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The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies. 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 Find it online: and  The digitization ofthis collection was made possible by the Federal Reserve Bank of St. Louis. From the collections of the Seeley G. Mudd Manuscript Library, Princeton, NJ These documents can only be used for educational and research purposes ("fair use") as per United States copyright law. By accessing this file, all users agree that their use falls within fair use as defined by the copyright law of the United States. 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Mudd Manuscript Library 65 Olden Street Princeton, NJ 08540 609-258-6345 609-258-3385 (fax) Federal Reserve Bank of St. Louis  Monday, February 5, 1979  4:00 p.m.  •  • 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 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  1/ Federal Reserve Bank of St. Louis  Includes volume data for Clearing Activity.  .1  Government Securities Activities of this Bank Compared to System Totals  1.  This Bank's inter-district transfers of government and  agency securities represent 43% of the System's total of interdistrict transfers.  2.  This Bank handles on an intra-city basis alone a volume  of transfers equal to 70% of the System total.  3.  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. Federal Reserve Bank of St. Louis  4  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 Federal Reserve Bank of St. Louis  t•Ir .  • 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 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  •  B.  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: Federal Reserve Bank of St. Louis  •  •  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, riat the option of each Reserve office, the redist bution of building costs for vault and other high security areas separately from those of the rest of the building.  4  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. Federal Reserve Bank of St. Louis  C.  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,  5  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  3  ACH entries Fund transfer entries  35  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. Federal Reserve Bank of St. Louis  6  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. Federal Reserve Bank of St. Louis  "Pricing Cash Services"/WRI 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. 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.  2  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 Federal Reserve Bank of St. Louis  or are fit currency previously issued, might be  3  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;  2)  moderate charge for deposits of sorted fit currency sealed in plastic bags, and  3)  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  • Federal Reserve Bank of St. Louis  4  •  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." Federal Reserve Bank of St. Louis  5  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. Federal Reserve Bank of St. Louis  Whitney R. Irwin February 1, 1979  r Fifth Progress Report  1 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  • 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.  • 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. 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 —  •  I.  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 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 ; • 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. 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 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 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  •  • Federal Reserve Bank of St. Louis  •  • 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, 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 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 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  • 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,, 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,  • 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. Federal Reserve Bank of St. Louis  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.)  • 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. 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. 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.  Al 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  is  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  \'‘)) •  t  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.  • 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.••••••• 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. • Federal Reserve Bank of St. Louis  -14-  V.  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).  • . • Federal Reserve Bank of St. Louis  ..a... , ..4.4..L...1.W.SAX••••••••1•0:•...:••144,4i,44.14.4i.;...a6  •••••••ML1,..s.:44-....1111,4oddie  •••••4.-••00.  4;4*  •  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  .  ' •  ••  %go*  .  - • ••••••41.0,•••••••••rno4 A,....o..Akiair••••,•46•446.••••colka. • •  •,••••••  44, ikzit  •  •-111..  .  da•••,..,11eidimmar•-•  A-2 • 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  I  few cents.  I Federal Reserve Bank of St. Louis  • • , -"?'•"'"""" •'  ••  -•..-•  •-  • ^'  •••••  • ^  -  • •••; ••• • •7: ' . ••• • •••'  ..•••••Firitr7 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  )1.  , L  reVarliJalrirahrrArAiral, 06.•  ;Alt•elliabrVI.**41.41.11Prir  rrskalkirer.1110111iiiirinfrilli1441116..1.6.  "  : " 41111 ‘ 1 0 1 " " ....."464441,11641  •  •  •  Appendix B  •  Derivation of Private-Sector Adjustment  41 .14  '44  A  a 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  "w  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. Federal Reserve Bank of St. Louis  •,•01•••.•• • ',NI,.  ft••••11.7?0•1  •  •  11go• -•-• ••• •Spre.-,  1.1% ^  ,  •••1  4.4.•••44/4/16//eaSea:•t1004,6heikapaltrne,64k1.41,4110,16014411;MiNt.lati4NliadMikei,4\•111 ..1:111.44C.440121144:41. , ow,:weLt,tiOMOUVIII&C ddlOillYft'4161144,,,yetiklY411,lipaggaty,{4,40„ ...:4108,44.1614.441•441.11144411aialgaiii4MO,  .  44  -2-  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  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.  4  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. • 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  A  VS*  ..11.,..11..11•MI,  Agb,w.  .  • ...  -  ‘r1"TrY i,  yevo.o.t4,114..eked.Onarlft4i11.0.4101G111.11.4.w..  4.‘a••••4...4140...........,..•  wilt•  -•••••••1.  }41.  444..  g  ,e  Uteui , e,4 /44sem..1,,&/ Yi4I•4146700••••ablaNaktS481.‘04.66/aara2•111211...,11.0.111.•61.....•••  08,••••Vitil.:045.- ••  •  • 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 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  NI  4/Askotestabwwiseisv suraid.ortimA4iauwie.obs.  •  • 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  •  A  II  1 1 QUESTIONS AND ANSWERS ON PRICING  El  POLICY DECISIONS ON PRICINU 1.  Is the proposal to charge for Federal Reserve services tied to the membership problem?  II  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.  k.  