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F ederal reserve Bank of Dallas DALLAS, TE X A S 75222 C i r c u l a r No. 78-49 April 28, 1978 IMPROVEMENT OF PAYMENT SERVICES TO ALL BANKS AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: R eferen c e is made to o u r C i r c u l a r No. 78-6, d a te d J a n u a r y 17, 1978, whic h a d v i s e d th a t th e Board of G o v e r n o r s of the Federal R e s e r v e Syste m had a n n o u n c e d p la n s to im prove natio n w id e settlem ent s e r v i c e s for B a n k w ir e f u n d s t r a n s fe r a n d among auto mate d c l e a r i n g h o u s e s (ACH's) , a n d inv ited comments. T h e Board of G o v e r n o r s h a s a u th o r iz e d Fe d e ra l R e s e r v e Banks to p r o v i d e s e r v i c e s n e c e s s a r y to tie t o g e th e r ACH facilities into a nationw ide n etw ork for making p a y m e n ts e le c tr o n ic a lly r a t h e r t h a n b y c h e c k . T h e Board has a lso a p p r o v e d o th e r Federal R e s e r v e s e r v i c e s to facilitate t r a n s f e r of f u n d s among member b a n k s o v e r B a n k w i r e , a p r i v a t e l y o p e r a te d w ir e n e tw o rk . P r in te d on the following p a g e s a r e the p r e s s re le a s e a n d FEDERAL REGISTER do c u m e nt. If you h a v e q u e s ti o n s with r e g a r d to the p ro p o s a l on B a n k w ire s e tt le m e n ts, p le a s e c o n ta c t M r . E. W. V orlop , J r . , a t Ext. 6223. For m ore information a b o u t ACH s e tt le m e n ts , call Mr. C. J . P i c k e r i n g , Ext. 6294. S in c e r e ly y o u r s , R obert H. Boykin F i r s t Vice P r e s i d e n t Banks and others are encouraged to use the following incoming W A T S numbers in contacting this Bank: 1-8 00 -492 -440 3 (intrastate) and 1 -8 00 -527 -497 0 (interstate). For calls placed locally, please use 651 plus the extension referred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) FEDERAL p r e s s RESERVE release For immediate release April 17, 1978 The Board of Governors of the Federal Reserve System today authorized Federal Reserve Banks to provide services necessary to tie together facilities for a nationwide network for making payments electronically rather than by check. The Board also approved other Federal Reserve services to facilitate transfer of funds among member banks over a privately operated wire network. The Board said it expects these actions to enhance and improve financial services to individuals and to financial institutions; to encourage the use of electronic movement of funds as a more efficient and less costly alternative to check payments; and, to stimulate the development of non governmental services that will lower the cost of banking services to the public. The Board said that it intends to publish a proposed schedule of charges for ACH services as soon as such a schedule can reasonably be developed. It is contemplated that such charges for ACH services will be considered in the context of possible charges for other reserve bank services. To achieve equity under such a program allowance might be made for balances held by users at Reserve Banks. -2 - The services approved by the Board were proposed for public conment -- which has been favorable — last December 27. They are: 1. Providing Federal Reserve clearing and settlement services for electronic payments made through local or regional automated clearinghouse associations. This will permit the connection of these facilities into a national network for making fund transfers electronically rather than by check. 2. Providing Federal Reserve net settlement services to member banks to complete transfers of funds made over a communications network -- known as Bankwire -- owned by an association of banks. A. Bankwire is operated by the Payments and Communications Administrative Communications Corporation. It provides transfers of funds among some 200 banks throughout the country. Net settlement of Bankwire transfers by member banks will begin as soon as final arrangements are completed. Under the terms of the arrangement with Bankwire, member banks will appoint Bankwire as their agent. Settlement for fund transfers over Bankwire will be made by crediting or debiting member bank reserve accounts. Bankwire is responsible for supplying the information needed to make settlement: net amounts to be credited or debited to which member banks. B. Implementation of the nationwide exchange of payments among automated clearinghouses will begin in May and is expected to be complete by yearend. -3 - An automated clearinghouse asaociation is a local or regional association of banks and other depositories agreeing to initiate and receive among themselves electronic transfers of funds authorized by customers of member financial institutions. Such electronic transfers are made only on behalf of customers who request them. can continue Depositors who prefer to use checks to do so. The Federal Reserve currently operates 32 automated clearinghouses. These consist of computers -- used also for other Federal Reserve functions — where payments instructions recorded on magnetic tapes are sorted and cleared. The payment instructions are from customers of member banks and other financial institutions that are members of automated clearinghouse associations. At present, these electronic payments are generally cleared locally. The planned nationwide connection of automated clearinghouses will make possible the interchange of electronic payments by some 9,000 banks and 1,000 thrift institutions that are members of the National Automated Clearing House Association. When the linkage has been made, a member bank or other financial institution that is a member of an automated clearing house association -- for instance, in Dallas — will be able to present payment instructions on magnetic tape to the nearest Federal Reserve Bank's electronic clearinghouse. Such tapes bear instructions to make payments to financial institutions that are members of automated clearinghouse associa tions in other parts of the nation. The Federal Reserve