View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Federal reserve Bank
OF DALLAS
ROBERT

D. M C T E E R , J R .

P R E S ID E N T
AND

C H IE F

E X E C U T IV E

DALLAS, TE X A S

75222

O F F IC E R

May 28, 1991
Notice 91-43

TO:

The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Modifications to the C r i t e r ia for Offering a Tiered
Pricing Structure in the Check Collection Service
DETAILS

The Federal Reserve Board has adopted modifications to the criteria
for offering a tiered pricing structure in the check collection service. The
revised criteria will enable Federal Reserve Banks to set fees that more
precisely reflect their costs of collecting checks drawn on paying banks
within a given check collection zone.
In addition, the Board has provided
clarification on several existing tiered pricing criteria. The Board has not
adopted the proposed modification to eliminate the current requirement to
offer a blended fee as an alternative to tiered prices within each collection
zone where a tiered pricing structure has been implemented.
Specifically, the Board has adopted the following modifications:
•

Tiered pricing may be applied to deposits in all
collection zones, provided clear cost differences
exi st.

•

Reserve Banks may offer more than two price tiers
within a collection zone, provided clear cost d if­
ferences exist to justify more than two tiers.

•

The approval process for implementation of tiered
pricing in additional Federal Reserve offices will
be the same as the approval process for other rou­
tine price and service level changes.

The modifications are effective January 1, 1992.
ATTACHMENT

A copy of the B o a r d ’s notice as it appears on pages 22168-72, Vol.
56, No. 93, of the Federal Register dated May 14, 1991, is attached.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

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

-

2

-

M RE INFORMATION
O

For more information, please contact Robert L. Whitman, (214)
698-4357, at the Dallas Office; Eloise Guinn, (915) 521-8201, at the El Paso
Branch; Luke E. Richards, (713) 652-1544, at the Houston Branch; or Herb
Barbee, (512) 978-1402, at the San Antonio Branch.
For additional copies of
this B a n k ’s notice, please contact the Public Affairs Department at (214)
651-6289.
Sincerely yours,

22168

Federal Register / Vol. 56, No. 93 / Tuesday, May 14, 1991 / Notices
SUPPLEMENTARY iNFCRMATiON:

Background

[Docket No. R-07121

Federal Reserve Fees for Check
Collection Services; Modification of
Criteria for Tiered Pricing Structure

Board of Governors of the
Federal Reserve System.

agency:

a c t io n :

Final action.

s u m m a ry : The Board has adopted
modifications to the criteria for offering
a tiered pricing structure in the Federal
Reserve’s check collection service. The
modifications allow tiered pricing in all
collection zones; allow for more than
two tiers of prices where cost
differences exist to justify them; and
conform the approval process for the
implementation of tiered pricing to the
approval process for other price and
service level changes. The Board has not
adopted the proposed modification to
eliminate the current requirement to
offer a blended fee alternative to tiered
prices within each collection zone where
a tiered pricing structure has been
implemented. In addition, the Board has
clarified several existing tiered pricing
criteria. The revised criteria will enable
Federal Reserve Banks to set fees that
more precisely reflect their costs of
collecting checks drawn on paying
banks within a given check collection
zone. These costs are generally based
on the location of, and volume of checks
presented to, each endpoint.
e f f e c t i v e d a t e : The modifications are
effective January 1,1992.
FOR FURTHER INFORMATION CONTACT:

Louise L. Roseman, Assistant Director
(202)452-3874), Julius Oreska, Manager
(202/452-3878), or Nalini T. Rogers,
Senior Financial Services Analyst (202/
452-3801), Division of Reserve Bank
Operations and Payment Systems; for
the hearing impaired Only:
Telecommunications Device for the
Deaf, Dorthea Thompson (202/452-3544).

