMONG SELECT PACS ACTIVITIES
(January-September 1978)

Second District
Volume

System
Volume

Volume

1,532,711

6,387,504

24.0

Transfer of Reserve
Account Balances

4,812,120

21,194,173

22.7

Noncash Collection

1,283,692

3,186,242

40.3

Safekeeping"
—

2,818,183

4,955,489

56.9

7,628

103,850

7.3

Commercial Checks:
Processing

1,244,324

10,492,996

11.9

Original Issue
Savings Bonds

2,569,486

14,904,738

17.2

79,649

383,777

20.8

Servicing-Marketable
Treasury Issues

717,868

1,673,340

42.9

Servicing-Government
Agency Issues

176,224

363,046

48.5

Activity
Verifying

Deposits

(Currency)

Automated Clearing House
Operations

Original Issue
Marketable Treasury Issues

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Federal Reserve Bank of St. Louis

Includes volume data for Clearing Activity.

Government Securities Activities of this Bank
Compared to System Totals

This Bank's inter-district transfers of government and

agency securities represent 43% of the System's total of interdistrict transfers.

This Bank handles on an intra-city basis alone a volume

of transfers equal to 70% of the System total.

This Bank handles 76.4% of the dollar value of all issues,

redemptions and exchanges of Treasury bills, notes and bonds.
4.

This Bank handles 79.9% of the dollar value of all issues,

redemptions and exchanges of non-marketable securities.

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Federal Reserve Bank of St. Louis

Edwin R. Powers

Fi:em

'.• ,
In accordance with your sugcjestion, afer the session
in your office on nonday regarding pricing of certain sc•rvices
offered by the' Federal Reserve System, I callcd

L,runc',y, Loard

of Governors, in an attempt to determine the status of

nricing

project for securities.
This morning, Mr. 3rundy returned my call and --that Mr. Eiscnmencjer, Senior Vice President at the tostc-in Fed, is
the individual running with the ball.

However,

is only now

beginning to assemble a subcommittee to focus on pricin,.,
relates to securities.

I mentioned to Mr. Drundv

York were most on::ious to have representation on

sc_commLttee

because of our major involvement in the whole spect-,:i_li
operation:;.

I further mentionud that I would lik(2

securit_ies

11,:ve

Mr. Thiekc, Assist- ant Vice Oresint, as the Now Ynr./. L'ed's member
on the subcommittec.
Brunciy, who appears to te workncl
Mr. Eisenmenger, il-Ziicated that he will convy
nr. Eisenmenger today.

Hopefully, we should bn hc,arinq favorably

on 1111i:; 17(.‘comm'onj,it ion :;hortly.

EnP/da

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Federal Reserve Bank of St. Louis

t•Ir .

•

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Federal Reserve Bank of St. Louis

TO:

Board/Presidents Pricing Policy Committee

FROM:

Pricing Task Force

SUBJECT:
DAIL:

Modifications to PACs for Pricing

February 5, 1979

In its report dated September 29, 1978, the Pricing Task
Force made a number of recommendations related to pricing of check
S rocessing and ACH services.

The Committee did not act favorably

uCS n certain issues in that report.
However, three recommendations were technical, proposing
changes to PACs accounting to reflect more accurately the true costs
S f the services provided.

The three recommendations were:

use of the dollar ratio allocation for only those
protection costs relevant to minimum building
security and use of the direct usage allocation of
all other security and protection costs,
at the option of each Reserve office, the redistribution of building costs for vault and other high
security areas separately from those of the rest of
the building,
the costs of gross settlement for work processed by
the Reserve Banks be recovered by including relevant
member bank and interdistrict accounting costs in
check collection costs. It is also recommended that
net settlement be priced explicitly but not until the
next phase of pricing.
The relevant portions of the September 29 report are attached.
The Pricing Task Force urges that the Policy Committee accept
these recommendations and forward them to the Conference of First Vice
Presidents for implementation.

The lead time for implementation of

changes to the PACs system is lengthy.

If the System is to be able to

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Federal Reserve Bank of St. Louis

To:

Board/Presidents Pricing Policy Committee
Page 2

change for check processing and ACH services by July 1, 1980,
based on accurately measured costs, the required changes in the
cost accounting system should soon get underway.

Attachment

•

Reallocation of PACS Costs

The following excerpts are typical:
Alternatives under the full cost guidelines might be:
Allocations to non-priced functions. Large portions
of overhead and support costs could be attributed to
the existence of the Fed to carry out its main function of monetary policy...Minor alterations in cost
allocations...(that)...would less arbitrarily match
expenditures with services. One example of this is
the bUilding cost allocation which includes expenses
related to the vault and other security equipment
connected with the provision of cash services...
Allocations to components of the payments services...
processing, transportation and settlement...
(Philadelphia)
PACS was never intended to support pricing decisions
and should be modified to suit the pricing purpose
before we can know what revenue would be required for
cost recovery. Adjustments to full PACS costs should
be made...removing cost elements that are irrelevant
to the public clearing house function. In particular,
the treatment of buildings...should be modified.
(Cleveland)
Our preference would be to use PACS data adjusted to
eliminate any cost allocations not directly related
to the service being priced...For example, our large
protection force would not be necessary for a check
operation and would not be used by our commercial
check competitors.
(Richmond)
Recommendation
permit the
It is recommended that PACS instructions be amended to
following two changes:

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Federal Reserve Bank of St. Louis

•

Discussion
Seven banks suggested reallocation of specific costs away from the
check service line so as to improve the cost accounting system. However,
lowering check costs would result in higher costs of other services.
The protection activity is one of the largest overhead activities in
terms of total expense accounting for 4.3 percent or $29.0 million of
total System expenses. Although the PACS manual permits allocations of
protection costs on a direct usage basis, the Board of Governors' PACS
maintenance and monitoring group has found that only about 15 to 20 percent of these costs are being allocated on a direct usage basis with the
remainder allocated on a dollar ratio basis. The 1977-78 review of PACS
conducted by the Subcommittee on Accounting Systems, Budgets and Expenditures found that the dollar ratio basis for allocating overhead costs
appeared to result in inordinately large allocations to the currency
paying and receiving and commercial check activities. That subcommittee
recommended that the cost of Federal Reserve currency and other shipping
expenses be excluded from the calculation of the dollar ratios used to
allocate overhead. This recommendation, which becomes effective January 1
1979, will reduce the overhead allocation of protection to currency and
commercial check activities. Even with this change, the cost of the
protection activity could be more accurately allocated if the PACS instructions were modified to put more emphasis on direct usage allocations.
Two different suggestions were made to improve the cost accounting
for building costs. Philadelphia suggested that the costs of building
activity be segregated between those related to security and those related to other areas, thus reducing costs of check services, particularly
in Reserve offices having new buildings. This suggestion was adopted by
the Task Force.
Cleveland suggested removing the costs of the public edifice portions
of Federal Reserve buildings from check costs as well as substituting
local fair market rental value for the present charges for insurance,
taxes, and depreciation. This approach recognizes that Reserve offices
occupying new buildings have a much greater proportion of their total
expenses reflected in taxes on real estate and property depreciation than
e of
do Reserve offices occupying old buildings. It also has the advantag
making it unnecessary to include capital costs of buildings in a private
sector adjustment factor, which may be added in the future. A disadvantage is that it would necessitate keeping two sets of books. Moreover,
at the present time no private sector adjustment factor is included in
any other cost. For these reasons the Task Force does not endorse the
Cleveland suggestion.

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Federal Reserve Bank of St. Louis

Treatment of Settlement Costs

With the increased incentive for local clearings,
banks would begin to make greater use of our settlement services. In fact, city clearing house banks
(our greatest potential competition) currently use
our settlement facilities, and in some instances,

IMOD

some of our personnel and space at no cost. We
believe that with pricing, we should also charge for
settlement and any other services (people, space,
etc.) provided to clearing houses. Our concern is
that clearing houses established in non-Fed cities
could equally demand that we provide facilities and
personnel free for their use.
(Boston)
As clearing arrangements evolve outside Federal
Reserve channels, the System is likely to be asked to
make settlement on its books. Since such settlements
should probably be priced, we would recommend that
any pricing proposal state that prices for settlement
services will be implemented.
(Kansas City)
Recommendation
d
It is recommended that the costs of gross settlement for work processe
by the Reserve banks be recovered by including relevant member bank and
interdistrict accounting costs in check collection costs. It is also
recommended that net settlement be priced explicitly but not until the
next phase of pricing.
Discussion
There are two types of settlement. Gross settlement refers to
debiting and crediting a member bank's account each day in detail for all
work processed by a Reserve office. Most of this activity is associated
with payments mechanism services as the following analysis of entry activity in the Fourth and Sixth Districts shows:
42%

Check entries

ACH entries
Fund transfer entries

All other entries

20
100%

by
The recommended change for gross settlement could be accomplished
as
redefining the member bank and interdistrict accounting activities
iate outsupport activities and redistributing their costs to the appropr
h the
put activities on the basis of entry volume. Under this approac
depositor of
originator of work processed at the Reserve office (e.g., the
change does,
a cash letter) would bear the total cost of settlement. This
however, require an amendment to the PACS instructions.

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Federal Reserve Bank of St. Louis

Net settlement refers to posting a summary debit or credit to a
outside
member bank's account from a zero-balance listing submitted by an
settlements
processor. Some examples of net settlement services are daily
does not
for local check clearing arrangements where the Reserve office
Wire II.
participate in the clearing, and for funds transferred over Bank
mechanism
Net settlement is clearly an integral part of the payments
its assoand therefore should logically be priced. However, because of
d in the
ciation with the wire transfer service,which will not be price
next phase
first phase, we recommend that net settlement be priced in the
and entry
of pricing. The price should be based on the cost of advice
possibly an
preparation, member bank and interdistrict accounting, and
allowance for risk.

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Federal Reserve Bank of St. Louis

"Pricing Cash
Services"/WRI

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Federal Reserve Bank of St. Louis

PRICING CASH SERVICES

The Cash Services Pricing Task Force considers
cash services to consist of two separate elements - processing
and transportation services.

The Task Force recommends these

two elements be priced separately.

This Bank agrees with that

division but not with the method of pricing the cash processing
portion.
Cash Processing Services
What services to price is the core issue.

Should

the Federal Reserve absorb the cost of providing cash services
as part of its mandated responsibility under the Federal Reserve
Act to furnish an "elastic currency" or should the banking
community pay for some portion of Federal Reserve cash processing services?

If so, what portion?

There is a general concensus among the Task Force,
the Reserve Banks and the Board's staff that the cost of
certain obvious governmental, or central bank, cash functions
should not be recovered through pricing.

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Federal Reserve Bank of St. Louis

Such functions are:

.printing of bank notes;
.transportation of bank notes from the Bureau of
Engraving and Printing to Reserve Bank offices;
.cost of cancelling and cutting unfit currency;
.cost of currency verification and destruction
operations.

The only other area of general agreement is that
prices should not encourage "overlapping" deposits or "crossshipments," i.e., banks depositing and ordering currency of
the same denomination within a week or ten days.

However,

there is considerable difference of opinion as to whether
this should be accomplished by pricing the deposit or order
side.

With a Solomon-like decision the Task Force has decided

to price each side equally.

Thus, except for the costs men-

tioned above, they propose equal prices for both ordering and
depositing.

It is our understanding such prices will be

quoted in terms of a per bundle charge.
The Board's legal staff has offered some comment in
an attempt to clarify this issue.

They have indicated:

"If the System is obligated to provide a
particular service, then by choice the System
will absorb the cost of its provision; and if
the System is not obligated to provide a particular service, then the System intends to charge
a user of that service for its provision."
The Board's Legal Division believes that:
"...the distinguishing characteristic between
an 'obligatory' service and a 'convenience' service
may logically and legally lie in the necessity of
providing the particular service to member banks.
For example, providing member banks with currency,
regardless of whether the notes are newly issued

411

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Federal Reserve Bank of St. Louis

or are fit currency previously issued, might be

considered an obligation since the System in the

•

preamble to the Federal Reserve Act is charged
with furnishing 'an elastic currency' (38 Stat.
However, tailoring such a currency shipment to fit
the Particular request of a member bank may
not necessarily be considered an obligation of the
System.

Under the policy poon set forth in this

memorandum, the System would absorb the cost of
providing currency, generally, but a member bank
could be charged for requesting a 'customized'
mix of note denominations other than that ordinarily
offered by the Reserve Bank."
Unfortunately, this opon is sufficiently broad to encompass

•

almost any of the proposed solutions.
This Bank would propose only to charge depositors of
currency and to impose three levels of charge:
1)

zero charge for deposits of unfit currency;

moderate charge for deposits of sorted fit
currency sealed in plastic bags, and

a full, if not penalty, charge for deposits of
unsorted currency.
We share the belief that printing and transportation

of new currency, and costs associated with destruction are
obligatory

central bank functions.

Additionally, we

believe that an equitable distribution of coin and currency

•

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Federal Reserve Bank of St. Louis

•

is an obligatory central bank function.

However, we do not

interpret equitable distribution to mean distribution to
individual financial institutions.

We believe equitable

distribution means absorption of the costs of distributing
to Reserve offices.

This clearly was the function of the

Sub-Treasuries.
Transportation Services
The Task Force recommendation will have the effect
of passing through present transportation costs.

Additionally,

the System Transportation Service has recommended a system of
pricing based on distance, value and weight.

This is the normal

method of pricing in the armored car industry but will result
in higher transportation charges for remote country banks than

•

for nearby banks.

We support this recommendation because, in

our opinion, to price otherwise

would make it difficult, if

not impossible, to maintain a viable transportation service.
Additionally, charging in a fashion different from that prevalent in the industry could subject us to legitimate and
embarrassing criticism.
Continued System provision of transportation services
seems justified on two counts:

1) we can control vehicle

scheduling and thus our work flows, and 2) we should be able to
obtain lower rates for banks.

* Treasury Department Circular No. 55, Sec. 100.2, states:
"The Federal Reserve Banks and branches are authorized and
directed to make an equitable and impartial distribution of
available supplies of currency and coin in all cases
directly to member banks of the Federal Reserve System and
to nonmember commercial banks."

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Federal Reserve Bank of St. Louis

There is one unusual circumstance with respect to

•

this District that .a

should be aware of.

We do not

pay for cash transportation services to New York City banks.
Rather, we reimburse them based on a fee schedule established
in 1972 and unchanged since.

When we price our services we

obviously will discontinue the reimbursement program.

We do

not plan to enter into the provision of cash transportation
services in New York City.

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Federal Reserve Bank of St. Louis

Whitney R. Irwin
February 1, 1979

r
Fifth Progress
Report

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Federal Reserve Bank of St. Louis

••••

C35.

•
TO:

Board/Presidents Pricing Policy Committee
'A

FROM:

Pricing Task Force

FIFTH PROGRESS REPORT

Since our last progress report, the Pricing Task Force has:
1) Established a Subcommittee on Wire Transfer Pricing, reviewed'
the report of the Subcommittee, and completed a report on the Subcommittee
document (both documents attached).

At the meeting scheduled for

February 5, 1979, the Task Force will discuss its report and will recommend that the conclusions of the Subcommittee and the Task Force be
•
accepted by the Pricing Policy Committee and forwarded to each District
for comment.

The Subcommittee on Wire Transfer Pricing consists of:

Howard Crumb., Chairman (New York); Richard Anstee (Board); Robert Dietz
(San Francisco); Ralph Kimball (Boston); Thomas Ormiston (Cleveland);
William Brown (Denver); and Robert Fitzgerald (Detroit).
2) Established a Subcommittee on Coin and Currency Pricing and
•,

reviewed the first report of the Subcommittee.

Since the issues involved

in pticing cash services are complex, the Task Force will discuss the
Issues further before presenting recommendations.

However, on February 5,

the Task Force will discuss with the Pricing ,Policy Committee some of the
many issues involved in pricing cash services and we expect to have by
March 15 a completed document with recommendations for consideration by

•

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Federal Reserve Bank of St. Louis

the Policy Committee.
consists of:

The Subcommittee on Coin and CurFency Pricing Ti"7

Peter Viguerie, Chairman (Atlanta); William Conrad (Detroit);
VW/

John Kerr (Atlanta); Gary Knecht (Dallas); James Stull (Board); and
A. V.
ATTENDED TO

Fifth Progress Report

•
P. ViswanaAan (Philadelphia).
3) Received a preliminary document from the Subcomnattee on
Pricing Administration.

The Task Force will work actively on pricing

administration issues and plans to have a document for your consideration
in late spring.
4) Begun organizing a Subcommittee on Safekeeping of Securities
and Noncash Items.
,

This Subcommittee will study issues involved with

pricing these services, including differences in availability of the
services at various Federal Reserve banks and problems in charging for
securities used as collateral.

