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F ederal R eserve Bank o f Dallas
DALLAS, T E X A S

75222

Circular No. 78-166
December 1, 1978

TO A L L BANKS
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE D IS T R IC T:
T h e Board of G overnors of the Federal R eserve System has released a
p re lim in a ry schedule of prices fo r Federal R eserve check and automated c le a rin g ­
house services (a proposal containing the schedule is attached) . T h e tentative
schedule was developed by the Board and the 12 Federal R eserve Banks as p a rt of
a com prehensive plan to p ro v id e g re a te r com petitive equ ality among financial in­
stitutions. No p ric e schedule w ill be implemented until effective steps have been
taken to a lle v ia te the burden of mem bership in the Federal R eserve System.
P rice schedules fo r other services such as the provision of coin and c u r ­
rency; w ir e tra n sfers of funds; the purch ase, sale, safekeeping, and c learin g of
securities; and noncash collection a re u n d er consideration.
T h e p ric in g of check collection services suggested in the attached
schedule is based on the volume of check clearin g s b y the Federal R eserve in the
fir s t half of 1978. T h e prices a re meant to recoup d ire c t and in d ire c t costs of p ro ­
v id in g such services . In ad d itio n , adjustments totaling 11 percent of these costs
have been added to re fle c t additional costs that would be borne in the p riv a te sec­
to r . These adjustm ents include capital costs, taxes, an allowance fo r d iv id e n d s ,
and provision for re s e rv e .
Prices for automated c learin g and settlement services have been calcu­
lated to be com petitive w ith check p ric e s . Establishm ent of prices fo r automated
clearinghouse services a t this level is intended to encourage banks and th e ir cus­
tomers to take advantage of the potentially lower cost of electronic fund transfers
as compared to the cost of payments by check, w h ile still affo rd ing opp ortun ity to
develop competing automated c learin g and settlement services in the p riv a te sector.
Before a final decision is made on p ric in g , the Federal Reserve w ill con­
sider the a d v is a b ility of establishing d iffe re n t prices fo r each zone in some Federal
R eserve d is tric ts .

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

-

2

-

Please send an y comments on the attached proposal to me in c a re of this
B ank, Station K , D allas, Tex as 75222. In a d d itio n , I would be pleased to discuss
th is m atter w ith an y interested ban ks.
S in c e re ly y o u rs ,
Ernest T . Baughman
President
Attachment

BOARD

OF GOVERNORS
□ F THE

FEDERAL RESERVE SYSTEM
W A SH IN G TO N ,

D.

C.

20551

proposal for i/ricing ol federal Reserve
Check collection ana automated Clearing ana Settlement Services

November

m
in

Daiuing,

17,

1976

connection witn legislation to enuance competitive equity
to improve monetary policy

oy ifeaerai reserve member

Danks,

and

to relieve the buraen borne

one of tne issues under discussion

during tne recent session of Congress was pricing of Reserve

Bank

services.

Service charges were one element of the comprehensive plan addressing
tnese issues tnat tne ooard submit tea to trie Congress last summer. In
addition, many of tae biiis under consideration by tne Congress required
tlie teueral reserve to publisn a price scnedule tor its services to financial
institutions. At hearings

on

tne bills, members oi Congress and other

interested parLies commented tnat a price scnedule for Reserve

bank

services

was needed in order to evaluate rully the effects of tne proposed legislation.
in response to these comments, the System has prepared a prelim­
inary proposal for charging tor Reserve bank check collection and automated
clearing and settlement services. A tentative price schedule is presented
to elicit additional discussion. The System particularly hopes to receive
indications of tne competitiveness of the prices in relation to prices
lor comparauie services W h e r e available) in iocal markets. In addition,
the system expects to receive analyses of tne etfects of implementing
tnese prices on tne o a n k m g industry and upon other users of payments
services.

—

J _

Attachment 1 to tuis proposal snows a tentative scnedule of
prices approximating those tnat would have been in effect in tne first
naif of 1^7o covering chec*. collection and Automateu Clearing house (ACh.)
clearing ana settleaieat services.