In November 1986, the Board
approved a proposal to implement tiered
pricing as a permanent price structure
for RCPC deposits in the Minneapolis
office and country deposits in the
Kansas City office, and to establish
criteria for the expansion of tiered
pricing to other Federal Reserve Bank
offices. (51 FR 43470, December 2,1986).
Tiered pricing enables Federal Reserve
Banks to establish prices that more
precisely reflect their costs to collect
checks drawn on paying banks within a
given check collection zone. Under a
tiered pricing structure, different fees
are assessed depending on whether a
check is presented to a high-cost or lowcost endpoint1 in a given check
collection.2 These costs are generally
based on the volume of checks
presented to, and the location of, each
endpoint. A high-cost endpoint is
generally one that receives a low
volume of check presentments and/or
one that is located in a remote location.
A low-cost endpoint typically would be
presented high volumes of checks and/
or be centrally located. A small,
remotely located paying bank may be
included in the low-cost tier if its checks
are presented to an intercept processor
that also receives presentments on
behalf of other paying banks. Tiered
pricing may be adopted by Federal
Reserve offices because the costs of
clearing checks in collection zones may
vary considerably between high- and
low-cost endpoints and charging a single
average fee does not reflect costs as
precisely. The criteria for adopting a
tiered pricing structure that were
approved by the Board in 1986 are as
follows;
1. Adoption of tiered pricing by an
additional Federal Reserve Bank will
require approval by the Board.
2. Tiered pricing will be offered as an
option to the sender; an alternative fixed
per item fee also will be offered for each
deposit category.
3. Tiered prices may be used only
where dear cost differences exist
between groups of items within the
collection zone.
4. Tiered prices may be used only
where they have the potential to provide
net savings for a substantial amount of
1 A n endpoint refers to the physical location at
w hich the Federal Reserve Bank presen ts checks
d ra w n on the paying bank.
2 A collection zone is a geographic subdivision of
a Federal Reserve territory. Each collection zone
h as a specified availability schedule under which
credit will be given for a check d eposited for
collection at the Federal R eserve office serving that
territory.

Federal Register / Vol. 56, No. 93 / Tuesday, May 14, 1991 / Notices
deposited volume or a substantial
number of depositing institutions.
In addition, the Board indicated that
tiered pricing could be applied to all
types of deposits in RCPC and country
collection zones and that the number of
price tiers within a collection zone
generally should be limited to two.
Proposed Modifications to the Tiered
Pricing Criteria
The Board believes that the ability of
Federal Reserve Banks to reflect their
costs more precisely through the use of
tiered pricing would be facilitated if
certain modifications were made to the
tiered pricing criteria that were
approved by the Board in November
1986. Therefore, in November 1990, the
Board requested comment on four
proposed modifications to the criteria
for offering a tiered pricing structure in
the check collection service (55 FR
47804, November 15,1990). The
proposed modifications are as follows:
1. Tiered pricing may be applied to
deposits in all collection zones, provided
clear cost differences exist.
2. Reserve Banks may offer more than
two price tiers within a collection zone,
provided that clear cost differences
exist to justify more than two tiers.
3. Blended fees will not be offered as
an alternative to tiered prices in a
collection zone in which tiered pricing
has been implemented.
4. The approval process for
implementation of tiered pricing in
additional Federal Reserve offices will
be the same as the approval process for
other price and service level changes.
The Board received 36 comments on
the proposed modifications to the tiered
pricing criteria. The following table
reflects comments by category of
respondents:
Comments
received
Commercial bar ks'B an* holding com­
panies.................................... ...............
Clearinghouses.................. ...
Trade associations..................................
Credit unions........................................ .
Savings institutions...................................
Federal Reserve Banks..................... .....
Total..,....... ............. ..... ...
.

19

s

5
3
1
3
36

The following discussion describes
the four proposed modifications, the
comments that were received on each
modification, and the final Board action
with respect to each modification, A
discussion of additional issues raised by
the commenters is also provided.
1. Tiered pricing may be applied to
deposits in all collection zones,
provided clear cost differences exist.

