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FED ER A L RESERVE B A N K OF DALLAS DALLAS, TEXAS 75222 Circular No. 71-1^6 June 23, 1971 POLICY STATEMENT ON PAYMENTS MECHANISM To All Banking Institutions and Others Concerned in the Eleventh Federal Reserve District: Enclosed is a press release dated June 17, 1971, containing the announcement of a Policy Statement issued by the Board of Governors of the Federal Reserve System calling for basic changes in the nation’s system for handling money payments. The Board regards the changes sug gested in its Policy Statement as initial steps in a major revital ization of the facilities for making financial transactions through the banking system. A high priority is placed upon providing faster, more convenient, and more dependable check clearing services by increasing the speed and efficiency of check handling. Your bank may be asked in the near future to cooperate with us in efforts to accelerate the funds transfer and check collection process. Additional information will be furnished as more definitive plans are developed. Until then, the current Operating Bulletins and practices of this Bank will remain in effect. Yours very truly, P. E. Coldwell President This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) F E D E R A L press R E S E R V E release For release In morning papers Friday, June 18 > 1971 June 17, 1971 The Board of Governors of the Federal Reserve System today issued a policy statement calling for basic changes in the nation's system for handling money payments. These are, essentially, transi tional steps toward replacing the use of checks with electronic trans fer of funds. The Board's Statement was directed to the Presidents of the 12 Federal Reserve Banks. It said that modernization of the nation's means of making financial transactions through the banking system "is becoming a matter of urgency." The Board's sense of urgency was based upon estimates that check volume will at least double in the present decade. Some 62 million checks a day--about 22 billion a year— are written in the United States, setting in motion the transfer of more than $16 trillion a year at the present time. In 1970, the Federal Reserve System cleared approximately 8 billion checks, transferring just over $3 trillion from one account to another. An average check passing through the clearing process is handled 10 times under present procedures. Despite the progress to date in mechanization and automation, increases in productivity are limited by the fact that the processing of checks continues to require a substantial amount of hand labor. This, together with mounting check volumes, presents banks with a problem of constantly rising costs for -2- their check handling operations. The Board's Policy Statement addresses itself to this mounting problem. The Board'8 Policy Statement placed "high priority" upon providing the public with faster, more convenient and more dependable check clearing services, by increasing the speed and efficiency of check handling. In part, the Board's plans called for this to be accom plished through establishment of new regional clearing centers through-" out the country. The Board asked for action "to achieve as soon as possible an accelerated flow of funds along more optimal routing patterns" across the nation, in two initial ways: 1. Structural changes in handling and settlement of checks: This would involve two alterations in the existing money payments system. First, zones of same-day settlement -- in immediately available money - * now operating in cities with Reserve Bank offices, * would be expanded geographically. Second, new regional centers would be established,wherever warranted, for rapid check clearance in imme diately available funds. In both cases, the Board has in mind clearing areas as large as permitted by reliable arrangements for overnight presentation and settlement of items. 2. Operational chanties: These would be aimed at reducing dependence upon checks by encouraging banks and their customers to make greater use of the ex panded capabilities of the Federal Reserve System's communications network. -3- Iinducements to begin replacement of money transfers by check with transfers via wire would be offered by (1) removing chargcs and other restrictions upon the use of the Federal Reserve's wire network by member banks for transfers of $1,000 or more for their customers, (2) increasing the number of hours the network is open for business daily, and (3) expanding facilities at Reserve offices, where justified by traffic potentials, to equip them for high speed tape transmission and computer-to-computer communications. This would permit linkups, chiefly of commercial bank com puters through the use of Federal Reserve facilities, allowing virtually instantaneous payment, without charge for the wire service, from a com mercial bank in one part of the nation to a commercial bank in any other part, where both banks are Federal Reserve members and have computerized accounting of their customers' deposit balances. With respect to timing, the Policy Statement said: "The first objective should be expansion of the geographic area of existing immediate payment zones* This should be accomplished as soon as necessary arrangements can be made. Meantime, studies looking to the establishment of new clearing centers, wherever warranted, should be undertaken promptly by each Federal Reserve Bank, and submitted to the Board for review. Expansion of facilities at Federal Reserve offices for increased access to the Reserve System's wire network should be con cluded at the earliest practicable time..." The Board's Policy Statement was prepared in