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F E D E R A L R E S E R V E B A N K OF D A L L A S Station K, Dallas, Texas 7 5 2 2 2 Circular No. 84-21 February 1, 1984 TO: All depository Reserve District ATTENTION: Operations Officer SUBJECT: Implementation of revised fees for off-line funds transfer and net settlement services and request for public comment on proposed new fees for on-line funds transfer SUMMARY: The Board of Governors of the Federal Reserve System has announced new fees for off-line funds transfer and net settlement services to become effective March 1, 1984. Additionally the Board is requesting public comment on proposed changes to the fee structure for services that are provided to depository institutions with on-line connections to the Federal Reserve. DETAILS: Attached is a press release from the Board of Governors of the Federal Reserve System containing important information about Federal Reserve on-line services that are provided to depository institutions and about the funds transfer service in particular. The Board of Governors has approved a new fee schedule for the off-line funds transfer and net settlement service, which will become effective March 1, 1984. This new fee schedule is described in detail in the notice and represents the first change in funds transfer prices since April 29, 1982. In addition, public comment is requested on a proposal to change the fee structure for services that are provided to depository institutions with on-line connections to the Federal Reserve. institutions in the Eleventh Federal As noted in the Board*s press release, concurrent with the announcement in March 1983 that existing fees for the funds transfer and net settlement service v/ould remain unchanged through 1983, it was indicated that the Federal Reserve would be examining alternatives to This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) Banks and others are encouraged to use the following incoming WATS numbers in contacting this Bank: 1-800-442-7140 (intrastatel and 1-800-527-9200 (interstate'!. F o r c a l l s D la c e d lo c a llv . Dlease u s e 651 d I us t h e e x t e n s i o n r e f e r re d to a b o v e . - 2 - charging only transaction fees. There are substantial fixed costs involved in operating a national telecommunications network, and these fixed costs do not vary, at least in the short-run, with changes in transaction volume. Moreover, the fixed costs are incurred to provide a basic level of service to all institutions, whether they use the capabilities of the network intensively by making many transfers or only a few transfers. Therefore, it appears reasonable to establish a fee structure that recognizes, at least to some extent, the fixed costs of providing on-line services. The fee schedule proposed in the Board's memorandum establishes a set of fixed monthly fees for on-line institutions by type of connection, i.e., leased line, dial-up, or computer interface. This would be a uniform national fixed fee and would be assessed once each month for each separately addressable on-line connection with the Federal Reserve. Only one fixed fee would be paid per connection, regardless of the number of services used. An important feature of the fixed fee schedule is the associated proposal that the per transaction fee for the funds transfer service would be reduced at least from $0.65 to $0.60, concurrent with implementation of the new schedule. This means that all depository institutions would benefit from lower transaction fees as fewer costs would need to be recovered from the fee component. While the proposal calls for an initial reduction in funds transfer transactions fees only, it is possible that similar reductions could apply to other services in the future. The proposed implementation date for the new fee structure is June 28, 1984. We believe that the proposed fixed fee structure for on-line access represents an orderly approach to offsetting, in part, the costs of providing the basic communications network required for such services. Your comments on the proposal are most welcome, and we would like to answer any questions you may have. Interested parties are invited to submit comments to William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, D.C., 20551; or deliver them to room B-2223 between 8:45 a.m. and 5:15 p.m. Comments should refer to Docket No. R-0505 and must be received by March 17, 1984. - 3 - ATTACHMENTS: Board's press release and material as submitted in the Federal Register MORE INFORMATION: Larry C. Ripley, Extension 6118; Jonnie Miller, Extension 6290; or Robert Boyanton, Extension 4346 ADDITIONAL COPIES: Public Affairs Department, Extension 6289 • - n) — ^ FEDERAL RESERVE press release For immediate release January 18, 198 The Federal Reserve Board today published, for public comment, a proposed revision to the fee structure for the Federal Reserve's wire transfer of funds service. The proposal includes a reduction of the basic fee for