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.  1 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.  3.  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 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  Or  January 15, 1979 Revised  •  •  Table of Contents  Page No. I. II. III.  IV. V.  Executive Summary  4  The Fedwire and the Subcommittee Assignment Major Issues and Subcommittee Positions  1  4 0  6  A.  Services Considered  6  B.  Uniformity in Prices  7!  C.  Charge Originator  9  D.  Charges for Accounting Transactions  i10  E.  Future Pricing Possibilities  11  F.  Penalty Charges  G.  Legal Impediments  0  12 14  Implications  15  Conclusions and Recommendations  19  Appendices A.  Calculations of Unit Costs and Suggested Prices  A-1  B.  Alternative Scenarios  B-1  C.  Sensitivity Analysis  Cl  D.  Environmental Impact  E.  Administration  C0059S901 Federal Reserve Bank of St. Louis  .•  D-1 E-1  •  I.  •  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  1.  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;  2.  Accepting a transfer request from an off-line bank, authenticating, processing and validating the request, and entering it into the automated communications facilities; and  3.  •  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 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: 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.  2.  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. •  3.  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.  4.  5.  • 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.  1/  •  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. 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. 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.  2.  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  3.  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.  • Federal Reserve Bank of St. Louis  6  •  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  • Federal Reserve Bank of St. Louis  7  •  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"  1/  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-  • 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:  • Federal Reserve Bank of St. Louis  1.  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;  2.  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-  •  3.  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 Federal Reserve Bank of St. Louis  -10-  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.  • Federal Reserve Bank of St. Louis  -11-  •  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.  1/  2/  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. 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.  1/  • 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.  -13-  •  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  •  • Federal Reserve Bank of St. Louis  -14-  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.  • Federal Reserve Bank of St. Louis  -15-  Ile  S  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.  • Federal Reserve Bank of St. Louis  -16-  obb  S  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  0  +15  -10  +25  Percent of volume originated and received by offline constituency  15  13  5  20  Percent immediate advice to total volume  40  6  1  40  Percent change in expenses  0  +5  +10  -10  133  102  61  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  • Federal Reserve Bank of St. Louis  a  -17-  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.  • Federal Reserve Bank of St. Louis  -18-  Alb  •  V.  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.  2.  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.  3.  Request the Conference of First Vice Presidents to discontinue the policy of having Reserve Banks automatically advise receiving institutions of third party transfers, allow originators access to immediate advice service, and modify Federal Reserve Bank Operating Circulars to reflect these policy changes.  4.  Include the additional environmental statistics in future PACS reports as described in Appendix E of this report to facilitate the calculation of unit costs.  5.  Disband the Subcommittee.  •  •  • Federal Reserve Bank of St. Louis  -19-  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. 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):  • 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:  • 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  • 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  1,254,854  3.  All other expenses  8,839,315  7,838,705  682,395  318,215  4.  Total activity expenses  14,807,570  9,601,192  3,629,213  . 1,577,165  5.  System projects and overhead  5,1O7,679  3 31] 819  '1,251,892  543,968  6.  Total costs to be recovered  $19,915,249  $12,913,011  $ 4,881,105  $ 2,121,133  17,275,308  17,275,308  2,563,656  1,720,213  62.52%  26.71%  Volume  7.  Total fund transfers  Allocations Used  8.  Line 1 - Est. from Table 2  100.00%  10.77%  9.  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 Federal Reserve Bank of St. Louis  A,  - 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: 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  • 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.  • 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 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  0  +15  -10  +25  Percent of volume originated and received by offline constituency  15  13  5  20  Percent immediate advice to total volume  40  6  1  40  Percent change in expenses  0  +5  +10  -10  133  102  61  195  Projected revenue as percentage of total adjusted expenses  •  Possible  Net Revenue (million of dollars)  46.5  Details from Tables • numbered (following) 26 Federal Reserve Bank of St. Louis  40.4  -8.6  51  20  61  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): 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.  • Federal Reserve Bank of St. Louis  NIA ••••  SHMMARY STATITIrS WANHHOL HrT REA)EMUE FOR FEPEPRL FFSFME  •  • 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  •  •  a  RP  •  a  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 Federal Reserve Bank of St. Louis  ••  1,Or  • •,r •),.i 0. • rra  r  •  I  •  •  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 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 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  •. •  .1  •  •  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 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 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 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 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.  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 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. 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. 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 : •  o  Number of fund transfers originated el  By on-line banks without advice  O  By on-line banks with immediate advice  o  By off-line banks withgut advice  o  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. Federal Reserve Bank of St. Louis
Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102