Tne payments inecnamsm services in ttiis

initial scnedule account tor aoout 00 per cent of the total expenses incuried by tne Reserve Jianb.s in proviaing services to financial institutions,
ireiiiainary prices tor the remaining services are in preparation and
will be available later.

implementation oi t'rices
onar6es ior Reserve bank services could enhance the etficiency of
Ciie nation's payments mechanism.

bucti cnarges would promote both cost

efrective payments techniques and equity among institutions proviaing
payments services co tae puDlic.

however, tne rederal Reserve L-ysteiu does

not intena to implement service cnarges until etiective steps have been
taK.en to r c a e v e tne uuraen of member ship m

the Federal Reserve.

Otherwise,

tne already very serious problem of withdrawals from the System would simply
i e exacerbated.
>
Tne Federal Reserve recognizes that these preliminary prices
may nave to t e adjusted to tetlect competitive realities and changing
>
conditions in the industry and in the Reserve Banks.
time of implementation,

Furthermore, at the

the System would monitor developments and could

revise the prices to avoid disruption of existing clearing arrangements.

Objectives oi tricing
In constructing the tentative price schedule, the system has

-3 -

been guided by tue policies announced by tne Board on July 10, 1^76 in
conjunction v i i its plan to resolve the membership problem.
/ti

Tne Boaru

staled tnat service cnarges should promote competitive equity among
users ol rederal keserve services, encourage innovation and more efficient
use ot payments services, ana enaance the opportunities of the private
sector to compete with ana improve upon Federal Keserve services. In
addition, tne Board announced that charges would be estaolished with
due regara to the need to assure continued efficient functioning of the
payments iuecnanism, to avoid major disruption curing the transition to
a ..iore competitive environment, and to maintain a satislactory basic
level oi service nationwide.

u f c r i V dt i o n

oi

tue

Prices

ine scnedule m

rittacnment 1 snows prices approximating those tnat

would nave ueen in eitect it service cuarges naa been implemented m
first iiali or I I n e

cneck collection prices are oased upon the cost

accounting data recorded oy tne Planning and Control bystem ( r A C S )
the reserve lianks.

the

for

A markup of li per cent was applied to the total

or direct and indirect FACs cost ol providing the check collection service,
alter certain minor adjustments were made to refine the raw data.
The markup covers imputed costs similar to the capital costs and
taxes that a private business firm providing the service would have borne,
ihis markup or private-sec tor adjustment was calculated under tne assumption that
the Reserve bank assets used in providing cneck collection services were fins
oue-uai£ o y ueut aud one-naif o y equity.

The cost of servicing cue deJL

-4-

was assumed to be 9 per cent annually.

The after tax cost of imputed

equity was set at 7 per cent, equal to the 6 per cent statutory dividend
that the System pays on Reserve Bank stocks held by member banks plus
an added 1 per cent for reserve.

The method used to construct the private-

sector adjustment is described in Attachment 2.
No charge for Federal Reserve float is included in the check
collection prices.

There are alternative strategies for dealing with

float that might be more desirable and should be considered.

In addition

there are uncertainties in measuring the value of float to society or to
individual banks which cloud the issue of charging for float.
Tentative prices for ACH clearing and settlement services have
been based upon projections of the estimated unit processing cost associated
with probable future volumes of electronic payments items.

Because of the

inherent uncertainties, however, the preliminary ACH prices are set comfort­
ably above the estimated long-run cost.

The price for intra-ACH items equals

the lowest District price for RCPC check items.

These prices will permit

banks, businesses, and consumers to reduce costs by converting to this
new, highly efficient and secure electronic payments medium.

Level of Detail of Prices
The tentative price schedule presents the prices at the level of
the Federal Reserve District.

Service level differences, regional wage

and transportation cost differentials, and other factors contribute to the
differences among the District prices shown.
among offices within a District.

Such differences may exist

Before a final decision is made on pricing,

the System will consider the advisability of establishing different prices

-5-

lor each zone in some Reserve Districts, i'cr tins reason, Lue »ystc>a
particularly hopes to receive indications oi the competitiveness of
tne tentative price schedule compared with prices cnarged Dy others
in those cases where comparable services are available in a local market.
Disparities between the District average price and prices lor comparable
services in individual oliice zones could lead to ineflicient volume
snilts or nave otner undesiraDle effects on the payments mechanism.
In sucn a case, adjustment ol the prices may be necessary.