Bank that receives the electronically recorded payment instructions will sort them and forward them to their destinations. This parallels the sorting and forwarding of payment instructions recorded on checks. But the electronically recorded payment instructions will be forwarded over the Federal Reserve's communications system, rather than by mail or courier. The Federal Reserve office serving the area where payments are destined to be made— for instance, the San Francisco Federal Reserve Bank— will sort and forward the payment instructions to the indicated depositories. The depositories involved— in this example members of the Southwestern and the California Automated Clearinghouse Associations— will debit the ac counts of the customers who are making payments and credit the accounts of customers receiving payments. Two recently initiated programs payed the way for and demonstrated the feasibility of such interdistrict electronic payments. One is the ongoing Treasury program for direct deposit of recurring Federal payments. The other program was a pilot test of interregional electronic payment transfers conducted during most of last year by the Federal Reserve and the National Automated Clearing House Association. The program approved by the Board today does not alter the Treasury's direct deposit program. The text of the Board's order in this matter is attached. -0- E x t ra c t From FEDERAL REGISTER, VOL. 43, NO. 79, Monday, April 24, 1978 p p . 17402 - 17404 [6210 -01 ] [D o c k e t N o. R -0 1 3 8 ] NET SETTLEMENT O F MEMBER BANK RESERVE A C CO U N TS A N D AUTOMATED CLEARING HOUSES A n n o u n c e m e n t o f A ction* A p r i l 17. 1978. SUMMARY STATEMENT: On D e cember 27, 1977, the Board of Gover nors published for comment notice of its intention to take two actions to im prove its funds transfer and clearing services (43 FR 1005). The Board has considered the comments received and the overwhelming majority of them support both proposals. The Board has decided to go forward with both actions. T he first action concerns the request from a group of member banks participating in a private clearing and settlem ent organization that Federal Reserve Banks make available to them a n et settlem ent service for their funds transfer messages. T he Board has approved this request contingent upon satisfactory operating agree m ents being entered into between Bankwire and th e Federal Reserve Banks. In the second action, th e Board has reaffirmed its plan to authorize Federal Reserve Banks, by year end 1978, to provide interregional clearing and settlem ent services for funds transfers originated at automated clearing house associations. T he Board believes that these actions will im prove th e efficiency of th e nation’s payments mechanism and encourage private-sector development of elec tronic payments services for the public. FOR FURTHER INFORMATION CONTACT: James R. Kudlinski, Director, Divi sion of Federal Reserve Bank Oper ations (202-452-3985); or Allen L. Raiken, Associate General Counsel (202-452-3625), Board of Governors of th e Federal Reserve System, W ashington, D.C. 20551. SUPPLEMENTARY INFORMATION: I. In t e r - D i s t r i c t N e t S e t t l e m e n t b y F ederal R eserve B a n k s for M em be r B anks The Board of Governors has consid ered a request from an organization of member banks that Federal Reserve assistance be provided to member banks participating in an independent privately owned organization provid ing interbank funds transfer services. The member banks participating in this organization have requested assis tance from the Federal Reserve System in an arrangement to use their reserve account balances at Federal Reserve Banks to settle for payment transactions that have been ex changed through a private clearing or ganization known as the Bankwire to which these member banks belong. Bankwire is operated by the Payment and Administrative Communications Corporation, a privately owned corpo ration. This settlem ent arrangement will allow the Federal Reserve member banks in this organization, throughout the country, to transfer among them selves payment instructions via Bank wire and then to settle for those funds transfers on that same day by means of appropriate adjustments to their re serve account balances. Comments received from member banks participating in th e Bankwire organization and others have indicated that significant efficiencies in current clearing and settlem ent services can be achieved through the use of th e re quested net settlem ent service. The service is described in more detail in th e Board’s earlier announcement con cerning this action. The vast majority of comments received by the Board supported the Board’s view that adop tion of this proposal will enhance the settlem ent services offered to member banks. The Board expects that the availability of these settlem ent ser vices will facilitate member bank par ticipation in private-sector payments clearing arrangements and will result in same-day funds availability for member banks participating in this private-sector clearing organization. The Board views these services as consistent with th e Federal Reserve System ’s commitment to provide assis tance to private sector initiatives di rected towards improving th e efficien cy of th e nation’s payments mecha nism. Providing this n et settlem ent service should permit th e Bankwire or ganization and its member banks to offer improved funds transfer services to the public. Since negotiations have not been completed concerning the de tails of th e agreement setting forth th e terms and conditions upon which th e net settlem ent service will be pro vided, the Board’s approval of this re quest is contingent upon a m utually satisfactory agreement being reached between Bankwire and th e Federal R e serve System. II. In t e r r e g i o n a l C l e a r i n g a n d S e t tlement S ervices T h r o u g h A u t o m a t e d C learing H ouses The Board has approved th e estab lishm ent of an Interregi6nal Automat ed Clearing House system , which the Federal