The Subcommittee will report to the Task

Force with their findings before proceeding to develop prices.

•

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Federal Reserve Bank of St. Louis

5) Investigated the pricing of securities services (purchase
and sale).

The Task Force will discuss at the February 5 meeting with

the Pricing Policy Committee the problems associated with pricing this
service.

The Task Force intends to recommend that the *service be abandoned

rather than priced.

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Federal Reserve Bank of St. Louis

Oil7i

A REPORT OF THE PRICING TASK FORCE
WIRE TRANSFER PRICING

CONTENTS

I.
II.
III.
IV.
V.
VI.

Executive Summary
Wire Transfer Services
Alternative Pricing Methods
Derivation of Prices
Additional Findings and Recommendations
Conclusion
APPENDIX A --

Calculation of Unit Costs -- A-1 - A-3

APPENDIX B --

Derivation of Private Sector Adjustment -- B-1 - B-5

APPENDIX C --

Report of the Subcommittee on Wire
Transfer Pricing

Airier —

•

Executive Summary
. The Federal Reserve Wire System provides a membeir,tian
k with

the capability to transfer ownership of reserve account balan
ces immediately to another member bank.

This service is provided under the

terms of Subpart B of Regulation J.
by the System since 1917.

Similar services have been offered

At present, the wire transfer service is

highly automated and makes use of the Federal Reserve Communicat
ions
System.
This report contains the analysis and recommendations of the
Pricing Task Force to the Joint Board/Presidents Pricing
Policy Committee on the pricing of wire transfer services.

The report first

defines the services that the System provides for the wire
transfer of
reserve account balances (Section II).
tures are then analyzed in Section III.

Three alternative price strucSection IV considers two alter-

natives for calculating an adjustment to make prices based
up PACS costs
comparable to prices in the private sector.

In Section V a number of

recommamiations are provided on ancillary matters related
to wire transfer
pricing.
RECOMMENDATIONS

The Pricing Task Force recommends:
(1)

The eight services shown in Section II should be provided

by all Reserve Banks, and prices should be imposed for them.

No other

service of the wire transfer function currently offered shoul
d be priced.
1
4

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Federal Reserve Bank of St. Louis

(2)

Wire transfer prices should be uniform nationwide for each

type of service provided, but the prices should differentiate
between

•

interdistrict and intradistrict transfers (Ad H Model).

However,

some members favored the ACH Model primarily because it would
,
avoid the possible criticism that the System is unfairly subsi
dizing
interstate transfers, the only wire transfer service where
privatesector competition currently exists.
(3) Initially, Reserve Banks should not offer immediate
advice ;
service on standing order from a receiver.

If such a service is offered

later, each transfer under the order should bear the immed
iate advice ;
•

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Federal Reserve Bank of St. Louis

charge.
(4) Prices should be based on total PACS costs, adjusted
upward by 11 per cent to cover imputed financing cost.
(5)

Originating institutions should bear all charges

for the eight services to be offered initially.
(6)

The $1.50 charge now imposed for transfers of a

value of $1;000 or less should be dropped after price
s are implemented.
(7)

PACS reports should be modified to provide additional

information on operation costs.

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Federal Reserve Bank of St. Louis

II.

Wire Transfer of Funds Services
, Four principal activities are performed by the Federal Reserve

Banks in providing this service:
(1)

Intradistrict Transfer.

Receipt of a transfer request

(debit) from an on-line bank, and delivery of an advice (credit)
to a
bank in the same district.

(Includes a mail advice for an off-line

bank.)
(2)

Interdistrict Transfer.

Same as Intradistrict Transfer,

except that the requesting and receiving banks are located in
differenit
districts.
(3)

Off-line Transfer Request. 'Accepting a transfer request

from an off-line bank, authenticating, processing and validating the
request, and entering it into the automated communications facil
ities;
and
(4)

Immediate Advice.

Advising an off-line bank by telephone,

telegraph, or messenger on the same business day of a funds
transfer
credit received for its account when requested by the originator
or the
receiver.

Not all Reserve Banks offer immediate advice service on stand
-

ing order from the receiver.
For the year ending in September 1978, the System recorded
the
following cost •and volume for providing each of the activities:
Cost

Volume
(000)

Intradistrict transfer

$ 5.8

8,638

Interdistrict transfer

7.1

8,638

Off-line transfer request

4.9

2,564

2.1
$19.9

1,720

Immediate advice

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Federal Reserve Bank of St. Louis

-4—
Chart 1 shows schematically how intra— and interdistrict
transfers are carried out.

Chart II depicts schematically how the

four activities described above are combined in providinglprteight
services to be priced.
(1)

Th eight services are:

Intradistrict On—line Transfer without Immediate
Advice.

A member bank directly connected to the

Fedwire requests a transfer to another bank in the
same district and does not request that the receiver
be given an immediate advice.
(2)

Intradistrict On—line Transfer with Immediate
Advice.

Same as (1), except that the Reserve Bank

advises the receiver of the transfers immediately
.upon receipt.
(3)

Intradistrict Off—line Transfer without Immediate
Advice.

A member bank not directly connected to

the Fedwire requests (usually by telephone) a
transfer to another bank in the same district, and
does not request that the receiver be given imme—
diate advice.
(4)

Intradistrict Off—line Transfer with Immediate
Advice.

Same as (3) except that the Reserve Bank

advises the receiver of the transfer immediately
upon receipt. -

Chart 1

BASIC TRANSFER SERVICES
Selernatic Approach

• INTRA-DISTRICT

MEMBER
BANK A

Transfer
Request

FEDERAL
RESERVE
BANK

Transfer
Credit

MEMBER
BANK B

INTER-DISTRICT

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Federal Reserve Bank of St. Louis

MEMBER
BANK.A

Transfer
Request

FEDERAL
RESERVE
BANK A

INTERDISTRICT
TRANSMISSION &
SETTLEMENT

•

FEDERAL
RESERVE
BANK B

Transfer
Credit

MEMBER
BANK C

Chart 2

ADDITIONAL TRANSFEM SERVICES
Schematic Approach

INTER-DISTRICT

FRB
A

INTERDISTRICT
TRANSMISSION &
SETTLEMENT

FRB

Off-line, Mail Advice

•

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Federal Reserve Bank of St. Louis

•

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Federal Reserve Bank of St. Louis

-5-

(5) Interdistrict On-line Transfer without Immediate
Advice.
i

(6)

krr.,
Interdistrict On-line Transfer.with Immediate
Advice.

(7) Interdistrict Off-line Transfer without Immediate
Advice.
(8) Interdistrict Off-line Transfer with Immediate
Advice.
Services (5) through (8) are the same as (1) through (4)
except that sender and receiver are in different Reserve Districts.
The Task Force recognized that some Reserve Banks
provided immediate advice on standing order from the receiver.
The Task Force debated at length whether this service should be
priced or discontinued.

The Task Force agreed that this service

should not be offered initially, but that if strong demand for the
service developed, a District could provide it at the same price as
immediate advice requested by the originator.
Returns and adjustments, as well as service messages on
behalf of member banks should be considered part of the overall funds
transfer service, just as they are considered part of the check collection service in the Board's proposal for check prices.
no explicit price should be charged for these services.

Therefore,

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Federal Reserve Bank of St. Louis

-6-

III. .Alternntive Pricing Methods
,
The Task Force considered three basic methods of pricing
wire transfer services.

These three basic methods are:

(1) a national

price structure that is uniform among Districts and between
intra- and inter-District transfers; (2) a price structure differentiating
between intra- and inter-District transfers but not taking into account
cost differences among Districts.

This structure is modelled on the

structure proposed for automated clearinghouses (ACH); and (3) a District.pricing structure based on District costs for intra-District
services and on national costs for inter-District services.

This struc-

ture is modelled on that proposed for check processing.
Each of these alternatives can meet the Task Force's requirement of recovering all PACS costs for the service, including direct,
overhead, and System-allocated costs, based on current wire transfer
volume.

Further, it is assumed that with each of the alternatives,

Reserve Bank service levels would initially remain unchanged.

Finally,

costs were marked up by 11 per cent for comparability with the private
sector and rounded up to the nearest multiple of five cents.
For comparative purposes each of the Task Force's three
alternative price structures is described in detail below.
A.

National Price Structure

The national price structure differs from the pricing
approaches proposed for check collection and for automated clearinghouse (ACH) services.

The national price structure would be based

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Federal Reserve Bank of St. Louis

upon the assumption that the basic funds transfer service provided
by the System does not vary either among Districts or ketween Districts.

transfer 'Lind interdisThus, the services of intradistrict
,

trict transfer (services 1-4 and 5-8, respectively, in the preceding
section) would be consolidated into a single service.

One price,

uniform across all Districts, would be established for this single,
national service.

Uniform national prices would also be established '

for the additional services of off-line transfer requests and requess
for immediate advice.

The resulting prices, assuming an 11 per cent

private-sector adjustment, are shown in Table 1.

All charges would

be imposed on the originator of the wire transfer, with the possible
exception of standing orders for immediate advice.
Arguments Favoring a National Price Structure
The Subcommittee on Wire Transfer Pricing recommended a
national price structure for a number of reasons.

First, there are

considerable differences in the PACS cost reported for the Districts,
with respect to both the basic transfer service and the additional
services (Table III).

These cost differences may not truly reflect

differences in resource cost of providing the services:

Moreover,

the cost differences do not appear to arise from differences in the
level of service provided in the Districts.

Instead, these apparent

cost differences are thought to arise principally from the cost
accounting methods in use.

In addition, the levels of excess capacity

in the wire transfer facilities vary from District to District.

Prices

based on PACS average cost cannot reflect varying capacity levels, so

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Federal Reserve Bank of St. Louis

Table 1
National Price Structure

Intradistrict and Interdistrict
,
On-line
With
Without
advice
advice

Off-line
With
Without
advice
advice

PACS Cost

.75

1.98

2.65

3.88

Proposed prices

.85

2.20

2.95

4.35

•

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Federal Reserve Bank of St. Louis

-8-

that prices set on that basis would be too high in the short-run and
might curtail development of the wire transfer service.„In any case,
41r.t.tr,
4,

capacity differences are expected to diminish over time.

Therefore,

member banks in Districts recording higher PACS costs, or where transfer volume is low, would, in effect, pay a penalty for being located
in that District.
The second reason that the Subcommittee favored a national
price structure was that the basic wire transfer service provides,
immediate transfer of balances wherever located.

In this view there

is no justification for distinguishing between transfers within the
same District and transfers among Districts.

The processing and

accounting technology employed is thought to be essentially the same
in either case.

Distinguishing interdistrict from intradistrict

transfers would impose artificial divisions of what is in essence a
national market.
A third reason for a national price structure is that all
other firms currently providing such services do so under a national
price structure.

Finally, a uniform national price would

facilitate administration.

There would be no need to record the

destination of the transfer in order to determine the charge.
Arguments Against a National Price Structure
A national price structure does not reflect the actual cost
of providing the service-to each user of the service.

Thus, banks

transferring funds in.a high cost District would receive a subsidy,

•

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Federal Reserve Bank of St. Louis

-9-

from those in a lower-cost District.

A More serious problem arises

from'the fact that there is an incentive for a District to improve
its service to its member banks because those banks onty pay a proportionate share of the cost of the improved service.

Banks in other

Districts would bear a share of the cost of the improved service.

This

problem could be avoided by maintaining a uniform service level, but
doing so would require that service levels be determined nationally,'
which might stifle innovation and productivity improvement.
Another drawback of a national price structure is that it
creates unrealistic incentives for private competitors.

In a District

where costs are low and volume is high, the System price would be well
above cost.

Private competitors would tend to enter this market whether

or not they were, in fact, able to provide the service as efficiently as
the Reserve Bank.

In cases where the System price was below cost, pri-

vate cbmpetitors would be discouraged, even if they could perform the
service more efficiently than the Reserve Bank.
B. Differentiated National Prices for
Intra- and Interdistrict Transfers (ACH Model)
Under this alternative the price for an interdistrict
transfer would be computed by applying a surcharge for interdistrict
transmission and settlement to a basic national charge.
transfers would not incur this surcharge.

Intradistrict

This pricing structure parallels

that proposed for ACHs, in which there is a single price (with the exception of New York) for intradistrict items and a surcharge for interregional items.

The 'resulting prices are shown in Table II.

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Table II
National Differentiated Costs and Prices
*
(ACH Model)
(117 markup rounded up to nearest nickel)
w
,
!c
Intra-District
Inter-District
On-line
Off-line
On-line
Off-line
Without
With
Without
With
Without
With
Without
With
advice advice
advice advice
advice advice
advice advice
Prices
PACS costs

.75

2.15

2.90

4.25

.95

2.30

3.05

3,95

.68

1.91

2.58

3.81

.82

2.05

2.72

4.40

Applied in all Districts.

10,

Advantages of the ACH Model
A price structure that is uniform for all districts but
which differentiates between intradistrict and interdistrict transfers retains almost all of the advantages of a uniform national price
described in the preceding section.

In addition, prices are established

at a level that would be closer to the actual resources involved in providing the interdistrict transfers.

Because the prices of inter-

district tran6fers exceed those that would be established under a
national pricing structure (95Q vs. 85Q), the implicit System subsidy
to interdistrict transfers would be reduced, and private-sector competition would be encouraged.
Arguments Against the ACH Model
The ACH model retains all of the disadvantages of the national
price structure, except that incorrect incentives to the private sector
are reduced as far as interdistrict transfers are concerned.

In addi-

tion, a pricing structure differentiating between intra- and interdistrict transfers would be slightly more difficult to administer.
C.

District Prices For Intradistrict
Transfers (Check Model)

This alternative for pricing wire transfers parallels the
structure proposed for check collection.

The price charged to the

member bank originating a.transfer would be based initially on the
cost of accepting and processing the transfer at the Reserve Bank
that first receives the request .

(These costs are shown in Table III.)

•

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Federal Reserve Bank of St. Louis

•••••••••••

Table III
District PACS Costs*

gu
Intra-District
Off-line
On-line
Without
With
With
Without
advice advice
advice advice

District

1.03

Boston

3.26

-7.27

.87

2.52

5.10

7.30

New York

.75

2.40

4.21

Philadelphia

.66

2.63

2.56

4.53

.81

2.78

Cleveland

.43

1.37

2.26

3.20

.66

1.60

i
4.33 ' 5.98
f
4.68
2.71
i
3.43
2.49

1.26

3.40

3.•85

5.99

1.21

3.35

3.80

5.94

Atlanta

.61

1.63

2.50

3.52

.78

1.80

2.67

3.69

Chicago

.53

2.13

2.23

3.83

.72

2.32

2.42

4.02

St. Louis

.67

1.59

•
1.83

2.75

.82

1.74

1.98

2.90

Minneapolis

.49

1.67

2.38

3.56

.70

1.88

2.59

3.77

Kansas City

.57

2.69

2.94

5.06

.75

2.87

3.12

5.24

Dallas

.65

1.58

1.85

2.78

.80

1.73

2.00

2.93

San Francisco

.59

1.05

1.27

1.73

.76

1.22

1.44

2.90

•

*Estimated.

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Federal Reserve Bank of St. Louis

1.06

5.07

•
5.81

Richmond

•

3.23

Inter-District
•JEIT
One
With
Without
With
Without
advice advice
advice advice

See Appendix A.

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Federal Reserve Bank of St. Louis

•

-11-

fe,

be
In aadition, a uniform intec-District delivery charge of 37c. would
added in calculating the cost basis for these transfer.

Thus, the

in
price for each service varies from District to District as shown
Table IV.
Advantages of the Check Model
- Under this alternative prices would most closely reflect
the fully allocated cost of providing each service, which is to be
the basis for prices under the membership legislation now under Congressional consideration.

In addition, the model provides the greatest

incentive for the private-sector to compete with the Reserve Banks,
while at the same time encouraging efficient resource allocation.
Reserve Banks would have the largest scope for innovations
and productivity improvement, not only because there would be no need
for a national, uniform determination of service levels, but also
•
because member bank users would press the Reserve Banks for lower costs
and improved services.

The benefits and costs of both types of improve-

ment would be reflected directly in the prices members would pay.
Arguments Against the Check Model
In considering the national price structure, the Subcommittee
pointed out the many drawbacks of using the PACS cost data as a basis
for pricing.

District prices bAsed on average costs derived from PACS

concould be quite inequitable,particularly in those Districts where
siderable excess capacity exists.

In addition, District prices would

•

be considerably more difficult to administer.