PRELIMINARY

Price Schedule
for
Federal Reserve
Check Collection
and
Automated Clearing and
Settlement Services

November

1 7 , 197e

PRELIMINARY
PRICK SCHEDULE
FOR FEDERAL RESERVE CHECK COLLECTION' AND ACH SERVICES
( c u n t s p e r ite m )
C ash L e t t e r s C o n s o l i d a t e d
w i t h S h ip m en ts S e n t from
O th e r Fed O f f i c e s t o
P r o c e s s i n g Fed O f f i c e

Cash L e t t e r s D e p o s it e d D i r e c t l y a t P r o c e s s i n g Fed O f f i c e *

F e d e r a l R eserv e
Disc r i c t

CjJLZ

Count ry

RCPC

Mixed

O th e r
Feds

NonMach,

P ackage
Sort

Group
S ort

C ity

Count ry

RCPC

A uton.it i d C l e a r i n g and
S i t t l i me lit Si-rv ic e s
Il it n s D e p o s ite d D i r e c t l y
nr P r o c e s s i n c Kid O f f i c e

Ini rn-AOl

Int er-ACH

1.4

2 .0

Bos t on

1.5

--

1.5

1 .9

3 .7

3 .9

.3

1.4

1 .9

--

1 .9 -

New York

2 .2

2 .4

2 .0

2 .0

4 .5

5 .6

.6

1.9

2 .6

2 .8

2 .4

.3

1.5

P h i l a d j l p h la

1 .4

1 .9

1 .9

1 .9

3 .6

4 .2

.6

1.5

1.8

2 .3

2 .3

1.4

2 .0

C lev elan d

1 .3

--

1 .9

2 .0

3 .5

4 .1

--

--

1 .7

—

2 .3

1.4

2 .0

Richmond

1.3

2 .3

1 .6

1.8

3 .6

3 .1

.2

—

1.7

2 .7

2 .0

1.4

2 .0

Ac l a n t a

1.3

—

1 .5

1.6

3 .4

3 .9

.7

--

1.7

--

1 .9

1 .4

2 .0

C h ic a g o

1.5

2.3

1 .6

--

4 .0

3 .4

.8

--

1 .9

2 .7

2 .0

1.4

2 .0

S t . L ouis

1 .4

2.2

2 .0

2 .7

3 .5

3 .3

.5

—

1 .8

2 .6

2 .4

1.4

2 .0

M l n n e a p o lis

1 .2

2 .0

1.4

1.8

3 .6

4 .6

.6

1.2

1.6

2.U

1.8

1.4

2 .0

K ansas C l t v

1 .2

1 .9

1 .4

2 .2

3 .4

3 .5

--

--

1.6

2 .3

1 .8

1 .4

2 .0

Da 1 l a s

1.4

2 .1

1.7

1 .8

3 .8

5 .0

.7

1.6

1 .8

2 .5

2 .1

1.4

2 .0

San F r a n c i s c o

1.3

—

1.4

--

3 .6

4 .2

.3

--

1.7

--

1 .8

1.4

2 .0

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8 )

(9 )

(10)

(11)

(12)

(13)

* I n c l u d e s D i r e c t Send Cash L e c t o r s .
P r i c e s o f o t h e r s p e c i a l d e p o s i t s e r v i c e s w i l l be a v a i l a b l e from e a c h F e d e r a l R ese rv e o f f i c e .
P r i c e * i n d i c a t e d a r c a p p l i c a b l e ac l o c a t i o n s o f f e r i n g t h e s e s e r v i c e s .

A t t a c h e d t o t h i s s c h e d u l e i s a d e s c r i p t i o n o f ea c h o f t h e s e r v i c e s f o r w hich p r i c e s a r e shown i n c o l u a n s 1 th r o u g h 13.