originating or receiving a wire transfer of funds from $0.65 to $0.60 per transfer. At the same time, the Board proposed a fixed monthly fee for all depository institutions that have an electronic connection with the Federal Reserve. The fixed monthly fee charges would be: Type of Connection Monthly Fees All Priced Services, Except Dedicated ACH and Securities Transfer Connections*/ Computer Interface Leased Line Dial Up Dedicated ACH Connections^/ $1,400 $ 350 $ 75 Comment is requested by March 16, 1984. Revisions to the off-line^/ surcharges for the Reserve Bank's wire transfer of funds and net settlement services have been made, to become effective March 1. The new fee schedule is: Wire Transfer of Funds Off-Line Origination Telephone Advice Net Settlement $5.50 $3.00 Off-Line Settlement Telephone Advice Pending Board action, the basic transfer fee, currently $0.65, will remain in effect for all on- and off-line funds transfers. The Board's notices are attached. (over) $8.00 $3.00 - 6 - 1/ Approximately 60 on-line connections are used by depository institutions solely for securities transfers. No fixed monthly fees will be assessed at this time for these dedicated connections, pending a review of the fee structure for securities transfers later this year. 2/ The automated clearing house (ACH) service is priced under an incentive pricing policy. The fees proposed for dedicated ACH connections reflect a 60 percent recovery rate for the service. 3/ O f f - l i n e i n s t i t u t i o n s do not have an e l e c t r o n i c connect i on with t h e Federal Reserve and, t h e r e f o r e , must o r i g i n a t e t h e i r t r a n s a c t i o n s and be advised of t h e i r s e t t l e m e n t by phone. FEDERAL RESERVE SYSTEM (Docket No. R-0505) FEE SCHEDULES FOR FEDERAL RESERVE BANK SERVICES AGENCY: Board of Governors of the Federal Reserve System. ACTION: Proposed 1984 Fee Schedules for Wire Transfer and Net Settlement Services. SUMMARY: The Monetary Control Act of 1980 Law 96-221) requires that schedules of fees be establshed for Federal Reserve Bank services. wire transfer implemented 1983. (Title I of Public of funds effective and net April 29, Revised fee schedules settlement 1982, and services continued for the were through The Board now seeks comment on the following new fee structure and new prices for these services to be implemented in 1984: Monthly Fees Type of Connection Computer Interface Leased Line Dial Up All Priced Services, Except Dedicated ACH and Securities Transfer Connections!./ $1,400 $ 350 $ 75 Dedicated ACH Connections.?/ $840 $210 $ 45 1/ A number of on-line connections are used by depository institutions solely for securities transfers. No fixed monthly fees will be assessed at this time for these dedicated connections, pending a review of the fee structure for the securities transfer service later this year. U The ACH service is priced under an incentive pricing policy. The fees proposed for dedicated ACH connections reflect a 60-percent recovery rate for the service. - In conjunction with 8 - implementing fixed monthly for electronic connections with the Federal Reserve, fees it is also proposed that: — the fee for originating transfer of funds be or receiving a wire reduced from $0.65 to $0.60 per transfer; and — the fee for originating a securities transfer be maintained at $3.00 per transfer. DATE: Comments must be received by March 17, 1984. ADDRESS: may be Comments, mailed Governors of to: the Constitution which should William Federal Avenue, N. W. refer Wiles, Reserve to Docket No. Secretary, System, W. , Washington, 20th D. R-0505, Board of Street 20551, C. and or delivered to room B-2223 between 8:45 a.m. and 5:15 p.m. Comments received may be inspected in room B-1122 between 8:45 a.m. and 5:15 p.m., the Board's except as provided in section 261.6(a) Rules Regarding Availability of Information of (12 C.F.R. § 261.6(a)). FOR FURTHER INFORMATION CONTACT: Director (202/452-2231), or Florence M. Young, Program Manager (202/452-3955), Division Gilbert T. Schwartz, or Elaine Division, Elliott C. McEntee, Associate M. Washington, D. C. Federal Reserve Bank Associate General Counsel Boutilier, Board of of Attorney Governors 20551. of the Operations; (202/452-3625), (202/452-2418), Federal Reserve Legal System, - SUPPLEMENTARY INFORMATION: requires Bank that 9 - The Monetary Control fee schedules be developed for Act of 1980 Federal Reserve services based on pricing principles established by the Board (12 U.S.C. § 248a). The Board, in accordance with the requirements of the Act, has established fee schedules for the wire transfer current fee of funds schedule, and net settlement implemented on services. April 29, The 1982, was retained because estimates of the volume of funds transfers and the total costs, including would cover the 1983 noted, at that the PSAF, time, changes comment would 1983). The appropriate be that a comprehensive were revenues of (48 that to be indicate if public March 23, that to revise the existing fee structure fee that necessary, F e d . R e g . 