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Federal Reserve Bank of St. Louis

415.11101•16•••..••

Table IV
District Prices
(Check Model)
up to nearest nickel)

III:runded

Inter-District

Intra-District

On-line
Without
With
advice advice

Off-line
Without yith
advice advice

On-line
Without
With
advice
advice

Off-line
Without
with
advice advice

1.15

3.60

5.65

8.10

1.20

3.65

New York

.85

2.70

4.70

6.45

1.00

2.80

4.85

Philadelphia

.75

2.95

2.85

5 05

.90

3.10

3.(15

5.20

Cleveland

.50

1.55

2.55

.3.55

.75

1.80

2.80

3.85

Richmond

1.40

3.80

4.30

6.65

1.35

3.75

4.25

6.60

Atlanta

.70

1.80

2.80

3.95

.90

3.00

Chicago

. .60

2.40

2.50

4.25

.80

2.60 '

2.70

4.50

.75

1.80

2.05

3.05

.95

1.95

2.20

3.25

Minneapolis

.55

1.85

2.65

3.95

•.80

2.10

2.90

4.20

Kansas City

.65.

3.00

3.30

5.65

.85

3.20

3.50

5.85

Dallas2.05

3.10

.90

1.95

2.25

3.25

..10San Francisco

1.95

.851.60

3.25

Boston

Louis

.65

1.20

1.45

\'‘))
•

6.65

-12-

It his been suggested that differential prices by District
could lead to circuitous routing of wire transfers, iiiiiiyanks seek
to find the lowest cost method of initiating funds transfers.

However,

Table III indicates that circuitous routing would be improbable unless
correspondent bank charges for initiating a transfer across District
boundaries were less than System costs for the same service.
For example, if the correspondent bank charged the Bankwire fee to t
a respondent seeking to enter the Fedwire through the correspondnt,
such circuitous routing always would be more expensive than for the
respondent to use the Fedwire directly.

•

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Federal Reserve Bank of St. Louis

IV.

Derivation of Prices
The wire transfer system is essentially a mature payments

service in the sense that no significant research and development
expenditures are required.

As such, prices established on the

basis of current average cost will not seriously impact the developof the service.

Therefore, the Task Force believes it would be

appropriate to apply an 11 per cent markup for imputed costs, similar
to the capital costs and taxes that a private business providing the
service would have borne.

A price established on this basis would be

consistent with the stated objectives of prices which are to recover
cost, to allow for private sector competition and to increase the
efficiency of the payments system.

(Appendix B of this report

describes the private sector adjustment in greater detail.)

41.•••••••

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Federal Reserve Bank of St. Louis

AlftahlkormJa...

-13-

An alternative markup method would be similar to that
developed for ACH services.

ACH services initially4V4.0 not to

be priced at current costs, but at costs associated with a "mature"
volume.

In addition to the costs for mature volume, a factor was

subsequently included to allow for error in estimating volumes and
to cover development costs.
If this method were applied to wire transfer services,
prices would be marked up to cover the future development costs of
FRCS 80, based on the argument that private-sector firms could price
in this way.

However, in practice, private-sector firms do not

always adjust current prices to cover future developmental costs.
•

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Federal Reserve Bank of St. Louis

-14-

Addonal Findings and Recommendations
The Task Force finds that, regardless of which of the

s401-1..
aforementioned three pricing alternatives is adopted,§everal
complementary changes and/or addons to System policies should
I- made prior to the implementation of pricing.

In general, the

following recommendations are designed to facate both the
administration of wire transfer pricing and the process by which
user institutions and the public must adapt to the pricing environ1/
ment:—
(1)

Charges should be assessed for transactions
resulting in accounting entries only (i.e., no
charges for services),

(2)

National pricing should not preclude the Federal
Reserve from using prices at some future time to
iIt.rove the efficiency or effectiveness of wire
transfer services,

(3)

The Conference of First Vice. Presidents should
I- requested to discontinue the policy of having
Reserve Banks automatically advise receg
institutiS ns of third party transfers, allow
ornators access to immediate advice service,
and modify Federal Reserve Bank Operating Circulars to reflect these policy changes.

1/ For further description please see Report of the Subcommittee on
Wire Transfer Pricing, pp. 9-13, 19. (attached).

•
.
•

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Federal Reserve Bank of St. Louis

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•

Appendix A
Calculation of Unit Costs

Unit costs used as a basis for the national, dirlerentiated
national, and District pricing alternatives are based on unit cost
calculations from PACS data, including overhead and System projects
costs, and do not include components for profits, taxes, bank accountCosts related to securities

ing functions, or future capital needs.
operations are not included.

The following table gives the basic cost categories and
data from which specific costs, and prices, appearing in Sections III
and IV of this report are derived.

These data are the individual

District unit costs for each of the three basic wire transfer services.

Off-Line
•
Basic

•
Receipt

Original

.1.03

4.04

2.20

New York

0.75

3.46

1.65

Philadelphia

0.66

1.90

1.97

Cleveland

0.43

1.83

0.94

Richmond

1.26

2.59

2.14

Atlanta

0.61

1.89

1.02

0.53

1.70

1.60

St. Louis

0.67

1.16

0.92

Minneapolis

0.49

1.89

1.18

Kansas City

-0.57

2.37

2.12

Dallas

0.65

1.20

0.93

San Francisco

0.58

0.68

0.46

System Average

0.68

1.90

1.23

Boston

Chicago

'
•

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1
Table I gives the differentiation of District,basic
3
1

service costs in debit (origination) and credit (recelVtfcategories.
District costs of basic service are differentiated on the assumption
the 2/3 of processing and other handling costs may be allocated to
the debit (originating) functions while 1/3 would be genekated in
credit (receiving) functions. This assumption is undergoing review
anI is subject to change.

If the assumption should be changed,

1I
I,

District costs and prices shown in Tables III and IV will change a

few cents.

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Federal Reserve Bank of St. Louis

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Federal Reserve Bank of St. Louis

•

Table I
Federal Wire System Costs

FRCS
Cost

Credits

Debits
Basic
Transaction

Off-Line
Origination

Basic
Transaction

Offline*
Immediate
Advice

Boston

.69

4.73

.34

2.54

New York

.50

3.96

.25

1.90

Philadelphia
,
Clevela:id

.44

2.34

.22

2.19

.29

2.12

.14

1.08

Richmond

.84

3.43

.43

2.56

Atlanta

.41

2.30

.20

1.22

Chicago

.55

2.05

.18

1.78

St. Louis

.45

1.61

.22

1.14

Minneapolis

.33

2.22

.16

1.34

Kansas City

.38

2.75

.19

2.31

Dallas

.43

1.63

.22

1.15

San Francisco

.39

1.07

.19

..65

* Includes basic transaction cost.

.
,i
i
t

Average
Interdistrict
Delivery Cost

.14

.23

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•

Appendix B

•

Derivation of Private-Sector Adjustment

41
.14

'44

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Federal Reserve Bank of St. Louis

•

Derivation of Private Sector,Adjustmont

The Federal Reserve System's cost accounting includes depreciation
of buildings, furniture, and equipment (at historical cost)'Vfit does not
include any of the costs which the System implicitly incurs to finance
these or other asset acquisitions.

To reflect these implicit financing costs

as if the Federal Reserve System were a privately owned enterprise, an adjustment factor was developed which has been added to the direct and indirect

costs recorded in the Federal Reserve cost accounting system.
In computing the adjustment factor, a determination had to be
made of the assets employed in providing services.

It was assumed that such

assets were financed in a way similar to the way the private sector finances
assets.

Total System assets to be financed were assumed to include existing

net book value o( buildings and equipment and other

orking capital" assets.

Assets solely identified with central bank functions, such as holding
Gold Certificates, SDR's, Acceptances and Treasury and agency securities
were not included because such assets are not used in providing services.
Because there are alternative strategies for dealing with Federal Reserve
float that may be more desirable, float was excluded from the computation of
working capital assets.

Also excluded were Federal Reserve assets associated

with the foreign function and any premium on securities derived from not reflecting
securities in the portfolio at cost on the balance sheet.

Based on the average

of six month end balance sheet reports for the twelve Federal Reserve Banks
during the first half of 1978, total System assets to be implicitly financed
were calculated to be $752 million as shown in Table 1.
The capital structure which was assumed to finance the $752 million
in assets included 507 equity and 507 debt.

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Federal Reserve Bank of St. Louis

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The return on equity was assumed to be 7% after tax or 13% ,before tax,
I

given an income-tax rate of 45%.

The interest rate on debtWas assumed to

be 9%.
4

Not all of the imputed $752 million in assets would be required
to provide the services to financial institutions that would be priced.
Therefore, a calculation was made to exclude assets supporting such functions
as monetary and economic policy, supervision and regulation, and services
to the Treasury as fiscal agent.

Service charges for these functions are

not included in this pricing proposal.

Capital assets were allocated to

priced services based upon ratio of the cost incurred for such services
during the first half of 1978 to the total cost of all System services during
that period.

Because shipping services are contracted from the private

sector, the cost of shipping was subtracted from both the numerator and
denominator of the ratio. - During the first half of 1978 the cost of services
to be priced less shipping expense represented about 54% of total System
costs minus shipping expense.
•

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Federal Reserve Bank of St. Louis

A total of $402 million in assets was therefore

allocated to the services to be priced.
On an annualized basis, the cost of the imputed debt of $201
million, at a 9 per cent annual rate, would be $18 million.

At a 13 per

cent annual pre-tax rate of return, the cost of the imputed equity would
be $26 million.

The $44 million resulted in a markup of 11 per cent on the

$402 million of direct and indirect cost of providing the services to be
priced.

This calculation is illustrated in Table 2.

If the System had priced

its services during the first two quarters of 1978 to recover direct and

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Federal Reserve Bank of St. Louis

-3-

indirect cost plus an adjustment of 11% for private sectows,
it would
have generated revenues of $223.1 million during this period.
Table 2 also shows the markup for the check collection servic
es
which accounts for 58% of the $402.2 million in costs incurred
by the
Federal Reserve for all operations to be priced.

Given a markup of 11%,

$128.6 million in revenues would be derived from check collec
tion services
•

at the 1978 volume for the first half of 1978.

•

411...•••••

••", •••••••

•.

•••••

••

•••••••••••- • •- •••

NI.•r

•••• •

•

,
.• ••••••••••,,
••

• ••,- • -

••••

-,••••••••-•••••••• ••

-77 i
'Immomm

4.i..4..4•144,
+
„,., • .....
6

:LE 1

Implicit bysteiu Balance Sheet
Underlying Private Sector Adjustment
kdilions, based on tne Average of Six
Month End balance Sheets for First half of 197d)

banK erealises, ivet

3b4.3

Debt

Difterence & Suspense Accounts

19Z.5

Equity

furniture . and Lquipuient, Net
Deterred Charges, utner
'utner Real Estate

•

Uverdratts

Total Assets Financed

0,
0

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Federal Reserve Bank of St. Louis

•t••••• t• 1•••

49.0
-43.9
42.2
36.2

Deterred Charges, Leaseholds

••^1.4,•••••••••••••••••••4••••••••-• ••...In'.

43'76.0

non”,

1.9

752.0

Total liabilities

V752.0

•

• • • ••••

tumor... Jo

4/Askotestabwwiseisv suraid.ortimA4iauwie.obs.

•

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Federal Reserve Bank of St. Louis

Estimated
Implicit mevenue Statement
Underlying ?rivate Sector Adjustment
Annualized, based on
first half 197o
Oux debt; 5U equity)
ftillions)

All Operations •
to be ericed
Revenues

$446.2

Less
PACS Cost of Service
Dept Service l@ 94)
Lquals: rre-Iax Income
. Less: . income lax
Lquals:

me turrr lo
tiaquity
r4)

Allocation*
To Check
Services
$257

402.2
16.0

231.8

26.0
12.0

15.0
6.6

14.0

6.2

10.4

implied elarkup

hEm0:

•

Assets have been allocated to Keserve Bank operations to be
priced in the same ratio that the rACS expense of providing
those services bears tp total expenses. i;or the first half
of 1976 this ratio appioximated 54';., and $402 million in
. assets were allocated to priced operations. In addition, it
was assumed tnat one-nalf these allocated assets are
financed by debt and one-half represent equity.

Debt
Equity
lotal

$201.0 LiilliOn
Z01.0 hillion
42.0 Nillion

w based on ratio of check collection eiws costs to eAcS
costs for all operations to be priced.

•iirrevir

"
1 -

-1,7717W

• i"1.43•1111.1...04•Iii.. As4114. 41.06...:aorm

•

1
1
QUESTIONS AND ANSWERS ON PRICING

POLICY DECISIONS ON PRICINU
1.

Is the proposal to charge for Federal Reserve services tied to the
membership problem?

Yes. If actions are not taken to tEt
the burden of Federal
Reserve wembersnip, tne Federal Reserve will not proceed to implement any
pricing scnedule.

Why is the Federal Reserve proposing to sharge for its payments services?

Tne Federal keserve is considering charging for its payments
services as part of its comprehensive plan to enhance competitive equity
among depository institutions and encourage competition to improve both the
effectiveness and cost of the payments mechanism.

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Federal Reserve Bank of St. Louis

Service charges are expected to encourage more efficient use of
I.yments facilities and to provide incentives for innovations that reduce
cSsts. For example, pricing of check collection services will provide an
incentive for banks to IS more check processing themselves and to set up
adonal local clearing arrangements. Therefore, the opportunities for
the private sector to compete with and improve upon Federal Reserve services
wouid ue enhanced. moreover, service charges will provide the System with
additional revenues to minimize the impact of the membership plan on the
Treasury.
an.

when will charging for Federal Reserve services be made effective:

Ihe exact date when,charges will be effective depends on implementation of a plan to CJ-!S%
the problem of attrition of membership in
the Feueral Reserve. In no case will cnarges be levied before July 1, 1979.

"—Tr-7

•

Report of the
Subcommittee on
Wire Transfer Pricing

•

R'ED........ .............. ....
1,1 1
ATIEl DED TO

Submitted by:

ow.

Subcommittee on Wire Transfer Pricing

.Members
Howard Crumb; Chairman
Richard Anstee
William Brown
Robert Dietz
Robert Fitzgerald
Thomas Ormiston
Ralph Kimball
Ann Li, Secretary

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Federal Reserve Bank of St. Louis

Coordinators
New York
Board
Denver
San Francisco
Detroit
Cleveland Boston
New York
•

James:Grieb
Richad Epps
Robert Van Valkenburg
William Glover
Ronald Robinson
Jerry Stojetz
Martha Perine
Charles ShromOff
Richard Ingram
Donald Carson

Boston
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Dallas
San Francisco

January 15, 1979
Revised

•

Table of Contents

Page No.
I.
II.
III.

IV.
V.

Executive Summary

The Fedwire and the Subcommittee Assignment
Major Issues and Subcommittee Positions

4
0

Services Considered

Uniformity in Prices

Charge Originator

Charges for Accounting Transactions

i10

Future Pricing Possibilities

Penalty Charges

Legal Impediments

12
14

Implications

Conclusions and Recommendations

Appendices
A.

Calculations of Unit Costs and Suggested Prices

A-1

Alternative Scenarios

B-1

Sensitivity Analysis

Environmental Impact

Administration

C0059S901

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Federal Reserve Bank of St. Louis

.•

D-1
E-1

•

Executive Summary

The Subcommittee believes that the Federal Reserve
System should'adopt a pricing structure based on three broad
catego..ies of wire transfer of funds services:
;
.$
40Aly

Processing the basic transaction through the
automated communications facilities including
immediate settlement and the provision of an
immediate advice to the on-line bank and a
mail advice to the off-line user;

Accepting a transfer request from an off-line
bank, authenticating, processing and validating
the request, and entering it into the automated
communications facilities; and

•

Advising an off-line bank by telephone, telegraph,;
or messenger on the same business day of a funds
transfer credit received for its account when
.requested by the originator.

Limiting pricing at this time to these three service
categories, in the Subcommittee's view, is the optimal means
for encouraging efficient usage of the Federal Reserve Communications System (Fedwire or FRCS) while providing Reserve Bank
management with a pricing program for wire transfers of funds
that is relatively simple and inexpensive to administer. It
also encourages standardization and equity among Districts
offering Fedwire services.
The Subcommittee's proposed prices are based on unit
cost calculations from PACS data including overhead and System
projects costs and the current Fedwire volume. The prices
suggested 4r the Subcommittee have been based on PACS data
only and do not include any component for profits, taxes, or
future capital needs. The Subcommittee's position that prices
for each of the three categories of wilre transfer services
should be the same nationwide is based on its concern that a
District pricing structure utilizing District costs would lead
to substantial price differences between Districts and regions
that would be detrimental to the stability, flexibility,
growth, and efficiency of Fedwire as one part of the national
payments mechanism.