In 1986, the Board indicated that the
application of tiered pricing would be
restricted to RCPC and country
collection zones. City zone collection
products were not considered likely
candidates for tiered pricing because the
Federal Reserve believed that, due to
the compact geographic nature of a city
zone, the cost differences that warrant
tiered pricing generally would not exist.
Subsequent analyses have indicated,
however, that the volume distribution of
checks among endpoints has a
significant impact on check processing
costs. In certain city zones,
approximately 20 percent of the
endpoints receive 70 to 90 percent of all
checks presented in that zone. The
checks drawn on these bigh-volume city
endpoints are less costly to process than
are checks drawn on lower-volume city
endpoints. In addition, the
transportation costs for certain city
endpoints are very low or nonexistent,
The Board received ten comments that
specifically addressed the modification
to expand tiered pricing to all collection
zones. Six commenters {three of whom
were Federal Reserve Banks) supported
the proposed modification, and four
opposed the proposal. One commenter
that supported the proposal
recommended that the Board require
tiered pricing in all collection zones.
One commenter that opposed the
proposal expressed doubt that cost
differences within city zones would be
sufficient to justify tiered pricing.
Eleven commenters {including one
commenter that specifically opposed the
proposal to expand tiered pricing to all
collection zones) expressed concern that
expanded use of tiered pricing would
result in reductions in Federal Reserve
prices for low-cost endpoints, in
particular city endpoints, and would
lead to shifts in volume from
correspondent banks to Federal Reserve
Banks. Two commenters indicated that
tiered pricing may also result in a shift
of mixed deposit volume from
correspondent banks to Federal Reserve
Banks, Seven commenters were
concerned that tiered pricing provides
the Federal Reserve the opportunity to
randomly place selected endpoints in
the low-cost tier category in order to
attract additional check volume drawn
on those endpoints.
The Board believes that Federal
Reserve Banks should be permitted to
implement tiered pricing in all collection
zones, Including city zones, provided
that clear cost differences exist. The
Board believes that pricing check
collection products more accurately to
reflect the cost of collecting checks
drawn on different endpoints results in a
more efficient payments mechanism.

22169

The Board does not believe, however,
that tiered pricing should be mandatory
in all collection zones, because clear
cost differences may not exist in
particular collection zones to warrant
the adoption of tiered pricing. The Board
has adopted the modification to apply
tiered pricing to deposits in all collection
zones, as proposed. A discussion of the
competitive impact of the modifications
to the tiered pricing criteria is provided
later in this notice.
2. Reserve Bonks may offer more than
two price tiers within a collection zone,

provided that clear cost differences
exist to justify more than two tiers.
When the Board authorized tiered
pricing in 1986, it indicated that,
although there were no plans to approve
more than two tiers to the price
structure at that time, the Board might
approve additional tiers and may
request public comment on a proposal to
expand beyond two tiers if conditions
warranted. In certain collection zones,
the variation in processing and
transportation costs of collecting checks
presented to different endpoints may
result in a range of costs that can be
grouped into more than two coat tiers.
The Board therefore proposed a
modification to the current tiered pricing
criteria to allow more than two tiers
within a collection zone.
Twelve comments were received on
this proposed modification. Seven
•commenters (including three Federal
Reserve Banks) supported the proposal,
and five commenters opposed the
proposed modification. One commenter
that supported the modification
recommended that multiple pricing tiers
be required in all collection zones. Three
commenters that opposed this proposal
were concerned about the reconcilement
complexities that more than two pricing
tiers may create. Two of these
commenters recommended that the
number of permissible pricing tiers be
limited to three.
The Board has adopted the proposed
modification to permit more than two
price tiers within a collection zone. The
Board acknowledges that expansion of
the permissible number of price tiers
within a collection zone may complicate
the billing reconcilement for some banks
that deposit checks subject to tiered
pricing, but believes that retention of the
blended fee alternative, which is
discussed below, addresses this
concern. The Board does not believe
that it should limit the number of tiers
within a collection zone to three, if clear
cost differences exist to justify
additional tiers. The Board believes that
such limitations may unnecessarily
restrict Federal Reserve Banks’ abilities