12135, review Board review of the had been undertaken and determined solicited results that costs of providing the service. The structure for these services significant indicated it is for the wire transfer of funds service in order to recover anticipated costs for 1984. Accordingly, the Board is requesting public comment on a revised fee structure. For the period January costs, including the through November, 1983, PSAF, amounted to $52.0 million and revenues amounted to $52.4 million, resulting revenue surplus of approximately $400 thousand. total total in a modest net The volume of funds transfers originated amounted to 34.7 million during the eleven month period, period in 1982. an increase of Cost, volume and 8 percent over the same revenue data for December, - 1983, are not yet available. 10 - However, it is expected that a modest net revenue surplus will be realized for the year 1983. The total costs, including a 16 percent PSAF, of providing the wire transfer of funds and net settlement service are projected to be $62.4 million in 1984. If the current fee schedule for projected revenues would these services amount to were $58.9 retained, million, resulting estimated net revenue shortfall of $3.5 million. order to match costs and revenues, the Board implement fixed monthly fees and lower basic on June 28, 3/ 1984.— As a result of these in proposes in to transaction fees changes, service, an Therefore, revenues of about $62.9 million are anticipated transfer of funds and net settlement annual for 1984 the wire resulting in a net revenue surplus of $500,000. Cost Structure The Reserve Banks provide electronic services to four classes of users: (1) institutions directly to Federal Reserve computers, terminals or micro-computers Reserve via dedicated, leased that are lines, with (2) computers institutions linked (3) linked to the using Federal institutions using terminals or micro-computers that are linked to the 1/ In this connection, the Board has approved, effective March 1, 1984, an increase in the off-line surcharges for the wire transfer of funds and net settlement services. (See Federal Register notice published simultaneously with this notice.) 11 - Federal Reserve facilities, that via public receive over the telephone or, The telephone lines or dial-up and (4) institutions without electronic connections initiate and house - ("ACH"), following funds and securities in the case of the automated clearing physically table transfers of deliver indicates the and receive transactions. approximate number of electronic links to the Federal Reserve as of December 31, 1983: Number of Electronic Connections Type Number Computer Interface Leased Line Dial-Up ACH Data Link 100 1,300 2,700 200l/ During 1983, on-line users of the Federal Reserve's electronic services originated about 98 percent of all funds transfers and about 99 percent of all securities transfers. the ACH service, percent and In the case of on-line institutions originated less than received only 10 percent of commercial 25 ACH 5/ transactions .— The on-line electronic payments services offered to depository institutions by the Reserve Banks are capital 4/ Unlike other electronic connections, ACH data links are frequently shared. Approximately 2,000 depository institutions are currently served by the 200 data links that are installed. 'kJ On September 23, 1983, a revised fee schedule for the ACH service was published for public comment. (48 F.R. 44650) The proposal to implement fixed monthly fees for electronic services will have a minor impact on the proposed ACH fee schedule since a relatively small percentage of ACH transactions are originated and received via on-line connections. - 12 - intensive services and fixed costs are high relative to total costs. The Federal Reserve has intradistrict and interdistrict invested in processing state-of-the-art equipment, and developed data data is sophisticated communications communications developing networks, and enhanced data automated systems for each of its electronic payments services. Certain elements of the Federal Reserve's communications and data processing costs would be order to offer electronic connections with other costs, in data incurred in payments services even if no on-line the Federal Reserve particular the were costs offered. associated However, with intradistrict communications networks, would not be incurred if on-line connections communications circuits, networks and modems the Federal costs were of local offered. consist Intradistrict primarily of used to link depository Reserve. the not During 1983, networks that the institutions it is estimated were lines, allocated that to the to priced services amounted to $6 to $7 million. Depository institutions connections with the Federal more than securities 60 percent transfers considerable of resources computer-to-computer Reserve the during to that total 1983. have