•

Only the originator of a wire transfer of funds
request would be billed, on a,per transaction basis, for those
wire transfer services resulting in accounting entries to
facilitate the administration of the pricing structure.
Additionally, the Subcommittee has taken the position that
development of separate nationwide prices for third party
transfers, transfers of certain low dollar values, transfers

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Federal Reserve Bank of St. Louis

-1

•

made at certain times during the business day and fees based on
other factors, such as on a volume basis, should be deferred
and subject to consideration after the recommended pricing
schedule is implemented and its effects are clearly understood.
The Subcommittee proposes the elimination of9pke
present $1.50 charge for tran.%fers below $1,000.00 in value.
This charge, now imposed by Reserve Banks for inter-District
transfers and by some Reserve Banks for intra-District transfers, will likely be unnecessary upon implementation of the
proposed price schedule for off-line banks, which could price
their transfers above the $1.50 level. Further the $1.50
charge could be viewed as being arbitrary. •

•

In developing a pricing structure for Fedwire transfer
services, the Subcommittee estimated the most-likely consequences of a changeover to pricing. The basic transfer services of
the FRCS, under the proposed pricing structure, would closely
resemble the priority transfer services of other transfer
networks and would be competitive with private transfer networks.
At this time, the SubcomMittee has concluded that its proposed
fee schedule may not cause a significant change in either the
number of users or the distribution of transaction volume
between Fedwire and other networks because of the unique
service offered by the wire transfer application which operates
within the jurisdidtion of Subpart B, Regulation J.
.
In the proposed pricing structure, transaction prices
are linked directly to the cost of providing the specific
services. This structure will accommodate any broader access
to the Fedwire involving nonmembers or other financial institutions as may be indicated in the fu.ture. The Subcommittee
feels that the proposed price structure is sufficiently
flexible so that additional service demands on the FRCS can be
met and thato"revenues from new or additional activities could
be adjusted to cover the cost-of modification or the .addition
of new facilities.
•
The full, PACS-based unit costs of the three services are
calculated as follows:

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Federal Reserve Bank of St. Louis

Unit Cost

Service
'Basic transaction charge to all users

$ 0.75

Extra charge for:
Accepting and processing requests from
off-line users
Immediate advice to receiving users

-2

$ 1.90
$ 1.23

•

These unit costs would be combined
into a four
category pricing structure as follows:
Service Requested

Transfer Originator
On-Line
Off-Line

No immediate advice
With immediate advice

$ 0.75
$ 1.98

$ 2.65
$ 3.88

The Subcommittee acknowledges that
the proposed
pricing structure could generate inc
reased demands for on-line
services. However, the Subcommit
tee is of the opinion that
such demands will not be large eno
ugh to cause problems in the
capacity,of existing computer equipm
ent (except New York and
Chicago). This view is based on
the fact that financial
institutions will need to make som
e ten or more transfers per
day to make on-line operations cos
t effective, in light of
terminal equipment, message prepar
ation, personnel, control
procedures, and otheL costs of online users.
Having addressed the range of
issues related .to wire
transfer pricing pursuant to its ass

ignment, the Subcommittee
recommends that the Pricing Task For
ce:
1.

Adopt the Subcommittee's methods wit
h respect to
the derivation and implementation
of a three service/
four category price model for wire
transfer pricing.

Request the Conference of First
Vice Presidents to
eliminate the $1.50 charge on wire
transfers of
a dollar value of $1,000 or less
during implementation
of pricing.
•

Request the Conference of First
Vice Presidents to
discontinue the policy of having
Reserve Banks automatically advise receiving instit
utions of third
party transfers, allow originato
rs access to immediate
advice service, and modify Federa
l Reserve Bank
Operating Circulars to reflect the
se policy changes.
Include the additional environmenta
l statistics in
future PACS reports as described
in Appendix F. of this
report to facilitate the calculati
on of unit costs.

•

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Federal Reserve Bank of St. Louis

Disband the Subcommittee.

Mob

II.

The redWire and the Subcommittee Ass
ignment

The Federal Reserve Communications System
(FfcS) frequently
referred to as ,the 7edwire" provides aut
horized users-i
(e.g.
member banks) with a unique national
payment mechanism service by
which they are able to transfer reserv
e account balances on a same
day basis to any other authorized use
r in the country. These
transfers of funds may be made for the
benefit of the users
themselves or the benefit of third (or
fourth) parties (customers).
All Federal Reserve Banks offer two
levels of wire transfer
service to member banks, although som
e Districts provide supplementary
services. The basic service is the
electronic transfer of reserve
account balances from one member ban
k to that of another. The
second service, initiated at the
request of the bank originating the
transfer, involves the immediate not
ification to the recipient
member bank by the Reserve Bank rec
eiving the message.

•

These two services are provided to
member banks that are
efther "on-line" -- have terminals
installed on their premises
directly connected to the District
computer switch, or to banks that
are "off-line" --do not possess ter
minals and must conduct transactions with the local Federal Res
erve Office by telephone. Transf
er
requests initiated by on-line ban
ks from their terminals do not
create costs for the System other
than those 59ncerned with the use
of the computer and communicatio
n facilities
and certain mandatory
control procedures. On-line banks
also receive automatic notification
of all incoming transactions
on their terminals, thus these ban
ks
receive the equivalent of "immed
iate advice" with all transactions
,
whether or not requested by the
originator, and at no additional
cost to the Reserve System.

•

Authorized wire transfer users
are designated in Federal
Reserve Regulation J as those
who maintain deposit accoun
ts,
including member banks, Edge Act
and Agreement corporations,
foreign governments, certain
international organizations, and
the
U.S. Government. Operating hou
rs for Federal Reserve wire
tra
nsfer
departments are designated by
Federal Reserve Operating Cir
cul
and are from 8 a.m. or 9 a.m
ars
. to 3 p.m. each day for int
erDi
-:trict
transfers. All transfers are
in Federal funds and settle
men
t
occurs at the end of the ope
rating day.
2/
The Federal Reserve incurs
costs for all communications
circuits while on-line users pay
for terminals and other com
munication related equipment on the
ir premises.

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Federal Reserve Bank of St. Louis

tar

•

Reauests for transfer of funds by an off-line bank must be
received, authenticated, transcribed, prepared for transmission,
verified, validated, and transmitted by Reserve Bank personnel. In
addition, a Reserve Bank receiving a transfer request requiring
immediate advice and destined for an off-line member bank must
notify the member bank by telephone that the transaction has been
received and credited to its account. Although the bulk (85%) of
all transactions involve on-line banks, most of the System personnel,
telephone, building, and housekeeping expense (nearly 90 percent)
associated with the wire transfer function arise from services
provided to off-line banks.
Some Reserve Banks presently provide supplemental services
to their members. These Reserve Banks routinely advise their
off-line members of all incoming third -party transfers, whether or
not such advice has been requested by the originator. Other Banks
provide immediate advice to off-line banks for all incoming transfers.
All Reserve Offices respond to requests (servicing) involving
previously sent transactions, adjustments, reversals, and other
inquires initiated by all users.

•

The Fedwire has been in operation since 1917 as a private
leased wire capability connecting the 12 Reserve Banks, the Board
of Governors, and the Treasury. Today, in addition, it conne
cts
the 25 Reserve Bank branches, numerous RCPCs, more than 450 membe
r
banks, and several government agencies in addition to the offic
es
previously mentioned. The original purpose of the FRCS was to
provide a means for the inter -District transfer of member bank
reserve account balances on a timely basis. Although a substantia
l
proportion of the transfers handled today are intra-District
in
nature, the FRCS is still the principal means by which
funds are
transferred between Districts. Unlike the Automated Clear
ing House
network, which subsequently used the FRCS to link sever
al separate
local ACH operations, the FRCS has always operated as a natio
nal
service. Indeed, it is unlikely that the District switches,
which
enable intra-District transfers to be made, would ever have
been
developed without the impetus given by the development of natio
nal
facilities. Further, the plans under consideration for futur
e
capabilities will tend to make less clear the identifica
tion of
inter -District costs. The Subcommittee thus view t the wire
transfer function as essentially a national service, and the FRCS
as a
single integral unit, rather than as a series of local servi
ces
and facilities tied into a national network.
In its charge to the Subcommittee, the Pricing Task
Force
included certain basic principles which should be appli
ed in the
formation of prices for all System services. The Subco
mmittee has
incorporated these principles in developing its propo
sed price
schedules. Foremost among these principles is the recov
ery of all
PACS costs, including direct, overhead, and System
allocated costs.
Furthermore, it is assumed that Reserve Bank service
levels will
initially remain unchanged. The prices suggested by
the Subcommittee
have been based on PACS data only and do not include
any component
for profits, taxes, or future capital needs.

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Federal Reserve Bank of St. Louis

-5_
'16

Major Issues and Subcommittee Positions
The Subcommittee considered the following issue
positions
in developing a pricing structure for Federal Res
erve wire transfer
services. These positions, the rationale and con
cerns form the
basis for the SubcommiLtee's pricing structure
. Additional supporting
data and descriptions have been included in
various appendices as
noted.

A. POSITION: THERE ARE THREE BASIC WIRE
TRANSFER OF FUNDS
SERVICES THAT SHOULD BE PRICED INITIA
LLY:
1.

•

Processing the basic transaction throug
h the automated
communications facilities including immedi
ate settlement
• and the provision of an immediate adv
ice to the on-line
bank and a mail advice to the off-line use
r.

Accepting a transfer request from an off
-line bank,
authenticating, processing and validatin
g the request
and entering it into the automated commun
ications
facilities; and

Advising an off-line bank by telephone
, telegraph or
messenger on the same business day of a
funds transfer
credit received for its account when req
uested by the
or

Once entered into the automated Federa
l Reserve Communications System, each transfer of funds
message receives the same
processing, settlement and accounting
treatment. This includes
management of the automated system
, exception handling, balancing,
and control, but excludes operation
s associated with processing and
entering a transfer request into the
system and those associated
with expediting advice of a transf
er credit received.
Some member banks have terminals and
/or computers on
their premises connected directly to the
communications computer in
their Federal Reserve District. These
on-line banks prepare and
enter their fund transfer requests dir
ectly into the communications
system and receive fund transfer adv
ices addressed to them on their
own in-house terminals.
Other member banks rely on tel
ephone, telegraph, and
messenger services to originate
wire transfer requests and to
receive immediate advice of wire
transfer credits for their account.
These off-line banks rely on
Federal Reserve resources to aut
henticate, process, and validate the
ir transfer requests, to enter
them
into the Fedwire and to pro
vide immediate advice of credit
s
received for their account.

•

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Federal Reserve Bank of St. Louis

•

Inasmuch as these three types of fund transfer
services
can be readily differentiated and involve 'differe
nt combinations of
capital and labor at Federal Reserve facrnies, sepa
rate prices,
based on costs, are justified. The Subcommittee
calculates the
full, PACS-based unit costs of these three serv
ices as follows:
Service

Unit Cost

Basic charge to all users

$ 0.75

Extra charge for:
Accepting and processing requests from
off-line users

$ 1.90

Immediate advice to receiving user

$ 1.23

These unit costs could be combined into a four
category
pricing structure as follows:
Transfer Originator
On -Line
Off-Line

Service Requested
No immediate advice
With immediate advice

$ 0.75
$ 1.98

$ 2.65
$ 3.88

The assumptions and methodology used to calc
ulate these
unit costs are shown in Appendix A.
Relatively high base costs and presumably the
eventual
charges, for an advice -- greater than the
cost of an on-line
transfer and nearly two-thirds the cost of
an off-line transfer -should have the effect of discouraging the
routine, almost casual
use of "immediate advice requested" initiati
ng banks currently
utilize when processing transfers through
Federal Reserve facilities.
As labor i<ensive activities, advices are
not only internally
costly and burdensome but represent a poor
use of Federal Reserve
resources.

B. POSITION: PRICES FOR WIRE TRANSFER SERV
ICES SHOULD
BE UNIFORM THROUGHOUT THE SYSTEM (I.E.,
".NATIONAL" PRICING).
The wire transfer of funds through Fede
ral Reserve facilities involves a processing and accounting
technology that is essentially the same whether the transfer is
between banks in the same
city or between banks in different Federal
Reserve Districts that
are geographically remote from one another.
Federal Reserve wire
transfer facilities in each District have been
specifically linked

•

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Federal Reserve Bank of St. Louis

•

together to provide us
ers with a national
mechanism for the wi
transfer of funds.
re
A national price serv
es to reinforce the 1/
System's commitment in
providing a national tr
ansfer service.-1
While District pricin
g might morp accurate
capiU.1 cost and volume
ly capture
differences among Rese
rve Banks as well
as differences in operat
ional efficiencies,
District pricing would
tend to inequitably pe
nalize those banks in
Districts where transfer volume was low an
d Federal Reserve ca
pital was newest or mo
underutilized. In th
st
ese Districts, unit
transactions costs, an
thus prices, would be
d
highest. A national
price eliminates any
inequities that would
tend to arise based
on geography or locale
users. (See Appendix
of
B for details.)
To the extent that Di
strict pricing would
range of prices nati
establish a
onwide, District pr
icing could encourage
to transfer funds in
banks
directly through corr
espondents in low pr
Districts, generating
ice
flows of funds that co
uld impair the efficiency and effectiv
eness of the national
payments mechanism.
national price elimin
A
ates the incentive fo
r banks to transfer
funds circuitously to
reduce their costs.

•

Another significant
argument for the nati
structure is that the
onal pricing
variances in District
costs dictate that if
District prices are br
oken down further
into separate prices
for intra-District an
d inter -District tr
ansfers, some District
could be charging more
s
for intra-District
items than for interDistrict items. This
might be difficult
to justify. Further
could shift demand fo
it
r Federal Reserve
wire transfer servic
es.
An eight category pr
icing structure, (see
which would further
Appendix B)
differentiate prices
for on-line and offtransfers by their
line
intra-District or in
ter-District nature,
rejected as being
was
administratively comp
lex and providing li
ttle
.0"

The development of a
"national" wire tran
sfer payments mechan
is effectively a pu
blic interest obje
ism
ctive whose benefi
shared by the nation
ts are
as a whole, not ju
st by specific bank
users of the wire.
The approach is al
so used by Bank Wire
with its initial
II
pricing scheme and
by S.W.I.F.T. in it
wide network.
s world-

•

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Federal Reserve Bank of St. Louis

AP•

differentiation between on-line and off-line prices relative to the
four category structure. Additionally, a pricing structure divided
by intra-District and inter-District transactions, would tend to be
inconsstent with the System's structure of an integrated "national"
wire transfer mechanism.
Further, the operating philosophy of FRCS-80, now in the
active development stage, will fundamentally alter the operation of
Fedwire and make the definition of inter-District and intra-District
costs extremely difficult. The new capability will utilize much
less centralization than at present with the inter -District transfers
passing through Culpeper switching center. Under study is a distributed pacRet switched mechanism connecting each Reserve Bank with
three others and offering a facility to enable each Reserve Bank or
Branch to communicate with any other. FRCS-80 will provide the
Federal Reserve with greater operational utility and security and
will make the current differentiations between intra- and interDistrict costs obsolete, impractical and difficult to uniquely
identify.

•

Given the Federal Reserve's inexperience with pricing for
its payments services, a national price should provide for administrative efficiency and be easier to administer than a District price
system. A national pricing methodology appears justifiable in a
practical sense as well, in that Systemwide cost and volume data
tend to compensate possible discrepancies in District data.
Additionally, it is noted that two other wire transfer
systems, BankWire II and S.W.I.F.T. use national and worldwide
pricing structures respectively, without regard to regional transaction differentials or geographical location. (See Appendix D
for further detail.)

CI''. POSITION:
BE CHARGED.

ONLY THE ORIGINATOR OF THE TRANSFER SHOULD

The Subcommittee considers charging the originator for
Fedwire transfers as the optimal way to price wire transfer services
because:

•

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Federal Reserve Bank of St. Louis

Wire transfer requests can only be originated by
qualified insititutions maintaining deposit accounts
at Federal Reserve Offices as outlined in Subpart B of
Regulation J;

It is administratively easier to charge originating
institutions. The System avoids having to split
billing between originators of transfers and recipients of advices; and

-9-

•

Charging originators would tend to encourage more
efficient Fedwire use and wopld serve to reduce
the
burden of collecting fees. •

Reserve Banks would be expected to advise receiving
banks of transfers only on instruction from the orig
inating bank
who would be billed for that service. For administ
rative consistency, the Federal Reserve should end its policy of
allowing
Reserve Banks to automatically advise receiving inst
itutions of
third party transfers and should modify Federal Rese
rve Operating
Circulars to reflect this change in policy. Rese
rve Banks would
provide immediate (telephonic) advice only when
requested by the
sending institution, or perhaps, on the basis of
ad hoc arrangements with the receiving institution. However,
in either instance,
it is conceived that no automatic telephonic advi
ces could be
consummated without prior instruction.
In arriving at its position in favor of char
ging only the
originating institution for wire transfer
services, the Subcommittee
determined that significant differences in
service levels exist at
the Reserve Banks. This is particularly evid
ent in the area of wire
transfer delivery services where often immediat
e telephonic advices
are provided under ad hoc arrangements (c.g. stan
ding instructions).