-

2

-

D e s c r i p t i o n of S e r v i c e s

Cash Letters (.Cnecks) deposited uirectly at the Processing Federal
Keserve urfice
Tne prices shown tor the eight types of cash letters apply
Doth to checks deposited oy financial institutions located
in t r ^ processing federal keserve office territory and to those
'.
cuecKs sent directly by institutions located in other Federal
Keserve otfice territories.
(.The latter institutions provide
the required transportation to meet tne deposit deadlines at
the processing federal keserve office.)
Tne Federal keserve intends to discontinue direct send trans­
portation reimbursements with implementation of pricing.
City

Country

City c h e c K S are drawn on financial institutions located
in tne saaie city as the processing Federal keserve office.
City cuecK services are available at 43 Federal Reserve
oitices.
Credit for city checks is available 011 the day
0 1 deposit at the processing Federal Reserve office if
tiruely deposit is made { i . e . , prior to the estabiisned
cut-oif uour.
(.Column 1)
Country c h e c k s are a r a w n o n D a n k s t h a t a r e g e o g r a p n i c a l l y
located outside a Federal Reserve office city and outsiae the
area served oy Kegional Check Processing Center (.kCPC) oper­
ations.
Presentment of cnectcs to country bantcs usually is
wade tnrough the U.S. Postal service.
Country check services
are availaoie at 13 Federal Reserve offices.
Credit for
country checks is availaoie one day after timely deposit
at t:ie processing Federal Reserve office.
(Column 2)

RCPC

RCPC checks are drawn on linancial institutions located in
geographic areas designated as RCPC zones.
Checks drawn on
k CPC iinancial institutions are usually transported by courier
for presentment.
There are 44 Federal Reserve offices that offer
itCPC check services.
Credit tor KCPC checks is available the
same business day if tne items are deposited by 12:01 a.m.
(.column s )

luxea

nixed cash letters contain checks drawn on financial institutions
located in city, country, RCPC and in other Federal Reserve office
territories.
At present, only those m e m b e r banks with less than
iteius t o oe cleared each uay are eligible to deposit mixed
cash letters, nixed cash letter services are available at 27
Federal keserve oriices.
Credit for checks deposited in mixed
casa letters normally is available the day after deposit if the
d e p o s i t is m a a e D e t o r e tne processing Federal Reserve office “city
cneck cut-oft nour".

^Column

h

)

- 3 -

otuer
Feds

isonaa cnin e a b l e

racKag,e
sort

G ro up
aort

ciiec^s drawn o n financial institut ions locateu in all federal Keserve oftice territories other
than tae processing Feaeral Reserve office territory.
Prices
lor collecting, tnese checks reflect the resources required to
sort t n e cnecK.s at two Federal Reserve offices and to transport
t n e items D e t w e e n t n e s e offices.
All
Feueral reserve offices
oifer this service.
Credit for Other Feus cash letters is
availaoie i or z days after timely deposit at the processing
federal Reserve office.
Sucn credit is dependent on the avail­
ability of overnight transportation and the type of item (city,
country or KCPC; . (Column o )

utner

reus

casn

letters

contain

iion-machineable cash letters contain checks which have rejected
from the computer sorting equipment of the depositing financial
institution, and those checks which are mutilated and cannot be
computer processed.
Prices for non-machineaole checks reflect
tne additional manual handling required to process these exception
items.
Credit for non-mac’ ine able checks is deferred one day
n
Deyona normal for the same type check (e.g., credit for a city
non-uiacnineable cneck would oe available tne day after timely
deposit to the processing Federal Reserve off ice.) . (Column o)
Package sort casn ietters contain only checks that are drawn on one
iinancial institution and are packaged for delivery.
Federal
Reserve service is limited to presentment and settlement.
ihe
package sort service is currently offered at 24 Federal Reserve
offices. Later cuc-olf hours are applicable to package sort
cash letters and credit is available on the sarue schedule as
for city, country, and KCPC items.
(Column 7)
Group sort cash letters contai n checks of a specific type ki.e.,
C l t y, country or kl.l' \ j ) wnich have been pa rtially processed by the
de posi t i n g financial institution.
For example, the lirst pass
through a check sorttv of a m u l t i p l e - p a s s sorting process
would constitute a group sort.
Seven Federal K e s e r v e o t n c e s
otter this service.
Later c u t - o f f hours are also applicable to
group sort cash ietters and credit is passed to dep osit ing insti­
tutions on tne same schedule as tor city, country and RCPC items,
(column o )