Reserve System intends to have operational by th e end of 1978. In its prior notice, the Board indicated its belief that establishm ent of an in terregional clearing facility will pro mote the development of a more effi cient nationwide payments system available to depository institutions, and will provide research and develop m ent data and experience that should be of assistance to other potential de velopers of automated clearing ser vices. The Board based its view, in part, upon th e results of th e recently completed pilot study. W ith few ex ceptions, th e comments received strongly support th e establishm ent of an interregional ACH system by the Federal Reserve. Since 1968 th e Federal Reserve System has assisted groups of deposi tory institutions in th e development and operation of automated clearing houses (ACHs) that provide facilities for th e exchange of paym ent informa tion on magnetic tape (1976 Fed. Res. Bull. 481). T hese facilities were devel oped as a means of reducing th e grow ing volume and increased cost of pro cessing paper checks. At th e present time, the Federal Reserve provides processing, settlem ent and delivery services on a regional basis for 30 auto mated clearing house associations and makes available settlem ent and deliv ery services for two privately operated ACHs. These facilities are also used in connection with th e Federal Reserve’s participation as fiscal agent in the Federal government’s recurring pay ments program. At th e present time th e major portion of Federal Reserve System ACH transactions consist of direct deposit and other funds trans fers for the United States Treasury. The feasibility and potential bene fits of a nationwide ACH facility have been demonstrated in th e Treasury’s direct deposit program and in th e pilot test of interregional commercial pay m ents conducted during 1977. In addi tion, th e large number of comments received favoring establishm ent of this interconnected ACH system attest to th e benefits perceived by financial in stitutions and others as resulting from such a system. The Board believes, therefore, that the probable longer run efficiencies resulting from inter connection of all operating ACH facili ties justify th e Board’s action at this tim e to provide these services to the Treasury, member banks, and other members of ACH associations. Such interconnection is likely to encourage th e private sector to provide more effi cient and innovative payment services to th e public. Moreover, th e Board continues to regard its action to inter connect the current regional ACH fa cilities as a research and development program that will provide technical data and experience in the operation of nationwide ACH facilities. The Fed eral Reserve System intends to make this information available to those in th e private sector interested in the de velopment of alternative systems. At th e present time, th e Board views as an appropriate activity its participa tion in a nationwide ACH facility that provides services to member banks, other depository institutions, and the U.S. Treasury. As indicated in its prior notice of this action, th e Board will continue to reevaluate Federal Reserve participa tion in the ACH program in order to assure that its actions remain consis tent with its paym ent mechanism re sponsibilities. In this connection, th e Board has considered carefully th e comments of the Department of Justice and others that have urged the Federal Reserve to reduce and ultim ately to terminate its current involvement in the oper ation of electronic payment systems. It has been argued that continued Federal Reserve presence may result in a Federal government payments system monopoly precluding th e de velopment of private sector alterna tives. Similar concerns have been ex pressed by those urging that a sched ule of charges for Federal Reserve ACH and other services be put in place prior to any action to make a nation wide ACH system operational. T he Board has no intention to estab lish and does not believe th at its ACH activities will lead to a governmental monopoly In the field of electronic payments. The record upon which the Board has relied establishes that, at th e present time, alternative private sector sources do not exist having the capability of providing an adequate level of services on a nationwide basis. Although the Board expects the pri vate sector to develop th e capability to provide interregional ACH sources in th e future, the Board considers it to be extrem ely unwise and inconsistent with its long-standing payment mecha nism responsibilities to withdraw to tally from the electronic payments area in the expectation that such action would eventually lead to the de velopment of a nationwide private sector ACH or other payments system network. Rather, the Board intends to proceed cautiously with th e ACH in terconnection program with an aware ness of the effect that its actions may have on private sector developments. The Board recognizes that implemen tation of a schedule of charges for ACH and other Federal Reserve ser vices would reduce the impact of a Federal Reserve operated interre gional ACH system on private develop ment. However, imposition of such charges at this time would also make more severe the burden borne by banks that are members of the Feder al Reserve System. Therefore, in the absence of relief from that burden, any pricing structure m ust take the burden of membership into account. The Board intends to publish a pro posed schedule of charges for ACH services as soon as such a schedule can reasonably be developed. It is contem plated that such charges for ACH ser vices will be considered in the context of possible charges for other Reserve Bank services. To achieve equity under such a program, allowance m ight be made for balances held by users at the Reserve banks. Board of Governors of the Federal Reserve System, April 14, 1978. T h e o d o r e E. A l l i s o n , Secretary of the Board. [FR Doc. 78-10959 Filed 4-21-78: 8:45 am]
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