22170

Federal Register / Vol. 56, No. 93 / Tuesday, May 14, 1991 / Notices

to set fees to reflect their costs of
collecting checks drawn on paying
banks within a certain collection zone.
The Board anticipates that Federal
Reserve offices that adopt tiered pricing
generally will implement two price tiers.
Although three tiers may be used in
rertain circumstances in which there are
significant cost differences between
groups of endpoints, the Board does not
envision the adoption of more than three
price tiers in the foreseeable future.
3. Blended fees will not be offered as
an alternative to tiered prices in a
collection zone in which tiered pricing
has been implemented.
Currently, Federal Reserve Banks are
required to offer a blended fee as an
option to the tiered pricing structure.
This requirement was initially adopted
to provide a pricing alternative primarily
to smaller depositors concerned with the
potential difficulties they would face in
reconciling their bills under tiered
pricing. The Board believed, that with
the experience of the past several years,
users of Federal Reserve check services
have become accustomed to component
pricing, i.e., pricing individual checks
within a given deposit at different
prices, since this is the billing procedure
for the mixed deposit option used
primarily by smaller depositors.3 The
elimination of a blended fee in the tiered
pricing structure would thus have been
consistent with the Federal Reserve’s
policy of pricing mixed deposits based
on the actual composition of checks in a
given deposit. Further, the Board
believed that depository institutions that
collected checks through the Federal
Reserve could easily use the
reconcilement procedures applicable to
mixed cash letter deposits to reconcile
the component pricing associated with
tiered pricing. The Board therefore
requested comment on a proposal to
eliminate the requirement that blended
fees be offered as an alternative to
tiered pricing structures.
Nineteen comments were received on
the proposal to eliminate the blended
fee alternative. Thirteen commenters
opposed the proposed modification,
while six commenters (including three
Federal Reserve Banks] supported the
proposed change. Eight commenters
based their opposition on the increased
billing reconcilement complexities
associated with tiered pricing. (Fifteen
3 C hecks d eposited in m ixed cash letters are
charged sep a ra te fees depending on w hether the
check is d ra w n on a paying b a n k in that Federal
R eserve Bank office's city. RCPC. or country zona
o r on a paying b a n k located in an o th er Federal
R eserve territory. Collecting b a n k s are billed for.
an d receive availability on. the checks in mixed
d ep osits b a se d on the actu al com position o f checks
in a given m ixed cash: letter.

commenters, including the eight
commenters referenced above, indicated
general concern with the billing
reconcilement problems associated with
a tiered pricing structure.) Commpntprs
noted that without a blended fee
alternative, depository institutions that
collect checks through the Federal
Reserve would be forced to alter their
billing reconcilement procedures
significantly or to accept charges from
the Federal Reserve without attempting
to reconcile those charges. In addition,
several of these commenters noted that
tiered pricing of Federal Reserve check
collection services would complicate the
billing of correspondent bank check
collection services to respondent banks.
Four small and seven large depository
institutions commented that they would
experience difficulty monitoring and
reconciling their bills from the Federal
Reserve under a tiered pricing
environment. Commenters opposed to
the elimination of the blended fee
alternative believed that depositors
should be given the choice of a blended
price or a tiered price option.
F>ased on an analysis of the comments
received, the Board has determined that
the blended fee should be retained as an
alternative to the tiered pricing structure
and has not adopted the proposed
modification eliminating the blended fee
alternative. The Board believes that
retention of the blended fee option
addresses commenters’ concerns
regarding the complexities associated
with billing reconcilement.
A Federal Reserve Bank that adop!s
tiered pricing will provide a blended fee
option to its depositors, if this form of
pricing is requested by the depositor. A
depository institution is not permitted to
deposit checks under both the tiered and
blended price options, thereby
preventing depositors from depositing
their low-tier checks under the tiered
pricing option and their high-tier checks
under the blended fee option. Because
the blended fee is based on the
composition of checks that is deposited
under that option, if, in practice,
depository institutions deposit under the
blended fee option checks drawn on
predominantely high-cost endpoint3,
then the blended price will tend to
approach the high-tier price over time.
The Board will continue to evaluate the
need to offer a blended fee option and
may determine to discontinue the
blended fee alternative at some point in
the future if circumstances warrant. For
example, if the difference between the
blended fee and the high-tier fee
becomes insignificant due to the
composition of checks deposited under
the blended fee alternative, the Board