Cash Letters Consolidated with Shipments Sent from Other Feaeral
offices to t h e Processing Federal neserve office

Keserve

Tne consolidated shipment service consists of consolidating direct
send check shipments with regularly scheduled Federal Reserve inter-office
check shipments.
The cash letter types listed (city, country and RCPC)
are tne same as those described earlier.
The price for these items reflects
the costs associated with receiving, sorting, reconciling, settling, and
presenting checks oy the processing Federal Reserve Office, and the price

tor transporting the checks Detween Federal Reserve offices.
Those financial
institutions autnorized to use the consolidated shipment service are also
authorized to airect send checks to processing Federal Reserve offices.
(Columns *, 10 and 11)
Automated Clearinghouse Services — Items Deposited Directly at the
Processing Federal Reserve Office
ihe prices shown, except at Wew York, are applicable at all Federal
Reserve operated clearing and settlement facilities and include receiving,
sorting, reconciling, settling and delivery of either debit or credit auto­
mated clearing house (Ach) transactions.
New ^ork prices reflect the
provision of ACti clearing operations in the private sector
and settlement by the Federal Reserve.
intraACn
Payment transactions received from local originating
linancial institutions for delivery to tinancial
institutions located in the same ACh area.
(Column 1l )
Inter ACh
Payment transactions received from local originating
linancial institutions and from private sector ACh
tacilities for delivery to tinancial institutions in
areas served Dy other ACHs. (Column 13J

Derivation of Private Sector Adjustment

The Federal Reserve System's cost accounting includes depreciation
of buildings, furniture, and equipment (at historical

cost) but 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 adjust­
ment 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 of buildings and equipment and other "working 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.
of six month end balance

sheet reports

Based on the average

for the twelveFederal 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 50% equity and 50% debt.

-2 -

The return on equity was assumed to be 7% after tax or 13% before tax,
given an income-tax rate of 45%.

The interest rate on debt was assumed to

be 9%.
Not all of the imputed $752 million in assets would be required
to provide the services to financial institutions that would be priced.
Therefore, a calculation was made to exclude assets supporting such functions
as monetary and economic policy, supervision and regulation, and services
to the Treasury as fiscal agent.

Service charges for these functions are

not included in this pricing proposal.

Capital assets were allocated to

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

Because shipping services are contracted from the private

sector, the cost of shipping was subtracted from both the numerator and
denominator of the ratio.

During the first half of 1978 the cost of services

to be priced less shipping expense represented about 54% of total System
costs minus shipping expense.

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

-3 -

indirect cost plus an adjustment of 11% for private sector costs, it would
have generated revenues of $223.1 million during this period.
Table 2 also shows the markup for the check collection services
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 collection services
at the 1978 volume for the first half of 1978.

IABLE

I

Implicit System Balance Sheet
underlying Private Sector Adjustment
v^ ii 11 ions, based on tne Average of Six
.> i
fiontli fcnd balance Sheets for First half of 157b)

bans. Premises,

wet

. 3d4.3
?

Liitierence 6 Suspense A c c o un ts

192.5

f u r n i t u r e and L^uipwent,

DeDt

s>376.0

E q u it y

^ 3 7 6 .0

49.0

Ueterr ea Uiar&es,

Net

otner

43.9

o tn e r Keui Lstate

42.2

ov er a r a t t s

38.2

u e i e r r e d Cnarges,

Leaseholds

Total Assets Financed

1.9

:
?