•

The Subcommittee recognizes that, with respect
to ad
hoc arrangements, the simultaneous implementati
on of the principles
of charging only the originator and includin
g a supplemental charge
for immediate advice service may present inco
nsistencies, pursuant
to arrangements between Reserve Banks and
receiving institutions.
However, the Subcommittee believes that thes
e inconsistencies
should be resolved by the Reserve Banks by
either discontinuing ad
hoc arrangements not included in the Subc
ommittee's proposed price
structure, or in offering additional services
free. of charge and
absorbing related operational costs.
D. POSITION: CHARGES SHOULD BE ASSESSED FOR
TRANSACTIONS
RESULTING IN ACCOUNTING ENTRIES ONLY (I.E.,
NO CHARGES FOR SERVICING).
Wire transfer service prices would be
imposed on transactions
resulting in accounting entries only. No
monthly maintenance fees
would be assessed users, nor would there be
any flat rate charges
for new users or minimum volume reauirements
under which fees would
be imposed. As is the case with check pric
ing, the System would not
charge for adjustments, misdirected
transfers, or rectifying incorrect
information. The cost of adjustments
would be factored into on-line
and off-line charges.
Banks might be required to purc
hase or rent terminals
to become on-line users to the
Fedwire. However, it is not envisioned that the System would
charge on-line users for differentiation in geographical location
or utilization of Federal Reserve

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Federal Reserve Bank of St. Louis

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Abb

•

services if the on-line equipment is temporarily unserviceable.
This pricing policy would effectively extepd the System's current
operating practice with respect to on-lirre banks and would serve to
encourage off-line banks to become on-line users.
Structuring a wire transfer pricing system in which users
are charged only for clearly identifiable services serves to encourage
greater use of the wire and facilitates administration and control.
E. POSITION: NATIONAL PRICING SHOULD NOT PRECLUDE THE
FEDERAL RESERVE FROM USING PRICES AT SOME FUTURE TIME TO IMPROVE
THE EFFICIENCY OR EFFECTIVENESS OF WIRE TRANSFER SERVICES.
The establishment of a peak load pricing system, the
granting, of volume discounts, and establishing a separate scale of
prices for third party transfers are among the possibilities that
should be considered when the System gains experience in implementing
pricing and can fully evaluate the impact of pricing demand for on
Federal Reserve payments services.
1. Peak load pricing could be used to direct financial
institutions toward more rational, efficient use of the
nation's payments system resources.. Wire transfer prices
could be structured on the basis of time of transmission in a
way that could induce banks to transmit transfer requests
evenly throughout the day. Peak load pricing could help
eliminate the "bunching" of transfer requests that occurs
daily between 1:30 p.m. and 3:00 p.m. (Eastern time).

•

2. Volume discounts could encourage increased use of
the wire and act as an inducement for banks to become on-line
users. Since current capacity in most Reserve Districts is
underutilized, (except during peak periods) increased volume
could significantly reduce unit costs, and thus prices, for
all wire transfer users.
3.
A separate pricing schedule for third party transfers
could serve to protect the System against overutilization
and misuse of its resources, ensuring that the wire transfer
mechanism remains primarily a bank-to-bank transfer mechanism.
Although the justification for implementing innovations
such as these might be valid now, the System lacks the practical
experience, data and cost differentiation technology to implement
such sophisticated procedures. In addition, the impacts of pricing
on market relationships and flows of funds are not yet known.
Moreover, changes in the banking environment caused by pricing may
alter the need for or direction of future pricing efforts.

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•

The proposed three service/four category
price schedule,
with its substantial differential bet
ween 'on-line and off-line
transfers, explicitly discourages off-line pro
cessing and encourages
banks to buy or 'lease -computer or terminal
equipment for on-line
hookups to District switches.
F. POSITION: NO PENALTY CHARGES SHOULD BE
IMPOSED
ON SMALL DOLLAR VALUE TRANSACTIONS.±4
All Federal Reserve ranks currently imp
ose a penalty
charge for processing small dollar value
transfers through the
wire. 2/
The penalty charge has been justified
as:
a. Conserving capacity. Reserve Ban
ks that have wire
transfer capacity problems maintain
that the penalty charge
serves to preserve their resources and
protect their operational
efficiency by discouraging banks fro
m transferring small dollar
value transactions;
b. Preserving the wire for its intend
ed use. It has
been argued that small dollar value
wire transfers are essentially third party transfers and rep
resent a misuse of the
wire more appropriately transferred
by check or transfer
networks. The Federal Reserve's wir
e facilities represent a
bank-to-bank reserve account transf
er mechanism and presently
is not considered an electronic sub
stitute for third party
payments; and

•

c. Etablishing discipline among the
authorized users
of the wire. Many commercial ban
ks see small dollar value
transfers as a costly and burdensome
service to customers.
The Federal Reserve's penalty cha
rge could be viewed as a
device that can be used by banks to
discourage private customers from requesting wire transfers
when check transfers or
use of other transfer networks could
suffice.

This position does not reflect
the unanimous view of the
Subcommittee of its coordinators
. In voting to eliminate the
$1.50 charge, the New York,
Chicago, Cleveland, and Minneapolis
Reserve Banks voted against
elimination of the charge. They
argued for its retention as a
device to protect the wire from
being utilized beyond its cur
rent capacity, particularly in
those Districts where Fedwire
capacity is a problem and as a
possible means to control low
value future demand.
The Federal Reserve Loose Leaf
service requires a charge of
$1.50 on inter -District and int
er-territory transactions of
$1,000 or less. Some Reserve
Banks employ the charge on all
transactions of $1,000 or less.
Many Reserve Banks waive the
charge on intra-territory
transactions of $1,000 or less and
Chicago waives the charge for
its on-line constituency.

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Federal Reserve Bank of St. Louis

411/b

•

The proposed pricing structure eliminates the current
penalty charges on small dollar value trap'sactions on the following
grounds:
a. A penafty charge is inherently arbitrary. The direct
and indirect costs to the Federal Reserve of processing a
$1,000 transfer are exactly the same as for a multimillion
dollar transfer. Thus, a penalty charge cannot be justified on
cost grounds. The choice of any dollar value cut-off and the
amount of any penalty is essentially a subjective one and hence
not readily justifiable;
b. Since little is known of demand for wire transfer
services, Reserve Banks have no 'way of knowing at what penalty
rate or cutoff point banks would begin to shift their small
dollar value payments from wire transfer to check or other
transfer networks. Too low a penalty charge would present
little disincentive and too high a penalty charge could lead
in a shift to other alternatives;

•

c. Wire transfers of $1,000 or less represent only 7
percent of the System's total transactions volume and do not
appear to be significant enough to treat as a separate class of
transactions. Furthermore, the wire transfer network, taken as
a whole, is underutilif9d. Capacity is not a problem for most
Federal Reserve Banks;—' and
d. The Subcommittee, notwithstanding the significant
variances in application of the $1..50 charge by individual
Reserve Districts, finds no substantive indication that the
charge has actually discouraged small dollar transfers.
•
Not only can the wire efficiently handle increased transfer volume, but increased volume may reduce unit costs, in
those
cases where the System's capital resources are not operating
up to
capacity. A penalty charge, which would effectively seek to
reduce
volume, could delay development of lower unit costs by holdi
ng down
the growth of wire transfer usage. A further considerat
ion is that
small banks might not have sufficient large dollar value trans
actions
volume alone to justify the cost of on-line operations.

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Federal Reserve Bank of St. Louis

The Federal Reserve Banks of New York, and Chicago suffe
r from
capacity problems. Assuming these Banks imposed a penal
ty on
small dollar value transactions to protect their resources,
commercial banks in those Districts could justifiably maint
ain
that they were being discriminated against by reason of
geography
or locale; that all banks were not being treated the same
by the
Federal Reserve nationwide.

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•

G. POSITION: THERE WILL
BE NO SUCSTANTIVE LEGAL
TO ESTAB
IMPEDIMENTS
RECOMMENDED BY THE SW1COM
IC
I NC STRUCTURE
MITTEE
The Subcommittee ha
s not addressed itse
inherent in wire tr
lf to legal issues
ansfer pricing but
recognizes that ther
several relevant le
e may be
gal matters that coul
d determine the natu
System's pricing st
re of the
ructure. Among them
are:
1. Whether Reserve
Banks, as corporat
impose a common ch
e entities, can
arge for payments se
rvices without viol
laws regarding . pric
ating
es; and
•
2. Whether Reserv
e Banks would be li
for how much) for
able (and if so,
advices requested by
transferees but not
processed by Federa
l Reserve personnel.
It is assumed that
issues such as thes
and resolved satisf
e will be examined
actorily before pr
ic
in
the resolution wi
g is implemented
ll not impair the
and that
wi
re
envisioned by the
transfer pricing st
Subcommittee.
ructure

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Federal Reserve Bank of St. Louis

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410.
• . Ift

111

IV.

Implications

The Subcommittee considered a variety of implications in
pricing for three Federal Reserve wire transfer services using a
four category price structure as well as other multi-price structures.
This section addresses a range of implications if the four price
structure is adopted and implemented. Appendices C and D further
describe several points in greater detail.
Basic concerns and questions are:
• What will be the effect on volume with the introduction
of pricing?
o Will some Districts feel negative effects more than
others?
• How will shifts in volume be evidenced?
o Will any shifts be confined to changes in member bank
requirement of telephonic adyices (since these will
cost more) without affecting overall volume?
o What will the impact of pricing be on the membership
situation?

•

e Would additional wire transfer services be offered in
some Districts with the introduction of pricing?
• Would some Districts have to cut back on services?
• What would be the effect on private sector wire transfer
systems?

To answer these and other questions, the Subcommittee
investigated a variety of areas: (1) comparison of the fee
structures of competitive networks; (2) analysis of potential change
s in
the wire service user community due Lo legislation; and (3)
the
potential for a sudden increase in demand for on:-line services
due
to a significant price differential between on-line and off-li
ne
transfers.

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Federal Reserve Bank of St. Louis

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Ile

The Subcommittee finds that in
making a comparison between
Fedwire and other networks such as
RankWi're II and S.W.I.F.T.1/ the
full range of competing services mus
t be considered together with
the fees charge'd by the other networ
ks. The Subcommittee's three
service/four category price struct
ure compares favorably with other
networks when the full range of ser
vices is considered, particularly in light of the unique nature
of the same day settlement
offered by the Federal Reserve.
(See Appendix D.)
In addition, the Subcommittee's cal
culations of the full,
PACS based unit cost for basic wir
e transfer service, although not
strictly comparable *to similar cor
respondent bank services, appear
to be somewhat below and theref
ore competitive with correspondent
prices, according to one recent
survLi.

•

Highly reliable service and compet
itive price are two
conditions mitigating against a
large and sudden shift in Fedwir
e
volume upon implementation of the
Subcommittee's pricing structure.
A related factor reducing the lik
elihood of a volume shift with
pricing is that statements of act
ivity, inquiries, and a range of
ancillary services (e.g. priority
delivery, acknowledgement, inquiry, statement) inherent in Fed
wire seevice are included in the
fee structure whereas other net
works charge -for these services.
After arriving at the proposed
three service/four category
price structure, the Subcommittee
conducted a series of sensitivity
studies to determine when genera
ted revenues would exceed expenses
under a variety of scenarios
and assumptions (see Appendix C).
Four sets of basic variables
were used. 'These included potent
ial
changes in Fedwire transacti
on volume ranging from -10 percen
+25 percent, possible cha
t to
nges in the transaction volume
originated
by off-line institutions
ranging from 20 percent to 5 per
cent,
utilization of immediate advice
service from 40 percent to 1
percent, and possible changes in
expenses ranging from -30 percen
t

1/ The Society for Worldwide Int
erbank Financial Telecommunic
ations
(S.W.I.F.T.) currently deals
only with international tra
nsfer
instructions and does not
.effectively compete with Fedwir
e,
since the latter transfers
funds and is national in sco
pe.

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Federal Reserve Bank of St. Louis

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obb

to +10 percent. These variables were then
applied to unit costs
(see Appendix A) to determine potential rpN"'en
ue which was subsequently compared with adjusted expenses. The
results are presented
below:

SUMMARY OF POSSIBLE SCENARIOS WITH
PROJECTED REVENUE RELATED TO ADJUSTED EXPENSES

Current
Percent changeTransfer volume

•

Possible

Extremes
Least
Most
Revenue
Revenue

+15

-10

+25

Percent of volume
originated and
received by offline constituency

Percent immediate
advice to total
volume

Percent change in
expenses

+10

-10

133

102

195

Projected revenue
as percentage of
total adjusted
expenses

The Subcommittee believes the fees (without consideration
for taxes, profits, and capital expenses) will cover costs and
will
require each Reserve Office to reduce or consolidate expenses now
experienced if a decline in requests for immediate advice servic
e
occurs with implementation of pricing. The Subcommittee recogn
ized

•

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Federal Reserve Bank of St. Louis

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or.
i

•

the greatest revenues would be generated when volume and off-line
requests are highest (e.g. more messages generated by Reser
ve Bank
personnel), a high demand for immediate advice service,
and a reduction
of expenses -- all highly unlikely, but possible. On the other hand
,
history does support 'a possible 15 percent increase in volume,
some
reduction in the percent of messages generated by Reserve Bank
personnel, a reduction in immediate advice usage because of prici
ng
and the 5 percent expense increase budgeted for 1979. The curr
ent
scenario is highly unlikely because of the high demand for
immediate
advice.
The Subcommittee believes that from current available
knowledge there will be few significant changes in the number
and
locations of FRCS user institutions or in the distribution of
transfer volumes between the FRCS and other wire transfer
networks.
This is not to say, however, that the introduction of pricing
will
not change current patterns of Fedwire usage. The Subcommi
ttee
believes the proposed pricing schedule will most likely redu
ce the
incentive for costly and indiscriminate use of immediate advi
ces by
Fe'dwire users by making use of such services more costly.
The
Subcommittee also believes the introduction of pricing in
this way
will, when combined with such additional measures as may
be found
necessary by individual Districts to facilitate the impl
ementation
of pricing, obviate the need for the present $1.50 charge
for
transfers of $1,000 or less. This would be particularly
so in the
case of off-line banks who would be charged at least $2.6
5 for any
transfer request with the implementation of the propo
sed pricing
structure.
The Subcommittee further belieVes that the proposed
price structure could have a positive impact on
the evolving
configuration of the FRCS by encouraging financial inst
itutions
now off-line to request on-line connection to
Fedwire due to the
proposed differential in fees for these two broad
types of transfers. The Subcommittee, however, does not belie
ve that such a
trend toward on-line service will be of a magnitud
e to cause
unduly burdensome problems in terms of available comp
uter capability or software in any District over the long
term. The
Subcommittee considers that any short term problems
which may
develop in Districts as to hardware or software avai
lability may be
properly resolved by transitional measures.
Finally, with respect to current Congressional
deliberations on such issues as System membership,
access to System
payments services, and pricing, the Subcommi
ttee feels that the
proposed pricing schedule will accommodate
additional demands on
the FRCS and that revenue from new or addi
tional activity and/or
services may be adjusted to cover the cost
s of modification of
FRCS facilities.

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Federal Reserve Bank of St. Louis

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Alb

•

Conclusions and Recommendations

The Subcommittee believes that the positions described in
this report represent a balanced and practical approach to the
derivation and eventual implementation of Federal Reserve System
pricing for wire transfer services in the public interest.
However, the Subcommittee acknowledges that specific
operational problems of a transitional nature, unique to individual
Reserve Banks, may arise as wire transfer pricing is implemented.
The Subcommittee is of the view that interim policies may be developed
by Reserve Banks and the appropriate System coordinating bodies to
✓ esolve such problems in a timely manner within the overall context
of the Subcommittee's positions described in this report.
Having addressed the range of issues related to wire

transfer pricing pursuant to its assignment, the Subcommittee
✓ ecommends that the Pricing Task Force:
1.

Adopt the Subcommittee's methods with respect to the
derivation and implementation of a three service/four
category price model for wire transfer pricing.

Request the Conference of First Vice Presidents to
eliminate the $1.50 charge on wire transfers of a
dollar value of $1,000 or less during implementation
of pricing.

Include the additional environmental statistics
in future PACS reports as described in Appendix E of
this report to facilitate the calculation of unit
costs.

Disband the Subcommittee.