originated number These purchase interfaces, computer-interface and of and funds and institutions and Federal the high transaction volumes expend install Reserve devotes considerable time to testing the equipment. that received are processed staff To ensure efficiently, - high speed, Federal dedicated Reserve. lines 13 - link In addition, these the institutions capacity of the to the Federal Reserve's data processing and data communications equipment is largely dictated by the volume of transactions originated and received by these high volume users. Institutions using terminals or micro-computers that are linked via leased lines accounted for nearly 30 percent of all funds software and necessary applications However, securities software Federal spread over to transfers interface is Reserve with capacity the by 1983. many cases, the than Federal the lines the Reserve. support a relatively broad base because In Reserve's Federal and Reserve Computer Federal the development carriers serving individual linked with provided institutions within a Federal equipment. during costs the majority District lines are use leased from the of same common institutions feed into one circuit Reserve and, used institutions by generally, have with less computer interfaces. During 1983, micro-computers linked institutions via public for using telephone about terminals lines, 8 percent or that dial-up connections, accounted transaction volume. The Federal Reserve provides the necessary software to support their use of electronic services. of is, total However, the lines connecting these institutions to the Federal Reserve are typically public telephone lines that require institutions to dial the transactions. Federal Reserve to originate or receive 14 - In serving summary, individual the costs - to the institutions with Federal computer Reserve interfaces of tend to be higher than for those with leased-line connections, which are higher the three than for those with dial-up connections. classes of on-line institutions use the However, Federal Reserve's electronic services with different intensities. When fixed costs, such as data communications costs, are spread over the high transaction institutions, to be volumes processed by computer-interface the per transaction impact of fixed costs tends lower. Conversely, for lower volume, leased-line or dial-up institutions, the per transaction impact of fixed costs tends to be higher. Alternatives At present, the fees assessed for the wire transfer of funds, securities transfer, and the ACH services are generally based Basing on the fees average on cost average of a 6/ transaction.— is an processing processing costs appropriate pricing methodology when a high proportion of total production costs are electronic variable. services, In the a high relative to total costs. case of the proportion of Federal costs Reserve's are fixed Thus, some modification to the Jj/ On September 23, 1983, a revised ACH fee structure was published for public comment that proposed instituting fixed deposit and receiver handling fees reflecting fixed costs associated with these activities. (48 F.R. 44650) 15 - - current fee structures for electronic services could result in fee structures that more closely resembled the cost structure of the services. To achieve this objective, the following alternatives were reviewed: — assessing variable transaction fees for wire transfers of funds and securities services based on the type of on-line connection used by a depository institution; -- assessing on-line institutions the actual costs of the lines and modems that are installed to provide electronic payments services; and — assessing fixed monthly fees that would type of on-line connection and would, recover the cost of intradistrict vary by on average, communications networks. Based on the staff study, the first alternative, use of variable transaction fees, would result transaction institutions being fees, using assessed connections, to with the dial-up highest connections institutions due to differences the three classes of on-line with being and in a range of assessed the the lowest to fees computer-interface in transaction institutions. volumes While among the use of variable transaction fees would reflect the costs of providing electronic payments services more accurately than the current fee structures, it still would not fully reflect the fixed cost - structure of services. provide the Federal Moreover, depository 16 - Reserve's variable transaction institutions type of connection linking electronic an fees incentive them with the payments would to also upgrade Federal the Reserve in order to reduce the variable costs they incur in using Federal Reserve services. more costly facilities to Since dedicated leased-line connections are the Federal Reserve and computer-interface than leased-line connections, than shared connections dial-up are more costly moves to upgrade connections on the part of depository institutions would