752.0

Total

liabilities

i?752.0

TAliLE 2

estimated
Implicit Revenue Statement
underlying Private Sector Adjustment
Annualized, based on
first Half l97o
debt; 50)4 equity^
Millions)

All Operations
to be Priced
Kevenues

Allocation*
To Check
Services

$446.2

$257.2

402.2
lb.O

231.8
10.4

26.0
1 2.0

15.0
b.b

14. u

0.2

Less

PALS Cost of Service
Lieut Service \ y 9a.
.
)
L^uals:
Less:

rre-iax Income
Income lax

L^uais:

return io
Lquity

/*)

11a

niijjlicd u a r K u p

iL»u
iii:

1 1

a,

Assets have been allocated to Keserve Bank operations to be
priced in the same ratio that the i'ACS expense of providing
those services bears to total expenses.
For the first half
of l97o this ratio approximated 54 a, , and $402 million in
assets were allocated to priced operations. In addition, it
was assumed tnat one-naif these allocated assets are
financed by debt and one-half represent equity.

Debt
Equity
lotal

$201.U million
201.0 Million
$402.0 Million

* based on ratio of checK collection PACS costs to PACS
costs for all operations to De priced.

QUESTIONS AND ANSWERS ON PRICING
POLlex DECISIONS Ol PRICING
fi
1.

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

problem?

Yes.
Ir actions are not taken to relieve the burden of Federal
Reserve membership, tne Federal Reserve will not proceed to implement any
pricing scnedule.

2.

why is the Federal Reserve proposing to charge for its payments services

Tne Federal Reserve 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.
Service charges are expected to encourage more efficient use of
payments facilities and to provide incentives for innovations that reduce
costs.
For example, pricing of check collection services will provide an
incentive for D a n k s to do more check processing themselves a n d to set up
additional local clearing arrangements.
Therefore, the opportunities for
the private sector to compete with and improve upon Federal Reserve services
would oe enhanced.
Moreover, service charges will provide the System with
additional revenues to minimize the impact of the membership plan on the
Treasury.

3.

when will charging tor Federal Reserve services be made effective:

Ine exact date when charges will be effective depends on imple­
mentation of a plan to resolve the problem of attrition of membership in
tne Feaeral Reserve.
In 110 case will cnarges be levied before July 1, 1979.

TO:

4.

Board of Governors

2.

Uoes Liie publication of a District average price schedule mean that
the Federal Reserve is going to implement pricing on a District
avera&e basis?

Tne Federal Keserve has not yet reachea a final determination on
what ievel (national, uistrict, or office) prices will be implemented.
There is little sentiment for national average check collection prices at
tnis time, uistrict average prices are being published because tney provide
sufficient information for the financial community to determine the impact
of pricing.
Tne rinal decision on the price structure will be intluenced
oy resource cost differences and the competitive situation existing at
different offices.

3.

will tne Reserve hanks be changing the levels of service they now
provide once pricing is instituted?

trices published are based on the levels of service currently provided
oy Feaeral Reserve Offices.
The Federal Reserve feels that the level of service
now provided is appropriate and does not intend to change when pricing is
initially implemented.
The Federal Reserve does, however, recognize its
responsibility to insure an efficient and effective payments system, which might
require iuture service level changes, as it has in the past.
Increased expen­
ditures to meet service demands or reductions in resource requirements
associated with technological or productivity improvements will be reflected
in prices charged.
Likewise, any change in availability schedules will be
related to tne System's ability to collect funds.

o.

why is there no charge proposed for handl ing r et u r n items?

C u a r & m g tor return item processing would impose a significant .iianual
accounting auruen on both Reserve Bank and financial institutions to bill and
reconcile sucn charges. The probable price for return item handling, developed
along the lines used for check services, would be small ( 5 cents to 10 cents)
.
and would nave little impact as an incentive to avoid creating return items.
In light of these ob ser vat io ns the Federal Res er ve has c h o s e n to perform return
item pro ce ss ing as a ne ce s sa ry adjunct to ch ec k pro ce ss i n g services and has
priced those services accordingly.

7.

when will tne price schedules for Fea services other than check and ACti
’
processing be available?

Tne tederal Reserve proposes to charge for ot ner services, including
the pro vis io n of cu rr e n c y and coin, tr a nsf er s of reserve acco un t balances, and

iu:

security
developed

o.