•

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Federal Reserve Bank of St. Louis

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A-1
APPENDIX A
CALCULATION OF UNIT COSTS AND SUGGESTED PRICES
Development of Total Costs
The total costs of providing the wire transfer
of funds
service are derived from the cost accounting (PA
CS) data by adding
total costs (including District project costs)
in the Transfer of
Reserve Account Balances activity to the cos
ts of System projects
and overhead related to this activity. The per
iod October 1977
through,September 1978 is used as the mos
t recent twelve-month
period for which data are available. A
full year's data are needed
in order to include the effect of season
al variation.
System project and overhead costs are acc
umulated in the
Electronic Funds Transfer (EFTS) servic
e for reporting purposes in
PACS and are allocated between the two act
ivities in this service:
Transfer of Reserve Account Balances and
Automated Clearing House
(ACH). Expenses related to System projec
t 9902 covering the development of ACH software are deducted from Sys
tem project costs prior to
making the allocations since they are sig
nificant and are not
related to provision of the Transfer of
Reserve Account Balances
service. The allocation of System pro
jects and overhead expenses
are made to the Transfer of Reserve Acc
ount Balances on the basis of
the ratio of its total activity cos
ts to the total activity costs in
the EFTS service (Transfer of Reserv
e Account Balances plus ACH).
The ,total System costs of the Transfer
of Reserve Account
Balances activity for the twelve-month
period October 1977 through
September 1978 are as follows:
Total activity costs
System projects
Overhead
Total costs

$14,807,570
96,182
5,031,497
$19,915,249

Expenses of $1,006,481 related to Sys
tem project 9902 covering the
development of ACH software were ded
ucted from total System projects
expenses in the EFTS service prior
to making the above allocations
of System projects.
Derivation of Volume
The volume of total transfers
processed as reported in
PACS for each Federal Reserv
e Office is the sum of the number
of
intra-Office transfers originate
d plus the number of inter -Offic
e
transfers originated plus the number
of inter-Office transfers
received. Since each Reserve Off
ice receives and delivers each of
the foregoing traffic types
(i.e., each transfer requires a
debit
and a credit on the books of the
Reserve Office), the volume is
appropriate for use in measur
ing performance among Reserve Off
ices.

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Federal Reserve Bank of St. Louis

A-2

However, since intra-Office transfers
arc only counted once and
inter -Office transfers are counted twi
ce (once by the originating
Office and once by the receiving Office
), the PACS volume data
cannot be used to calculate unit costs
that will be used to derive
prices for the funds transfer servic
e.
The Communications and Record Center
at Culpeper maintains
a data base containing each message ori
ginated and received by each
Reserve Office. This data base was
used to accumulate funds transfers originated and received by Res
erve Offices to provide volume
data for calculating the unit cost of
funds transfers originated.
For the period October 1977 throug
h September 1978, the following
breakdown of funds transfer volume
was accumulated from the Culpeper
data (in number of messages origin
ated):
Intra-Office
Inter-Office intra-District
Inter -District
Total

7,164,581
1,397,085
8,713,642
17,2754N3

Adjusting the Culpeper volume dat
a to the PACS reporting concept
of counting intra-Office volume plu
s twice inter -Office volume
(inter -Office intra-District plus
inter-District) gives 27,386,035
messages as compared to the 27,596
,961 messages reported in PACS.
The difference of less than one
percent can be attributed to differences in counting subtype codes of
fund transfer messages among the
Reserve Offices for PACS reporting
purposes.
In allocating costs among traffi
c types to develop unit
costs that could be used to derive
prices for the funds transfer
service, it is important to distin
guish between traffic originated
and received by a member bank that
has a computer or a terminal
on-line to a District switch and
traffic originated and received
by
a member bank that is off-line.
The on-line bank's traffic is
entered into and received from the
communications system by member
bank personnel whereas off-line
banks require a significant proportion of Reserve Bank personnel
and telephone resources to originate
and receive funds transfers. The
PACS environmental statistic
measuring the ratio of on-line
transfers or
to total
transfers originated was used to
estimate volume originated on-lin
e
and off-line. For the period
October 1977 through September 197
8,
85.16 percent of the funds tra
nsfers originated were originate
d by
on-line member banks. Applying
this percentage to the Culpeper
volume data gives the following
breakdown of funds transfer volume
(in number of messages originate
d):

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Federal Reserve Bank of St. Louis

On-line banks
Off-line banks
Total

14,711,652
2,563,656
17,275,308

A-3

•

For the System in total, the n6mber of fun
ds transfers
originated is equal to the number received
bydefinition. In
deriving unit costs, it was necessary to obt
ain the number of fund
transfers that were received off-line and giv
en immediate advice.
District management responsible for the fun
ds transfer operation
supplied the percentage of fund transfers
received for off-line
banks that was given immediate telephone adv
ice during the October
1977 through September 1978 period. The
percentages supplied by
each District are shown below:
TABLE 1
PERCENTAGE OF FUNDS TRANSFERS RECEIVED
FOR OFF-LINE BANKS GIVEN IMMEDIATE ADVICE
Federal Reserve
District
Boston
New York
Philadelphia
Cleveland
Richmond
At
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
System

•

Percent
42.3
75.0
50.0
95,5
60.0
100.0
53.0
75.0
50:0
55.0
66.0
80.0
67.1

Thus, the volume of off-line traffic giv
en immediate
advice is estimated to be 1,720,213 in
the October 1977 through
September 1978 period.
Calculation of Unit Costs
It has been determined that it wou
ld be desirable to
charge the originator of a funds transf
er and to price .three wire
transfer of funds services: (1) the
basic transaction cost to all
users including immediate settlement
and the provision of an
immediate advice to the on-line
bank and a mail advice to the off-li
ne
user; (2) the additional cost of
receipt, authentication, processing, preparation, and validation for
a transfer request from an
off-line originator; and, (3) the
additional cost of giving same
day advice to an off-line bank of
a funds transfer credit receiv
ed
for its account when requested
by the orignator. Total costs
are
allocated to these cost elements
as follows:

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Federal Reserve Bank of St. Louis

•

Personnel costs, communications
costs less the costs of
operating the Federal Reserve com
munications system
(FRCS) inter-District operations
including the Culpeper
switch, building and housekeeping
costs are allocated
by District management respon
sible for the funds transfer operation on the basis of
internal operating data.
The allocations for each District
are shown in Table 2;

A-4

• Fncs

costs are entirely allocated
action costs to all users;

to the basic trans-

•

All other activity costs and
District projects are allocated
by District management respon
sible for the funds transfer
operation on the basis of int
ernal operating data. The
allocations for each District
are shown in Table 3; and

•

System project and overhead cos
ts are allocated on
the basis of the total activi
ty costs in each cost
element to total activity cos
ts.

TABLE 2
ALLOCATION OF PERSONNEL_L COMMUNICATIONS (LES
S FRCS)
BUILDING AND HOUSEKEEPING COSTS
Federal Reserve
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
System

Originated and
Received On-Line

Originated
Off-Line

Received
Off-Line

10.00%
15.00
10.00
8.00
10.00
15.00
7.00
7.00
8.00
10.00
10.00
25.00
10.77

75.00%
63.00
60.00
64.00
60.00
57.00
63.00
60.00
70.00
60.00
60.00
44.00
62.52

15.00%
22.00
30.00
28.00
30.00
28.00
30.00
33.00
22.00
30.00
30.00
31.00
26.71

TABLE 3
ALLOCATION OF ALL OTHER EXPENSES

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Federal Reserve Bank of St. Louis

Federal Reserve
District

Basic
Transaction

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Knnsas City
.
Dallas
San Francisco
System

85.20
89.60
93.00
89.40
85.20
90.00
85.20
95.00
85.20
92.50
90.00
9000
88.68

Additional Costs
.
Off-Line
Off-Line
Or
Receipt
10.40
7.30
4.50
7.40
10.40
5.00
10.40
2.50
10.40
5.00
7.00
7_!.00
--7.72

4.40
3.10
2.50
3.20
4.40
5.00
4.40
2.50
4.40
2.50
3.00
3.00
-3760

A-5

•

The cost aflocations for the peri
od October 1977 through
September 1978 are shown in Table 4.

TABLE 4
CALCULATION OF UNIT COSTS
(October 1977 through September 1978)
•

Expenses
Personnel, communications (less
FRCS), building and housekeeping
expenses

410

Total

$ 4,713,401

Basic
Transaction

Additional Costs
Off-line
Off-line
Origination
Receipt

$ 2,946,818

$ 1,258,950

507,633

FRCS expenses

1,254,854

All other expenses

8,839,315

7,838,705

682,395

318,215

Total activity expenses

14,807,570

9,601,192

3,629,213

. 1,577,165

System projects and overhead

5,1O7,679

3 31] 819

'1,251,892

543,968

Total costs to be recovered

$19,915,249

$12,913,011

$ 4,881,105

$ 2,121,133

17,275,308

2,563,656

1,720,213

62.52%

26.71%

Volume

Total fund transfers

Allocations Used

Line 1 - Est. from Table 2

100.00%

10.77%

Line 3 - Est. from volume
ratio and Table 3

100.00

88.68

7.72

3.60

100.00

64.84

24.51

10.65

$ 0.7475

$ 1.9040

$ 1.2330

10. Line 5 - Est. from dollar
ratio line 4

•

Unit Costs

11. Unit cost per transaction

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Federal Reserve Bank of St. Louis

- A-6
•
DerivaLion of EstimaLed Prices
The unit costs calculated in Table 4 for
fund transfers
are ccnverted into c:;timated prices under the
following assumptions:
e

The basic unit cost of processing a funds
transfer through
the communications system is equal to the uni
t cost
shown and should be included in the cha
rge for each funds
transfer message originated.

•

The additional unit cost of originating
a funds transfer
by a bank that is not on-line to the commun
ications
system is equal to the unit cost shown and
should be added
to the basic transaction cost for each off
-line funds
transfer message originated off-line.

•

The additional unit cost of processing
a funds transfer
requiring immediate advice to the receiv
ing bank is equal
to the unit cost shown and should be add
ed to the cost of
the bank originating the funds transfer.

Therefore, the price needed to recover
all costs of the funds
transfer service is as follows:
Service

Unit Costs

Basic charge to all users

$0.75

Extra charge for:
Accepting and processing requests
from off-line users

$1.90

Immediate advice to receiver

$1.23

These unit costs can also be combined
as follows:

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Federal Reserve Bank of St. Louis

Service Requested
No immediate advice
With immediate advice

Transfer Originator
On-line
Off-line
$0.75

$2.65

1.98

3.88

B-1
APPENDIX B
ALTERNATIVE PRICING SCENARIOS
Some .alternatives to the. recommended pricin
g methodology
were explored. These alternative scenarios
are summarized below:
Single National Price. A single national
price based on
recovering total expenses from all originato
rs of fund transfers
would be about $1.15 per transfer originate
d. This approach would,
however, discriminate against the on-lin
e banks who are incurring a
portion of the cost of originating and rec
eiving funds transfers for
off-line banks.
National Price Differentiating between Int
ra-District and
Inter-District Traffic. In addition to dif
ferentiating between
on-line and off-line originators and tra
nsfers sent with and without
immediate advice to the receiving ban
k, a price differentiation can
be made between those fund transfers bet
ween two member banks in the
same Federal Reserve District and tho
se that move across District
lines. This would be equivalent to cha
rging the FRCS costs only to
inter -District transfers ($0.1440 per
transfer) rather than to
all transfers ($0.0/26 per transfer)
as provided in the recommended
methodology. The price schedule would
be:
Transfer
Originated

•

IntraDistrict

InterDistrict

By on-line bank:
without advice
with advice

.6749
1.9079

.8189
2.0519

By off-line bank:
without advice
with advice

2.5789
3.8119

2.7229
3.9559

This approach would, however, be
unnecessarily complicated and
would discriminate between member ban
ks located in Districts with
several branches and those located in
one-office Districts. It does
not appear to be justified by the rel
atively small difference in
cost between inter -District and intraDistrict transfers.
Additional Chz.lrge for Transfers of $1,
000 or Less. There
is currently an arbitrary charge of $1.
50 imposed on fund transfers
of $1,000 and under to discourage the
use of the Federal Reserve
Communications System for small
dollar amounts. According to an
analysis of Culpeper traffic for
the month of September 1978 the
se
small dollar transfers accoun
ted for 7.34 percent of total fun
ds
transfer volume originated. If
this percentage is typical of the
twelve-month period October 197
7 through September 1978, the

•

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Federal Reserve Bank of St. Louis

B-2

•

volume of such transfers would have been about 1,270,000 messages
yielding a revenue of $1,905,000. Neverthe-less, the continuation of
this special charge with the implementation of pricing would be
unnecessary in view of the other charges contemplated which are
based on actual costs.
Single Price Per District. A single price per District based
on recovering total District expenses from all originators of fund
transfers within the District would result in the following price
schedule:
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta

•

$1.77
1.08
.98
1.02
1.97
1.01

Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

$1.09
1.20
1.46
1.23
1.02
.84

This approach has the disadvantage of reflecting the usual cost
differences among Reserve Districts in the price of what is deemed
to be essentially a national service. In addition, it reflects
the
impact of such special factors as significant District project
expenses incurred in the base period to install a new computer
switch in Richmond which benefits all Districts. Finally, it
is
influenced by significant variation among Districts in the ratio
of
fund transfers received to total transfers originated, which
varies from 86 percent in Cleveland to 111 percent in San Franc
isco,
again emphasizing the national character of the service where
transfers originated are equal to transfers received.

•

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Federal Reserve Bank of St. Louis

tab

C-1

•

APPRNIM C
SENSITIVITY ANALYSIS
Introd ction
A sensitivity analysis was conducted to determine when
generated revenues would exceed expenses under various sets of
demand assumptions for wire transfer services. Demand characteristics were identified and include:
(1)
' (2)

(3)

•

the volume for wire transfer transactions;
the percent of volume generated by off-line banks;
and
the request for immediate advice to the recipient
by telephone.

Exhaustive combinaLions of these characteristics, together with the three service/ four category price schedule presented
in Appendix A, were simulated to generate total annual revenues.
These revenues were then combined with varying expense patterns to
calculate net revenue in terms of (a) net dollar levels and (b)
ratios of total revenue to total costs. These data appear in
columns 8 and 9. in the tables included at the end of this Appendix.
Assumptions
For the purposes of this analysis, a given set of assumptions were analyzed. These include:
(1)

Possible changes in volume most likely to occur
between -10% and +25%. Four percentages were
identified: -10, 0, +15, and +25.

(2)

The percentages identified for volume generated by
off-line banks were: 20%, 15%, 13%, 10%, and 5%.

(3)

The percentage demands for immediate advice by
telephone to total volume were: 40%, 6%, 3%, and 1%.

(4)

Changes in expenses compared to total expenses were:
-10%, 0%, +5%, and +10%.

Analysis

•

Based on foregoing assumptions four selected scenarios
were analyzed and the results are presented in summary
form below.
The following summary based on the foregoing assump
tions, groups
the variables within four scenarios: current, possib
le, least
revenue, and most revenue categories. From these, proicc
tions of
total revenue were derived from each set of basic assump
tions and
compared to current adjusted expenses. The Subcommittee
also

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Federal Reserve Bank of St. Louis

C-2

•

developed a series of computer simula
tions - to determine the potential
revenues for each of the three servic
es were used as a basis in the
four categories, as follows:
Advice Provided to Receiver

Originator
On-line

Next day by mail
Same day by telephone

Off-line

$0.75
$1.98

$2.65
$3.88

Total volume was 17,275,308 transfers
and total expenses
were $19,915,249 as described in App
endix A. These variables,
while adjusted, served as a base for
developing Tables 20, 26, 51,
and 61 following which show the res
ults in terms of the current,
possible, least revenue, and most rev
enue scenarios. Selected
other tables have been included for
comparative purposes.

