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F ederal reserve Bank of Dallas


C i r c u l a r No. 78-49
April 28, 1978


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 (

p r e s s



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

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

It is contemplated that such charges for ACH services will be

considered in the context of possible charges for other reserve bank

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:


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.


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.


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.


is responsible for supplying the information needed to make settlement:
net amounts to be credited or debited to which member banks.


Implementation of the nationwide exchange of payments among

automated clearinghouses will begin in May and is expected to be complete by

-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.

E x t ra c t From
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 ]
A n n o u n c e m e n t o f A ction*

A p r i l 17. 1978.
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
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.
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 ­
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
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]

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102