3.

uoard or Governors

sarekeeping.
ana

will

De

Price

scneaules

available

at

a

tor

these

later

date.

other

services

are

being

what impact will service cuarfes have on Federal Reserve policy concerning
a
access to the services'.'’

Service charges can D e implemented when, and only when, steps nave
taken to relieve tne D u r d e n borne by m e m b e r banks o " tne Federal Reserve
i
System.
ii tne memoership Duruen is removed, the bystem would be able to
reevaluate tne access policy.
been

v.

now will the Federal Keserve adjust its prices over time?

Tue Federal Reserve is still considering the issue
of how prices
are to be administered.
The board has stated thatprices will be determined
with oue regard for competitive conditions and for tiie need to maintain a
basic level of payments services nationwide.

Ii-iFALX oi? P R I C I N G

lU.

Wnat impact will service cnarges nave on the payments mecnanism?

iue anticipated impact on tne payments mecnanism will oe to increase
its efficiency oy providing tne private sector with greater opportunities to
compete with and improve upon Feaeral Reserve services.
Pricing snould stimu­
late the development or more efficient means ol making payments.
1L may also
roster tne transition irom a paper-based payments system to a less costly
electronic-based payments system.

11. what

will be the cost of service charges to the banking

sector?

Service cuarges for check collection and automated
clearing house
services will total about $225 million.
however, tnese costs can be imposed
in the context ol a general membership ^lan tnat will reduce the cost of
Federal Reserve membership.
After service cnarges are deducted, most mernDer
banks will have a gain in earnings from the membership legislation under
consideration in the last Congress whan compared with nonmember banks that
ao not incur the burden of sterile reserves.

4.

TO:

i>oard of Governors

VI.

what e n e c t will pricing have on the volume oi payments processed by
trie Federal Keserve?

we are uncertain at this time as to the changes in total volume
oi payments processed D y tne Federal Reserve that may occur as a result oi
pricing.
Itiere is a possibility of volume decline at some offices if
pricing is implemented as the private sector begins to provide services in
competition with the federal Keserve.

i-ihCUAnItS OF LEI'EKi m Ik G PKlCbb
-U
ij.

i tne announced prices include any allowance for imputed costs that
/o
take

into

on

capital

oy

a

account
that

private

the

would

Dusiness

taxes
have

tnat
been

would

have

provided

had

been
the

paid

and

services

the
been

returns
provided

firm?

ine tentative prices include an allowance tor depreciation of the
capital assets associated with the service D e i n g priced. The costs of leased
facilities (e.^., computers, transportation contracts) already have a private
cost of capital imbedaed in them. In adaition, the prices include an adjust­
ment to cover the cost oi financing the assets employed in providing the
services. The adjustment also allows ior income taxes, for a dividend at the
statutory rate on the Keserve bank stock imputed to providing the service,
ana tor tne replacement cost of capital.

14.

u o the prices include the value of float?

The value of float is not included in the prices for check services.
Float usually is not included by the private sector in unit prices for payment
services.
Instead, the private sector often allows for float by adjusting
the availability of funds to their customers.
It would be difficult to
allocate the cost of float among different types of checks and to determine
which financial institution should be charged in this early experimental stage
of pricing.

15.

Are these tentative prices based on costs?

The tentative prices are designed to recoup total Reserve Bank direct
and indirect costs associated with providing check collection services as well
as an adjustment lor capital, taxes and dividends. Thus, the average prices
shown are not precisely related to costs at any office.

5.

TO:

Board of Governors

To.

Tne proposed cnarges for ACH processing are clearly lower than current
costs woulo indicate, how is this consistent with the Federal Reserve
policy of recouping costs?

ACH prices were set to t e competitive witn prices for comparable
o
check collection services. These prices also approximate the estimated unit
price of a mature A t service. U-iature operating levels are expected to be
Ci
attained by tae mid-lyaO1 ) These prices should assist banks and their
s.
customers to take advantage of this potentially lower cost way of trans­
ferring tunas while still afiording considerable opportunity to the private
sector to establish competing automated clearing ana settlement facilities.
Operating costs and ACH prices will be reviewed as the ACh concept develops,
ana private initiatives will be encouraged.

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