increase rather reduce the overall than costs of the Federal Reserve's electronic payments services. The alternative of passing through actual line and modem costs to individual depository institutions would provide an objective means of assessing institutions with cost-effective, an fees. incentive on-line transactions handled. to connection However, It would also provide select the based on the most volume telephone rates are frequently based on distance and may vary from region to region, in disparate charges Furthermore, the uncertainty Finally, AT&T regarding determining institutions sharing would be complex. to institutions divestiture the the fees costs leased that this within creates that lines Therefore, of or would the same a great be class. deal of assessed. would be using dial-up approach resulting assessed was to networks regarded as unacceptable due to its complexity and the unpredictability of telephone rates. - 17 - The third alternative, assessing fixed monthly fees to on-line institutions that vary by type of connection, like passing through actual line and modem costs, would be based on clearly identifiable structure that fixed reflects costs the and would that fact result fixed high in a fee costs are incurred in providing electronic services. Setting fees that, on intradistrict average, would communications those of depending under fixed connections upon the monthly would variability the costs networks would generate generated effect recover vary an second fees charged rates would not occur. due comparable Although institutions each institution's in fees revenues alternative. on within of with connection volume of the on-line category transactions, to differences Therefore, to in telephone the use of fixed fees would remove the uncertainty regarding charges that would exist under the pass-through provide proposal. incentives for This alternative depository also institutions cost-effective, on-line connections and, thereby, reductions in the overall electronic services. alternative costs, and costs Accordingly, of the Federal this approach. select contribute to Reserve's the Board believes that this is the most reasonable basis for the following proposed to should fee recovering structure fixed incorporates - 18 - Monthly Fees All Priced Services, Except Dedicated ACH and Securities Transfer Connections Type of Connection Computer Interface Leased Line Dial Up $1,400 $ 350 $ 75 Under the Board's proposal, be assessed Dedicated ACH Connections a fixed monthly fee would for each separately addressed a depository $840 $210 $ 45 connection that institution and the is installed between Federal Reserve. When an institution uses one connection to access the Federal Reserve for all types of electronic services, one fee would be assessed based on the type of connection. a depository institution uses for funds transfer services services, connection. would be if a computer-interface connection and a dial-up connection for ACH and each connection institution However, assessed is separately the addressable, monthly fee for the each It should be noted that fixed monthly fees would be assessed to all on-line institutions— those that use their own equipment to interface with the Federal Reserve and those that lease equipment from the Federal Reserve. Because the ACH service is priced under pricing policy, an incentive it is proposed that the fixed monthly fees for communications links used solely for ACH transactions should be included under that policy. Specifically, the ACH fees recently published for public comment were set to recover percent of the costs That proposal also of providing commercial included fixed receiver ACH 60 services. handling fees for - 19 - both ground and electronic delivery. If fixed monthly fees for on-line connections with the Federal Reserve it is proposed that the receiver delivery, if one is adopted, handling are implemented, fee for electronic be eliminated in order to avoid double charging users of ACH services. There depository this institutions time, dedicated are a number no fixed of solely monthly connections, on-line for fees connections securities are used by transfers. proposed for At these pending a review of the fee structure for the securities transfer service later this year. Currently, some Federal Reserve Banks' terminal lease fees include a component that is intended to recover a portion of intradistrict communications and other costs. Banks also assess that own their fixed monthly fees own terminals to on-line or micro-computers leasing them from the Federal Reserve. monthly fees for on-line the fixed monthly institutions At fees institutions rather than If the proposed fixed institutions are proposed that these Reserve Some Reserve implemented, it is Banks would discontinue assessing that they now charge to on-line 7/ this time, the Reserve Banks project that intradistrict communications costs will amount to approximately 7/ Existing fees assessed for terminals used exclusively for securities transfers will continue in effect pending a review of the fee structure for securities transfers later this year. - 20 - $8.3 million during 1984, an increase of 20 to 40 percent over 1983 costs. The relatively substantial based on estimates of the effects increase incosts of the AT&T divestiture, which are highly tentative at this time, the number Based on the connection estimated of on-line connections projected with the number Federal that the proposed with of as well as growth in the each Reserve is Federal type during of Reserve. on-line 1984, it fixed fees would generate is annual 8/ revenues of approximately $8.0 million.