may determine to disconHrup the
blended fee.
4. The approval process for
implementation o f tiered pricing in
additional Federal Reserve offices will
be the same as the approval process for
other routine price and seri'ice level
changes.
The Board approves the prices and
service levels for all Federal Reserve
Banks on an annual basis. In addition,
Board approval is required for other
proposed changes to the price or level of
Federal Reserve Bank services, if the
proposal raises significant policy or
operational issues. The Board has
delegated authority to the Director of the
Division of Reserve Bank Operations
and Payment Systems to approve
routine price and service level changes.
Given that the adoption of tiered
pricing in a Federal Reserve office is
approved pursuant to the criteria that
have been established by the Baord, the
Board proposed to handle approval of
tiered pricing structures under delegated
authority, to conform the approval
process with that used in other routine
price and service level changes, The
Board received eleven comments on the
proposal to modify the approval process
for tiered pricing structures. Eight
commenters opposed the proposed
modification, while three commenters
(including two Federal Reserve Banks)
supported the change. Three
commenters that opposed this proposal
believed that all tiered pricing proposals
should be issued for public comment
and be considered by the Board because
of potential competitive implications. An
additional five commenters that
opposed the proposal indicated that
each proposed tiered pricing application
should, at a minimum, be subject to
Board review and approval.
The Board believes that it is
appropriate to conform the approval
process for adoption of tiered pricing to
the process used for other routine
proposals. The adoption of a tiered
pricing structure by a Federal Reserve
office does not raise significant policy or
operational issues because approval is
subject to the criteria established by the
Board. Consequently, the Board has
adopted the proposal to amend the
approval process for implementation of
tiered pricing in additional Federal
Reserve offices.
Additional Issues
Commenters raised several additional
issues related to the pricing of Federal
Reserve check collection sendees.
FJeven commenters stated that the
existing guidelines for tiered pricing
structures should be further clarified.

Federal Register / Vol. 58, No. 93 / Tuesday, May 14, 1991 / Notices
and thus were opposed to, or had
reservations concerning, one or more of
the proposed modifications. Specifically,
ten commenters suggested that the
Board provide greater specificity
regarding the criterion permitting tiered
pricing only where “clear cost
differences exist between groups of
items within a collection zone." Three
commenters requested clarification of
the criterion that “tiered prices may only
be used where they have the potential to
provide net savings for a substantial
amount of deposited volume or a
substantial number of depositing
institutions.”
The Board adopted the guideline that
“clear cost differences" exist between
groups of items in a collection zone to
ensure that tiered pricing is
implemented only in those situations
where the resulting price differences
between the tiers would be material,
Currently, the Board considers the
"clear cost difference" guideline to be
met if the difference in cost between
groups of endpoints supports at least a
twenty percent difference in price
between each tier, or, alternately, at
least a 2 mil! difference in price between
each tier. The Board may modify this
test in the future if it determines that
changes in the cost basis and fee
schedules for check collection services
warrant a change in determining what
constitutes “clear cost differences.”
Currently, the Board believes that the
“net savings” guideline would be
satisfied if either twenty percent of
depositing institutions would have the
potential to realize a net savings or
twenty percent of deposited volume
would be classified as low-tier. In
instances where a Federal Reserve Bank
is implementing more than two tiers in a
collection zone, the “net savings”
guideline for volume would be satisfied
if twenty percent of deposited volume
would be classified as being in a tier(s)
with a lower per item fee than the
existing fee. These figures may also be
subject to change in the future if the
Board determines that market
conditions support a change in the
definition of “net savings.” A Federal
Reserve Bank must meet this guideline
when it initially implements a tiered
price structure in a collection zone.
Five commenters requested that the
Board indicate the frequency with which
endpoints in a collection zone will be
reviewed to determine whether they
should be calssified as either low-tier or
high-tier and the amount of advance
notice a Federal Reserve Bank would
provide prior to reclassifying an
endpoint in a different price tier. The
classification of endpoints as either low-