SUMMARY OF POSSIBLE SCENARIOS WITH
PROJECTED REVENUE RELATED TO ADJUSTED EXPE
NSES

•

Current
Percent changeTransfer volume

•

Least
Revenue

Most
Revenue

+15

-10

+25

Percent of volume
originated and
received by offline constituency

Percent immediate
advice to total
volume

Percent change in
expenses

+10

-10

133

102

195

Projected revenue
as percentage of
total adjusted
expenses

•

Possible

Net Revenue
(million of
dollars)

46.5

Details from Tables
•
numbered (following) 26

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Federal Reserve Bank of St. Louis

40.4

-8.6

C-3
The "current" scenario does not change transf
er volume
o r expenses. The approximate current Systtm ave
rage for off-line
u sage as reported in PACS is 15 percent and the use
of immediate
advice service is 40 percent based on type cod
e 12 transfers
✓ eported from the Cu]peper statistical data bas
e. With these
condi,..ions stable revenues generated would exc
eed expenses by 33
percent.
In the "possible" scenario, transfer volume inc
reased
15 percent based on the Subcommittee's estima
tion of annual increases over the past several years. Off-li
ne volume generated
is 13 percent in anticipation of a continuin
g trend toward greater
usage of on-line service. Immediate advice
s are assumed to decline
to six percent because of the charge for suc
h service. Expenses
are constant to reflect savings from the red
uction in cost to
process immediate advices, the reallo
cation of resources for online usage and increased productivity mea
sures being investigated
throughout all Reserve Offices. As a
result revenues would be
over expenses by two percent, a margin
too narrow to adjust at
this time in the opinion of the Subcom
mittee.
In the "least revenue" case, volume dec
lines 10 percent.
The off-line volume generated reduces
to 5 percent reflecting a
significant increase in on-line transacti
ons. Also there is a
change in the immediate advice service
which declines to one
percent. Expenses increased 10 percent
with the decline in volume.
In the "most revenue" case, volume inc
reases 25 percent.
Off-line volume generated is 20 percen
t, representing significant
✓ equests from new users at low vol
umes. The immediate advice
service is 40 percent. Expenses dec
rease 10 percent, because of new
simplified procedures.
Immediate Advice Analysis
lietth respect to the category of immedi
ate advice, the
following explanation gives the Subcom
mittee's rationale for
the assumption that the percent immedi
ate advice to total volume
could decrease from the current 40 per
cent level with the implementation of pricing.
The operating standards (SIR No.
7.3) governing the
origination of fund transfers ove
r the Federal Reserve Communications System specify that those
transfers requiring immediate
advice to the receiving bank sho
uld be designated by using type
code 12 with the message address.
All other transfers not
✓ equiring immediate advice sho
uld use type codes 10 or 15.
Analysis of funds transfer traffi
c in the Culpeper data base
indicates that these type codes
are currently being used more
often than is necessary. For
example, for the period October
1977 through September 1973,
the breakdown of fund transfers
o riginated was as follows (in
number of messages):

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Federal Reserve Bank of St. Louis

Without advice (type codes 10
and 15)
With immediate advice (type cod
e 12)
Total

10,115,519
7,159,789
17,275,306

C-4

•

This would indicate th
at 41.5 percent of the fund
transfers oriainated required immediate ad
vice to the receiving bank.
However,
on-line banks automaticall
y receive immediate advice
and only the
14.84 percent of the to
tal funds transfers originat
ed to off-line
banks require special inst
ructions as to whether or
not immediate
advice is required.
If the provision of an im
mediate advice is subject to
extra charge when pricin
an
g is implemented, it has
to
be
those transfers sent to
assumed that
on-line banks which automa
ti
ca
ll
y receive
all traffic will not be co
ded to receive immediate
ad
vi
that funds transfers. orig
ce. Assuming
inated in the October 1977
th
rough September
1978 period that were co
ded to receive an immedi
at
e
ad
vice were
normally distributed be
tween on-line and off-line
ba
nk
s, they would
be distributed as shown
in the first column below:
Type
Originated

•

Actual

Adjusted
for Pricing

Total
without advice
with advice

17,275,308
10,115,5-19
7,159,789

17,275,308
1-6,-212,87-7
1,062,431

By on-line banks
without advice
with advice

14,711,652
8,614,37-66,097,276

14,711,652
13,806,886
904,866

By off-line banks
without advice
with advice

2,563,656
1,501,143
1,062,513

2,563,656
2,405,991
157,665

The second column abov
e is adjusted for the im
tion of pricing assuming
plementathat the 41.5 percent of
fund transfers
currently coded to rece
ive immediate advice is
a fair representation of the need for im
mediate advice, but that
it would he used
only on the 14.84 peLc
ent of total transfer tr
affic sent to offline banks. In other wo
rds, it is assumed that
the proportion of
total funds traffic requ
iring immediate advice
will drop from the
current 41.5 percent of
total traffic to 6.15
percent of total
traffic after pricing is
implemented (41.45 x 14
.84).
Findings
The Subcommittee believ
es the proposed fee st
absent an upward adjust
ructure,
ment For profit, cost
of capital, and taxes,
will cover costs and the
recovery of PACS cost
s is largely
dependent on the System's
ability to reduce cost
s as the demand by
institutions requesting
immediate advice serv
ices declines in the
future. However, the data
in the "possible" sc
enario also indicate
that, with a likely volu
me increase of 15 perc
ent, based on annual
increases over the past
several years, and a
relatively small
decline in the number of
off-line transfer reques
recoverable,: even in th
t, PACS costs are
e case of a 34 percent
decline in the number
of immediate advice reques
ts as a percent of to
tal volume.

•

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Federal Reserve Bank of St. Louis

NIA
••••

SHMMARY STATITIrS WANHHOL HrT REA)EMUE
FOR FEPEPRL FFSFME

•

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Federal Reserve Bank of St. Louis

NUM1-1-R OF HET PEI.IrHUL RECOMF::::
WERAGE HET kEuEHUE:
.4
'"1".1
""
S7PHDARTJ D9n1=1TIOM:
MTHINUN 11!-q_UE:
mAxImHm MLHE: $17,101,3
NHHT:ER nr HET RE:UR-WE corrrnmEs ro..JER

•
TABLE 20
RESULTANT ANNUAL PRnFIT
OR LOSS ARISING FROM
CrImAImAT/nNS
(1) CHANGE IN voLump OF .10 PER
CENT
(2) ON.OFF SPLIT OF 95-5 PERCEN
T
(3) CHANGE IN TOTAL
EYPENSES OF
10 PERCENT

ON.LTNE
wITHnuT
ADVICE
. 90
p
00

.
. 99
. 090
r
eo7
07
P
07
r
.67
r 9‘;
9a
P

,9J

ON-LINE
WITH
ADVICE
.01
,01

.01
.0 1

on3
.03
.03
.-n3
.06
.06
.06
.06

.40
.40
.40

ON-LINE
REvENUE
11,25q.467
11,259,467
11,259,J/17

11,259,467
11,622,819
11,622,819
11,622,819
11'9622,8 1 9
12,107,646
12,167,11 46
12,167,846
12,167,846
1 8,344 ,/1,2
1 8,344,822
1/1,344,822
1s,144,822

OFF.LINE
WITHOUT
ADVICE
.99
.q 7
.(44
,60
.99
.07
.94
,h0
.99
.97
.60
.99
.97
.94
.60

OFF.LINE
WITH
ADVICE
.11.

OPF.LINF
RrvENIT
2.069.642
2,ns8,766
2,117,49P
2.atIP.556
2,069,642
2,088,76
2.117.492
2.442,596
2,069,642
Z,088,766
2.117. 492
2,44P,596
2,069,642
2.0,8.766
2,117,4S2
2.942,556

,06
.40
.01
.03
,06
.40
,01
.03

,ao
.01
.03
.06
.40

•

TOTAL RFvFNUE
11,329,109
13,348,233
11,376,9 19
13,702,023
13,692,461
13,711,565
13.740,270
14,065,374
14,237,488
14,256,612
14,285,298
111,610,1102
20,4 1 4,465
20,933,588
20,462,274
20,787,378

TOTAL REVENUE
As A PERCENT
oF ADJuSTED
ExPP,SE
60.8
60,9
61.1
62,5
62.5
62.6
62,7
64,2
65,0
65,1
65,2
66,7
93,2
93.3
93.4
94.9

NET PROFIT
OR LOSS
.8,577,665
.8,558,541
.
8,529,65
5
-8,204,751
.R8,214,313
6,6,1 95,189
.8,166,504
.7,8111 ,11C0
.7,669,286
-7,650,162
.
7,621,06
.07.296,372
.m1, 492,309
-1,4173,185
.1,444,500
s1,119,396

•

Asst.p..PTInS
(A) CHANGE /N VOLUvEt .10
PERCENT
(R) Ar),U)STED vnLumF: 15,547
,777
(c) nNi.oFF SPLIT: . 95-5 PERCEN
T
(p)
VOLOF!
14,770.388
(E) CFF.LINE VOLUYE
777,389
(r) cwF IN
EXPE"!SES:
to PERcENT
(c) AoJHsrp) EXPENSES: 21,906,774
•
GIVEN
TOTAL VOlU v Et
17,275,308
TOTAL EXPENSES: 10
,91 5.P 4g
PI, ON.L/NE PRICE WITHOUT
ADVICE: 0,75
P2, oN.riNP oRycE WITH
ADVICE: 1.418
P3. OFv.LINE PRICE wITHOU
T ADVICE: 2.65
Pu, OrreLINE PRICE viITw ADV
ICE: 388

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Federal Reserve Bank of St. Louis

••

1,Or

• •,r •),.i 0. • rra

•

TABLE 26
RESULTANT ANNUAL PPriFIT
OR LOSS ARISING FROM
CnmPrnIATIONS oFt
(1) CHANGE IN vOLump OF 0 pERCENT
(2) ON -OFF SPLIT OF 85.
15 PERCENT
(3) CH.INGE IN. TOT
AL
EYP
ENS
0 PERCENT
.
. . . .Es
. OF
_
x
oN.LT%E
w ITHo'IT
ADvTrE
•0114
.
cq
r
Og
.9°
'.7
197
.°7
97
.
.
04
94
tP
.ol
.,7/4
.sn
.p t0
P 60

.60

X
oN.LINE
WITH
ADVICE
.n1
.01
.
.01
.01
.03
.03
.03
.03
s 0,
e n- s
.06
..ns
.40
.40
,40
.40

(IN.LT%F' '
REVENOT
11,193,622
11,193,622
11,103,62?
11,1°3.62?
11,5940!9
11,R54,P4q
11,55a,849
11,-55c,p49
12
2 :
::
N
12,n96,689
12,nP6,680
18,237,543

18,237,543
18,237,543
18,237,5(3

x
OFF-LINE
WITHOUT
ADVICE
4 99
.97
2"
.60
.09
.97
.g4
.60
•09
.q 7
.94
,60
.
(79

.q 7
.94

.60

(4) CHP:nE TN VOLUvE:
0 PFRCENT
(R) Ar),MSTE1 VIILUmF:
17,275,308
(C) r":4"IFF SPLIT: . 85.15 PER
CENT
(0)
VoLeEt
14,61;4,012
CE)
vOLIF
2,591,296
CFI cH.A.%,f;F TN ExPrJS
ES: 0 PERCFNT
Cr,) AnjuSTEn ExPENsFS:
19,915,249
GIvEN
TOTAL VOLUvE: 17,,79,30
8
TOTAL FYPEI45ES: 19,
915,24q
Pl, 1.0!..LPIE PPICE WITHOUT
ADVICE: 0.75
02, f*1 ..LPIE PRICE' WIT
H ADVICE:
1.
P3, OF7..LINF
PRICE WITHOUT ADVICE:.982,6
5
P4, rIFFIDLIfvF
PRICE AITH ADVICE:
3.88

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Federal Reserve Bank of St. Louis

.
OFF.LINF
IfITTH
ADVICE
.01
.03
.06
.40
,01
.03
,06
.40
.01
.03
.06
.40
.01
.03
.06
.40

OFF.LTNF
PFVENHF

6,89A.
6,96P.554
7,nc8,173
8,141.853
6,898,8,8
6,062,554
7,058.173
8,101,853
6,898,808
6,962,554
7,n58,173
8,141,853
6,8Q.
6.962,554
7,158,173
8.141,853

V:!TAL

9FVENuE
18,092,430
1A,156,176
1 8,21.795
1 0.315,475
18,453.657
1 8,51 7,003
is,613,021
10,606,72
1A,945,497
1 9,059,24 3
0,15'1,862
20,238,542
29,136,351
25,200,096
25,2c5,715
26,379,395
*

NET P9rPTT
OR LOSS
.1,822,819
.1,759,073
..1,663,454
_579,774
.1,461,592
..1,397,8u5
.1,302,?2F
-218,547
.919,752
.856,0416
-76r.1,387
323,2q3
5,22t,102
5,2u,847
5,380,466
6,464,146

- TOTAL 9EvraiE
As APE 0 CE`JT
0F AlJuSTED
ExPE%SE
;1,8
91.2
C1.6
07,1
q2.7
93,6
93,5
09,0
gi e 4
95,7
06,2
1(11.6
126.2
126.5
127.0
132.5

S•

•
'CARLE 51
RESULTANT ANNUAL PoRrIFIT OP LOSS ARISING FROM
COm°TkATIONS OF:
(1) CHANGE IN VOLUmr OF 15 PERCENT
SPLIT OF A7.11 PEPCENT
IN TOTAL EXPENSES OF 5 PERCENT

0N-LTNE
wiTrelUT
ADVICE
'00
•
.99
• qo
00
p
07
.
.c7
o7

ON-LINE
KITm
ADVICE
.01
.0 1

.9c
64
p
04
.
r 9c
.61
..60

.01
.03
.03
.03
.03
.06
.06
.06
.0h
,c0
sa0

.611

040

ON.LINE
PEVEUE
13,175,552
13,175,55?
13.1 75,592
13,175,552
11,600,717
13,600,737
13,690,77
1
13,'600,737
14038,5141,238,51
14,238,514
14,238,514
21,406,661
21,466,661
21,4,66,661
21,4660561

wiTHOUT
7:
11:E
NE
og
.
.97
.94
.60
.Qc,
.97
squ
.60
1 99
.9
.91
.60
.90
.q7
.g4
.60

OFF-LINF
NITH
ADVICE
,01
.03
,n6
.40
.01
sn3
.06
.40
.01
.n3
.06
.10
.01
.03
,06
,40

_ . . . , ....

GIVEN
TO7L V1LUYEt 17,275,308
TOTAL Ex0ENSES: 19,91 5,249
PI, oN.LINE PPICE i#;ITOuT ADVICEt 0.75
P7, T4..LT%c PP:cr v4IT-4 ADVICE: 1.98
P3, 07F.LINE PRICE KITHOUT ADVICE: 2.65
P4. nFF.LINE PRICE WITH ADVICE: 3;88

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

;
201.?N:c3-4tql
20.210,197
21,290,265
70,476,549
20,540,082
20,635,382
2/.715,450
21,11 4,326
21,177,860
21,273,160
22,353,22A
28,342,472
2,3'42,72
2A,406,006
2A.501,306
2P15A1,374

::1817151.78i;
6,939,345
7,014.645
8,114.713
6,875.812
6,91q.145
7,0144
,6 5
6,75,i2
6,939,34;5
7,034,6115
8.114.713

•

ASSUYPTIONS
(A) C-4 ANGE IN VOLUYE: 15 PEqCEMT
CR1 AIJIYSTFI VOLUmF: 19,F66,604
(C) rvi.cPP SPLIT: . A7.13 PERCENT
Cn,
VOLUvPt
17,283.9!:6
(E) CFF.L:%E VOLU"E
2,587,650
cc) cwA%Gr TN ExPENSES: 5 PERCENT
CG) ADJUSTED EXPENSES: 20,911,011

TOTAL
1,VEliJUE

OFF.LINF
PFvENUE
6,875,812
6,919.305
716
,04.45

•. •

•

NET PROFIT
OR LOSS
-859,648
.796,114
.710,814
37°,253
.4341,463
.370,929
•279,629
P0a,439
203,315
266,84P
362,148
1,41;2.216
7,431,461
7,494,994
7,590,29 u
8,670,362

TOTAL REVENUE
As A PFRCFNT
OF AD.:uSTED
ExPP,.SE
g5.9

101.'2
97.9
9¼9.2
93.7
113,8
1n1,0
1(7, 1.3
11,7
1Ct.9
135,5
139,8
136,3
11,5

TALE Sa
RFSULTANT ANNUAL PRnFTTflR i'n” ARISING FROM
cnmATmATInNs nFt
(1) CHANG0 IN vnLumi- nF. 15 pFs(FNT
(2) oN.OFF SFITT nF on.in PERCFNT
IHANG
=
A PL.
7 *:.RCE
E. IN.TM TALF
()
m c ...
. Y2cg
NT
• .C •

rn-L/ME
1 ITH
6
ADVICE
.01

CN.LTNF
PEvEYuF
13,052°,AA1

wTATD7rE

.M1

17,h2t/rFatAl

.n1
.01
.03
.03
e 03
em3

11.A2c),PAI

p c7
.04

iii,n0,72A
1 11,00,72A
tb,A0,7p4

.nt,

.
.g7
.°41
.A0

1 41,72q,1J0 A

.CQ

CIFF.LINF

I l,0
1.6 P
hg
Q:7
"
PA

.c,(1

ant)

1/1,720,4Q4

.07

IL,72Q,Uqg

.06
.40
.40
.0
1
.40

.q a

2 4,72Q.4014
22,,06,Aon

.A0
mcK1
.07
eq0
.60

Asq . lk.piTr%S
Tm VoLOYEt
fAl
15 050CFNT
:41 an,tlisTED vnulurt
19,4A6,6n4
(C) r%J.nirr SPLIT: . 00.10 PFRCENT
(0) rA-LTP:E VOLUmE:
17,87q,q44
(FI ^7F-LT"!F vnulmr
1,94A,66n
CFI r6lAmr:F
Ex°FmSFS! 0 PERnENT
CD, ADJUSTED ExFp.REs:
1g,915,240
1TvFm
TOTGI vnillmFt
17,?75,30A
Tc0.11 FxP!.NsFst
1 0,Q 1 5,n*
.
n!J.LT,IF 0RTCF w/THmuT ADVICE: 0.7g
I.LTIE opTcr wITH AnyTcF: 1.08
P 2. r"'
143. nFr.Lik37 FR/CF NITHOUT
AIVICE: 2,65
OFc.LI'vr P0I0E wITw ADVICE: 384