collaboration with the Federal Reserve System Steering Committee on Improving the 4- Fayments Mechanism, headed by Reserve Board Governor George W. Mitchell. Other members are Governors Sherman J. Maisel and William W. Sherrill, Reserve Bank Presidents George H. Clay of Kansas City, Aubrey N. Heflin of Richmond, and Eliot J. Swan of San Francisco, and the First Vice Presidents of the Chicago and the New York Reserve Banks, Ernest T. Baughman and William F. Treiber. The Steering Committee was assisted by the Committee and Subcommittee on Collections of the Conference of First Vice Presidents of the Reserve Banks. Preparation of the state- mert involved extensive consultation among Reserve Banks and with com mercial banks. The Policy Statement confirmed the Federal Reserve System's commitment to a nationwide direct, fast and economical system for the transfer of funds and settlement of balances. The immediate aim is a reduction, across the nation, of the volume of items now being handled, speeding settlement by minimizing handling of checks, and reduction of commercial bank and Federal Reserve float resulting from delays in settlements. Expansion of areas of fast clearing and settlement in imme diately available funds is appropriate, in the Board's opinion, due to increasing urbanization and improvement of highway systems surrounding major cities, and the growing utilization, even in small banks, of centralized electronic accounting for demand deposits. During the past year zones of immediate payment surrounding the Kansas City, the Minneapolis and the Denver Federal Reserve offices -5- have been expanded. The first -- experimental -- new regional clearing center was established for the Washington-Baltimore area, and is now in its second year of successful operation. The second such regional clearing center will become operational in Miami, Florida, this year. Looking to the future, the Reserve System has three projects in being for further improvement of the payments mechanism: 1. Construction of a payments mechanism simulation model for the System, to be used both to understand better the present payments system and to indicate in what ways it can and should be improved. 2. An in-depth study of exactly how payments are effected in Florida and Georgia, being done by the Georgia Institute of Tech nology for the Federal Reserve Bank of Atlanta. 3. The cooperative participation, in California, of the Federal Reserve Bank of San Francisco and its Branch at Los Angeles with a Special Committee on Paperless Entry (SCOPE) through which com mercial bank groups are attempting to reduce check volume by substi tuting electronic means of transferring money. Meantime, the Reserve System's wire network is being both ex panded and converted to higher speed operation. It includes a communi cations center at Culpeper, Virginia linking the Board and all Reserve offices, and is capable of extension to commercial banks. A copy of the Board's Policy Statement is attached. -0 - STATEMENT OF POLICY ON THE PAYMENTS MECHANISM Increasing the speed and efficiency with which the rapidly mounting volume of checks is handled is becoming a matter of urgency. Until electronic facilities begin to replace check transfer in substan tial volume, the present system is vulnerable to serious transportation delays and manpower shortages. Structural changes in the present check clearing system can effect significant savings in manpower and unneces sary handling of checks. These changes will result in faster, more convenient, and more economical banking services for the public. will reduce the cost of operations. They The Federal Reserve Board therefore states as a matter of policy that it places high priority upon efforts by the Federal Reserve System to improve the nation's means of making payments, initially along the following lines: 1. Extending present clearing arrangements, in cities with Federal Reserve offices, into larger zones of immediate payment, consistent with transportation possi bilities, check volumes, and the location of check processing centers. 2. Establishing other regional clearing facilities, in which settlements are made in immediately available funds, located wherever warranted by the need for more expeditious and economical check handling, or other operating and financial conditions. -2 3. (a) Encouraging banks and their customers to make greater use of the expanded capabilities of the Federal Reserve wire transfer system. (b) Removing restrictions on third party transfers of demand deposits, and extending the time period in which the wire transfer system can be used. (c) Expanding facilities at Reserve Bank offices, where justified by traffic potentials, to include high speed tape transmission, and computer-to»computer communicat ions. Plans for making these basic changes in the present money transfer system should be pursued actively, to achieve as soon as pos sible an accelerated flow of funds along more optimal routing patterns. These initiatives are generally intended to supplement those efficient direct check exchange programs that are now in existence. The first objective should be expansion of the geographic area of existing immediate payment zones. This should be accomplished as soon as necessary arrangements can be made. Meantime, studies look ing to the establishment of new clearing centers, wherever warranted, should be undertaken promptly by each Federal Reserve Bank, and sub mitted to the Board for review. Expansion of facilities at Federal Reserve offices for increased access to the Reserve System1s wire net work should be concluded at the earliest practicable time, generally during the next 12 to 18 months. -0June 1971