— As a result of these changes, it is also proposed that the following transaction fees be implemented: Basic Transfer Originated Basic Transfer Received Net Settlement Entries $0.60 $0.60 $1.30 This proposal would result in a $0.05 reduction in the basic fee for originating change is proposed for or the receiving fee for net a funds transfer. settlement No entries. This new transaction fee would be implemented at the same time fixed monthly fees are implemented, which is proposed to be June 28, 1984. By order of the Board of Governors of the Federal Reserve System, January 17, 1984. (signed) William W. Wiles William W. Wiles Secretary of the Board Approximately 70 percent of the revenue generated through fixed monthly fees would be allocated to the wire transfer of funds and net settlement service. - 21 - FEDERAL RESERVE SYSTEM Docket No. R-0504 FEE SCHEDULES FOR FEDERAL RESERVE BANK SERVICES AGENCY: Board of Governors of the Federal Reserve System. ACTION: Fee Schedules for Wire Transfer of Funds and Net Settlement Services. SUMMARY: The Monetary Control Act of 1980 Law 96-221) requires that schedules of fees be established for Federal Reserve Bank services. wire transfer implemented 1983. The (Title I of Public of funds effective Board has and Revised fee schedules net April 29, approved surcharges for the wire settlement 1982, an transfer and services continued increase in the for the were through off-line of funds and net settlement services. EFFECTIVE DATE: March 1, 1984. FOR FURTHER INFORMATION CONTACT: Director (202/452-2231) (202/452-3955) Schwartz, or M. Elaine Division, or Florence M. Division Gilbert T. of Washington, D. C. requires Attorney Governors of the Young, Reserve Program Manager Bank Counsel (202/452-3625) (202/452-2418), Federal Reserve The Monetary Control that fee schedules be developed Reserve Bank services based on pricing principles by the Board Operations; Legal System, 20551. SUPPLEMENTARY INFORMATION: ("Act") Federal Associate General Boutilier, Board of Elliott C. McEntee, Associate (12 U.S.C. § 248a). Act of 1980 for Federal established The current fee schedule for - 22 - the Federal Reserve’s wire transfer of funds and net settlement services was implemented on April 29, 1982, and was reviewed by the Board on March 17, 1983. As indicated continuing the existing fee schedule comprehensive review was structure the wire transfer for services. transfers conducted These services made through in the notice (48 F e d . R e g . 12135), during of funds 1983 and of net the a fee settlement include both on-line services— i.e., electronic connections— and off-line services— i.e., transfers made upon the receipt of a telephone request. This provided review concluded to depository that institutions the are off-line labor services intensive and that the current off-line surcharges are not fully recovering the costs enable the incurred in providing the services. Reserve Banks to recover the To costs of off-line services, the Board has determined that the following surcharges will apply for off-line services beginning March 1, 1984: Wire Transfer of Funds Net Settlement Off-line Origination $5.50 Off-line Settlement $8.00 Telephone Advice $3.00 Telephone Advice $3.00 The current fees are $3.50 for an off-line origination of a funds transfer, $5.00 for an off-line origination of a net settlement, and $2.25 for a telephone transfer or net settlement entry. it is anticipated that annual approximately $ 8 million. As a off-line advice of a result of the revenue will funds changes, be The current basic fee for transfers - originated and received 23 - ($0.65 per transfer) and net settlement entries ($1.30 per entry) will remain in effect until a new fee schedule is approved proposed that originated and the by the basic received be Board later transaction fee reduced this year. for It is transfers to $0.60 and a new fixed monthly fee be assessed to on-line institutions based upon the type of electronic institution Schedules connection and the for Wire Services, published By order of that Federal Reserve Transfer of is installed Bank. Funds and (See between Proposed Net the Fee Settlement simultaneously with this notice.) the Board of Governors of the Federal Reserve System, January 17, 1984. (signed) William W. Wiles William W. Wiles Secretary of the Board