tier or high-tier will be reviewed
annually in conjunction with the Board’s
review of all Federal Reserve check
collection prices. In addition,
redesignation of selected endpoints to a
different tier may occur at other times
during the year, if conditions warrant.
The Federal Reserve provides a
minimum of 30 days advance notice of
price and service level changes,
including reclassification of endpoints to
a different price tier.
The Board received eight comments
on the relationship between the
proposal to modify the tiered pricing
critieria and the Board’s proposals to
amend Regulation CC to provide for
same-dav settlement for checks
presented by private-sector presenting
banks and to modify the Interdistrict
Transportation Service (ITS) price
structure. Six commenters requested
that the Board not take action on the
proposed modifications to the tiered
pricing criteria until the Board takes
final action on the proposed same-day
settlement rule, due to the competitive
implications of both proposals. One
commenter stated that the ITS, sameday settlement, and tiered pricing
proposals should have been issued for
comment simultaneously due to the
potential cumulative impact on
correspondent banks. Another
commenter requested that the Board
defer final action on the modifications to
the tiered pricing criteria until the issue
of ITS cost determination has been
acted upon by the Board. The Board
believes that the tiered pricing proposal
is sufficiently independent of these other
proposals and final action need not be
deferred until the Board acts on the
other proposals.
Two commenters questioned whether
tiered pricing would adversely affect the
negotiability of checks drawn on highcost endpoints, given that the cost to
collect those checks would increase
under a tiered pricing structure.
Significantly different Federal Reserv e
check collection fees currently apply to
checks drawn on various endpoints and
these existing price differences have sot
affected the negotiability of checks
drawn on the relatively high-cost
endpoints. While tiered pricing may
result in an increase in the collection fee
spread for checks drawn on low- and
high-cost endpoints, the Board does not
expect that this fee spread will
negatively affect the negotiability of
checks drawn on high-cost endpoints.
The criteria for offering a tiered
pricing structure in the Federal
Reserve’s check collection service, as
modified by the Board, are as follows:

22171

1. Tiered pricing may be applied to
deposits in any collection zone,
provided clear cost differences exist
between groups of checks within that
collection zone.
2. Tiered prices may be used only
where they have the potential to provide
net savings for a substantial number of
depositing institutions or a substantial
amount of deposited volume.
3. A blended per item fee will be
offered as a alternative to tiered prices
for each deposit category.
4. Federal Reserve Banks may offer
more than two price tiers within a
collection zone, provided clear cost
differences exist to justify more than
two tiers.
Competitive Impact Analysis
All operational and legal changes
considered by the Board that have a
substantial effect on payments system
participants are subject to the
competitive impact analysis described
in the March 1990 policy statement “The
Federal Reserve in the Payments
Mechanism.” (53 FR 11648, March 29,
1990) In this analysis, the Board
determines whether the proposed
change would have a direct and
material adverse effect on the ability of
other service providers to compete
effectively with the Federal Reserve in
providing similar services due to
differing legal powers or constraints or
due to a dominant market position of the
Federal Reserve deriving from such legal
differences.
Six commenters expressed
reservations about the competitive
impact analysis provided with the
Board’s proposal to modify the tiered
pricing criteria. Four commenters
requested additional information on
Federal Reserve volumes, costs, and
price projections. Two commenters
stated that a detailed competitive
impact analysis should be performed
with the respect to each tiered pricing
proposal based on potential competitive
implications.
The Board does not believe that tiered
pricing will affect the ability of other
service providers to compete effectively
with the Federal Reserve in providing
similar services. The Board
acknowledges that in some instances
tiered prices may result in volume shifts
between correspondent banks and
Federal Reserve Banks; however, any
volume shifts that may occur due to the
adoption of tiered pricing by a Federal
Reserve office would not be due to
differing legal powers or constraints o»
due to a dominant market position of tht
Federal Reserve deriving from such legal
differences. Tiered pricing is an

Federal Register / Vol. 5G. No. 93 / Tuesday. May 14, 1991 / Notices

22172

accepted price structure in the banking
industry and is used by other providers
of check collection services. The effect
of the proposed modifications to the
tiered pricing criteria will be to more
accurately reflect the cost of collecting
checks d 'awn on a particular paying
bank in the price assessed for collecting
those checks. A more precise alignment
of costs and prices vviii not adversely
affect the ability of other service
providers to compete effectively with
the Federal Reserve.
By order of the Board of G overnors of the
F e d e r a l Reserve System, May 8, 1991.

W illiam VV. VViies,

Secretary of the Boa rd.
[VR Doc. 81-11372 Filed 5-13-OT; 3:45 air.j
CODE 6250-01-M

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