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

OFF:.LimiP:TI

5 2 0. 46
5.337.0q8
5.411.20,6

.10

.015

;?2:;:)0:::gq
22,P06,490

OFF.LINF
wITI4
ADVICE
,11
.n3
.P6
.0 1
en3
.06
.a0
e01
.P3
,n6
.140
.01
en3
ent,
eu0

5.;g
:g0
,
'
7
5
::54-11:92::
6.242.0A7
5.2A0.n!,A
5.317.0c8
5.411.266
6.247.0$47
5.
e2A6
!TilA 7
ti1

VITAL
pcvFNIIE
:R•QIP.967

1A,067,839
10,041,147
1 0,A71,q68
10,35A,A14
10,407,A46

127:4371::N

2n,n2F,S4a
20,00,456
21, 0,753
Prip071,555
27,4:05,076
;77Z
1.8
1Z:
24,448,077

NET RPrFIT
OR LrSS
•006.282
.
0117,410
..A711,102
.41,781
.556,435
.507,563
.03a,P56
3c6,566
1 01,335
15?,2n7
22,51i1
I,05,33l,
7,0,727
7,620,500
7,702,007
8.533,728

TmTAL REVENtIE
As A 0E0 CE:47
oF A%PiSTED
EYPr':S."7
cc.0
05.2
qC,h
qq.8
07.2

07,5
97,8
112.0
10,.5
Ino,4
101.1
105.3
13F.1
13A.3
1P.7
142.0

E 5R
RESULTANT ANNUAL PqnFiT nP
in!ls AP/SING FROM
cnHaT;;ATinNg nF:
(1) CHP1 GF tI vrLumr PF
15 pFPCFmT
(P) ON.OFF SPLIT rF 06:5 PFR
CENT
(3) CwANGF IN TrTAL Fybc.NSES nF
n PERCENT

.%
nN.LTR:F
w7T6inirT
LIVI0F
'cl
r
co
00
00
q7
97
•
r q7
C7
r
•01
Qu
CI
•
04
F
hl
60
p
.60

X
(-LINE
wITH
A0MCF
.01
.0 1
.^1
.0 1
.13
803
403
.03
.46
.06
,06
.06
,c0
.40
.40
4 on

MN:LINF
RrvEmUE
1C,IP7.M07
1u,v87,007
1a,787,0007
la,v47,0q7
1a,P51,170
1 4,0 51,17o
14,AS1,17e
1 0,A91,179
l6,qi:7,P01
15,547,P01
15.547,A01
15,547,P01
23,440,606
21,aandoh
21,440,606
23,440,606

X
OFF.LTNP
WITHOUT
10VICF
..00)
.07
.04
.60
.")
.07
.04
.60
.41(4
•Q4
.60
•og
.Q7
•941
,60

•

ASII;1,PTIPN!S
(A) rH!.0.6 !Pk, VOLgmEt
15 DERCrNT
(R) 10.1!Ic7Fn lirLijkTt
19,8A6,604
(C)
sPLTT! •45.5 PEDCFNIT
(0) fl'i..LTP:E. VOLUYFi
18,873,27A
(P) rFr.1PtF. VCLumF
091,130
(F) cH!.%,
:F
r)( 2!"!SFS! 0 PERCENT
(G) ADTHSTFD EYpERES: 19,9
15.240
nIvFP1
TOTat Vr111P'rt
17M5,301
7n7AL Fx 0E"SFS:
1 9,0 15,240
PI, f":..1,P.F PRTCE
ADVICE! 0.75
24TCF 0./Tk A0VICE
S
1,98 .
D3, rF,=.1./Nc PPICF
wITwOUT ADVTCES, 2.6
5
Pa. nFF.LINE PRICE WITH
ADV/CE: 3.88

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

X
flFF.LINF
wITH
A01/ICE
.01
am3
&Mb
.40
.0 1
,n3
.n6
.40
..01
.06
.40
.111
.n3
.06
.40

•

• •

•

PFVFNUE_
P.644.5/J1
7.66A.,779
7.705.631
3.121.044
2.01114,5113
2.hAA.070
1.1?1.0C4
2.64a,sa3
2,668,q7g
P.705,613
3.121.044
7.6/14.5/fi3
2:666.97,P
2,715.633
3,121.0/14

• • • • S. • •

g• .1
, • •

• • •

TPTAL
PrVFNUF
17,03 1,640
17,066,076
17,002,730
17,506,140
17,o95,q2?
17,570,358
17,557,017
Ilig7P,423
1A,t9P,341h
1A.P16.782
1A,253.436
18,668,8u7
26,085,1 40
26.1o°,55
26,146,230
26,61,650

• • •

••

NET. ParrIT
CR LPS5
-2,6S1,600
.P,S59,173
.
2,8
2?.5;°
.2,4n7,100
im2,4 1 9,1?7
..2, 1Q/
-2,156 ,217
-1.0 2,626
-1,7P7,001
.1,696,467
.1,661,611
•1,2c6,40
. 6,160,900
6,194,316
6,230."0
6,646,401

TrTAL RcVENflE
A s A PFCCcNT
nF APJS7En
ExPEr.F.E
Ec.5

•

85.1
F7,c)
87,9
88.0
8.1.2
00,2
91.3
0!,5
01,7
93,7
131.0
13 1 .1
131.3
133.4

S
T;RLE 6i
pFSULTANT ANNuAL PpkFTT OP ns AR/SING FROM
CnmRTmATTnNR nF, _
Cl) CHANGE TM vnuw'r nF. 75 . FFPcENT
(2) Om.OFF SPLIT nF 10.p0 pEPCFNT
(1).CHANGE
IN TnTAL EYPFNSER nF -10 PERcENT
•

.%
ON.LTNE
wTTL410T
ADVICE
oo
qo
r
00
r
07
r
Q7
f
Q7
r
:
01

QU
Qa
qu
r
r hn
611
6t1
I
.60

ON-LINE
.e/TH
ADVICE .
,n1
.0 1
.0 1
.01
,n3
.n3
.03
.03
.06
.fsh
.nh
,n6
.
▪ 41C
.40
.40

rINILTNF
REvrnIF
11,16A,Qh7
13,1hA,167
11,16A,067
13,c11,0ii0
13,cq3,0 un
13,cq3,0 1:m
13,qq3,0 un

14,P31,3944
14,731,19P
ia,p31,1P9
14031,1c0
21,t55,9 31
21,655,913
21,655,933
21,455,933

x
OFF.LTNT
wiTPruT
ADVICE
cc)
.q 7
.04
.60
00
,07
.94
.60
,P9
.q 7
.q 4
.60
.414
47
P
.94
.60

••

oFF.LiNF
viTTH
ADVICE
.01
.03
.06
.40
,01
.03
.06
.40
.0 1
.01
.06
.60
.0 1
.03
.06
.40

nTvFN
TOTAL kTL'2"F! 17075,308
TOTAL PX ,
7cSFS: 10,Q15,2:40
Pl. nN•LTNE PrITCE L':/THOUT ADVICE:
0.75
P2,L7FPPTCF HITH ADVTCE: i sP8
63, oFF.LIE PRICE w/THOUT
Ar)VICE: 2.65
P4, rIFF.LINE PRICE WITH
ADVICE: 388

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

• - • • •

•

riFLLiNF
PFVFNIT_

II.40;.t.013
i1.6na.?5.6
71.70,1.671
T3.CAQ,7Q4
T1.agR.013
T1,6114.6
;1.7A3.61
71.5A$9.7s6
Ti.moa.n!3
11.6wa.25h
/1,7A1.671
11.5A9.7ca
T1.49R.0!1
T1.604.256
T1.73.671
73.569.754

•

ASsuvoT/nNS
(A) rHANnE TN VOLUME: 25 FERCENT
(R) tnJimTE1 VriluHF: 21,5p6,115
(C) 1 4.r1 P.F SPLIT! )10.20 PFIRCEP4T
r",;.LT':7 VTLU"Fi
17,275,308
(5)
Vrolvp
a,31p,A27
(F.) rwiNGr TN ExPENSFS:
-10 P"CENT
(G) ADJUSTED ExPENsES: 17,923,7
24

•

• •

• • •

TOTAL
REVENIIE

2C,6h6,9A0
24073,22u
24,0 32,5R
PA,718,72P
7Q,091,053
2--;. 1".1c h
25,1C7,561
27,161,6944
25,729.ff1P
27,R15,655
25,995,020
P7,R01,151
1P,951,966
13,060,189
13,210,55u
35,025,687

NET PPrIFTT
OR LOSS
6,741,256
6,Aug,tiQg
7,n0A,841
8,A14,gog
7,16)1,220
7,27L,472
7,431,P37
q,230,070
7,P09,68
7,q1 1,g31
P,n71,20o,
P,877,6P9
15,031,222
15,136,455
15,295,82q
17,101,1;63

TnTAL FEVENUE
As A PF0 CENT
nF .A.D.r!STED
EYPFA9E
137,6
11g.2
130,1
140.2
140,0
114%6
!tn.:4
151.6
161.5
lac.1
1450
te3.q
185.3
195.4

D-1

APPENDIX D

111

ENVIRONMENTAL It41CT
As part of its effort in es
tablishing a pricing schedu
for Federal Reserve Wire Tran
le
sfer services, the Subcommitt
ee considered the potential impact of
implementing the pricing sche
dule
suggested in the Final gepo
rt. The areas investigated in
cluded:
(1) comparison of the fee st
ructures with other transfer
networks,
such as BankWire and S.W.I.F.
T. to determine the likelihood
of
volume or users shifts due
to cost or service benefits;
(2) analysis
of potential changes in us
er community as a result of
pending
legislation or a more open
policy of access; and (3) th
e likelihood
of a significant demand for
on-line services because of
price
differential between on-lin
e and off-line transfers.
The chart below shows the
current fee structure of th
BankWire and the S.W.I.F.T.
e
system and the proposed fees
for Fedwire.

COMPARISON OF WIRE 4 TRANSFER
FEES

•

Service
Basic transaction

Fedwire
750*

BankWire II
600

S.W.I.F.T.
400

Service to off-line cons
tituency
a)
b)

Telephone Orders
Immediate Advice

$1.90
$1.23

N.A.
N.A.

Other services to on-lin
e
constituency
a)
b)
c)
d)

Acknowledgement
Priority
Statement
Undelivered traffic

**
**
N.C.
N.A.

150!
150!
600!
600!

200!
200!
200!
N.A.

* Does not include costs
for taxes, profits or
capital investment.
** Included in basic tr
ansaction.
N.A. - Service Not Availa
b]e
N.C. - No Charge

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

•

D-2
OLher factors must be included in
addition to transaction
charges in order to make a fair com
parison. For example, only the
FRCS provides immediate settlement
for its:transactions. Settlement
for BankWire or S.W.I.P.T transacti
ons must be arranged independentl
y.
The constituency served by the FRCS
is very large, some 5700 institu 4 ions at present whereas the Ban
kWire, services only 180 large
instii- utions and S.W.T.F.T. 60 U.S
. organizations. There are no
membership fees or capital investmen
ts required to utilize the FRCS
as there are in the other networks.
The most iMportant difference,
however, and the fact that makes
direct comparison of fees misleadin
g,
is the size of the constituency
served by the various networks.
The
fact that the Federal Reserve must,
by law, provide the wire transfer
service to small, occasional users
in remote locations as well as to
large money center hanks, means tha
t the per transaction price of
Federal ,Reserve operation will alw
ays be higher than that of a
network interconnecting only hig
h volume on-line users.
The establishment of a fee schedu
le for Federal Reserve
wire transfer of funds is not exp
ected to significantly change the
distribution of transaction volume
between BankWire and the FRCS.
(S.W.I.F.T. deals only with int
ernational transactions and, theref
ore,
would not derive any increase in
transaction volume from Fedwite
actions, since the latter is nat
ional in scope.) The need to
purchase terminal equipment, the
limited membership of BankWire and
the lack of an immediate settle
ment may continue to dissuade ban
ks
from using BankWire, regardless
of the transaction fee. Furthe
rmore,
the basic transaction in the FRC
S is delivered within minutes
of origination by an on-line ban
k and most closely resembles the
BankWire priority transaction (75
¢) and the S.W.T.F.T. high -prior
ity
message (80). The proposed fee
of $.75 is competitive with the
se
prices considering that statem
ents of activity, inquiries, etc
., are
handled at no cost in the FRCS,
whereas the other networks charge
for these items. Given these
conditions, the Subcommittee con
cludes
that •the proposed fee schedule
most likely will not cause a
sig
nificant change in either the number
of users or the distribution of
transaction volume between the FRC
S and other networks.
The connection between pricing
for services and legislation
needed to resolve the membership
problem is clear. It is also
clear
that if legislation is passed sim
ilar to that proposed late in
the
95th Congress, the Federal Reserv
e may see a significant impact
on
its membership and in the type of
services demanded. However, the
Subcommittee feels that the pri
cing structure proposed is suf
ficiently
encompassing that additional
demands of fhe FRCS could be
met and
that the revenue from new or
additional activity could be
adjusted
to adequately cover the cost
of modification or addition of
the FRCS
facilities. The structure wil
l also accommodate any ten
den
cies to
"open" access to the FRCS to age
nts of members or other fin
ancial
institutions, since the cost per
transaction is linked directly
to the cost of providing the
necessary services. Major
changes in
the wire transfer area are not
expected since Fed funds
traders are
already using the FRCS facilitie
s today (via correspondent
relationships) and the number of tra
nsactions and dollar amount
are
expected
to remain fairly constant.

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Federal Reserve Bank of St. Louis

D-3

•

The proposed price schedule could have significant
impact on the confiauration of the FRCS in' terms of encouraging
medium size banks who are now off-line to request a terminal
or
on-line connection to the FRCS due to the differential in fees
for
off-line and on-line transfers. A trend in this direction would
have a favorable impact on the Federal Reserve providing the
computer systems installed can accommodate the added demand for
on-line service. It is . the Subcommittee's opinion, however,
that
the trend toward on-line service will not be of a magnitude
that
will cause problems in terms of the available computer equi
pment.
This opinion is based on the observation that it will stil
l take a
fairly large volume of transfers (10 or more per day) to make
it
cost-effective for a member to come on-line since the trad
e-off
against transaction fees must include not only terminal
equipment,
but labor intensive preparation, operation was control
procedures
which are not necessary in a telephone based operatio
n. An informal survey suggests that Reserve Banks are already
planning to
be in a position to accommodate members with volumes
in this
category in the near future. Consequently, the impact
of a differential pricing schedule between on-line and off-line
will be
favorable to the Federal Reserve (less labor intensiv
e operations,
better security and control) and can be accommodated
within
existing and planned communications facilities.
As a matter of interest, the Subcommittee noted that
as an additional point of comparison, Western Union comme
rcial, funds
transfer fees are $4.50 for a transfer value up to $200
and vary
to $15 for a transfer up to $5,000. Additional fees
are charged
at a rate of $4.45 for each $500 (or fraction ther
eof) in excess
of $5,000. Western Union's fees are nationwide.

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Federal Reserve Bank of St. Louis

E-1

APPENDIX E
ADDITIONAL DATA NEEDED TO ADMINISTER
Raf.di4W15-ffn PRICING METUODOLOGY

As explained in Appendix A, the volume dat
a reported in
PACS for the Transfer of Reserve Account Bal
ances are appropriate
for use in measuring performance among Reserv
e Offices but cannot be
used to administer the pricing methodology
proposed for the funds
transfer service. Therefore, if the pricin
g methodology proposed is
approved, the following additional enviro
nmental statistics should
be incorporated into the regular PACS report
s in order to provide
all of the necessary data in a single report
:
•

Number of fund transfers originated
el

By on-line banks without advice

By on-line banks with immediate advice

By off-line banks withgut advice

By off-line banks with immediate advice

Number of fund transfers received
o

By on-line banks without advice

•

By on-line banks with immediate advice

•

By off-line banks without advice

•

By off-line banks with immediate
advice

Only those fund transfers with typ
e codes 10, 12, and 15 that
generate accounting entries should be
included in the above volume
data.

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Federal Reserve Bank of St. Louis

Full text of Paul A. Volcker Papers : Pricing Policy Committee : February 5, 1979, Box 20, Item c245

FRASER