View original document

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

wrnrnmw~ru~~mmu~~
~(D(3[J(J(b [J(300[J[!U

o(JGJm 1]11 1:B(b(3(!U&TIGJ(D

To Member Banks in the Fourth Federal Reserve District:

We are pleased to present the 7977 Annual Report of the Federal
Reserve Bank of Cleveland. This year's report reviews the growth of
electronic funds transfer systems and the contributions
of the Fourth
District to the advancement of EFT.
In the last several years the financial markets have undergone
considerable structural change. Automation and electronic payments systems
have often been at the forefront of these changes. In some parts of the
payments mechanism, these changes have been adopted at a rapid pace. In
others, the process of adoption and implementation
is still at an early stage.
The introduction of these new ways to transfer funds has altered more than
the technological methods of payments.
It has blurred the traditional
dis tin c tions among financial institutions,
and it has changed their
competitive roles. This report considers the effects of EFT on the evolving
payments mechanism and financial sector, and it describes the types of
systems that have been adopted to facilitate business, retail, and government
transactions.
It is particularly appropriate that our Annual Report feature the story
of EFT. The Federal Reserve has a vital interest in the maintenance of a
strong and efficient payments mechanism, and the Fourth District has been
in the vanguard of payment system automation. Its banks have introduced
automated
payments
systems.
The District's automated
clearinghouses,
among the first established in the country, have participated in a pilot
program to clear automated
transactions nationally.
Last year the 4
automated
clearinghouses
in this District processed nearly 6 million
commercial and Federal transactions.
We would like to take this opportunity to thank the member banks, the
directors, and the officers and staff of this Bank whose support enabled us to
carry out our commitments
last year. We ask for your continued assistance
in accomplishing the responsibilities of this Bank.

Robert E. Kirby
Chairman of the Board

Willis J. Winn
President

E.

J.

Stevens

Rising costs in paper-based payment systems
stimulated interest in EFT. The noted authority on
the payment system, George Mitchell, foretold much
of current EFT activity in his 1965 description of the
cost-saving and marketing opportunities
that computer technology
made available to the banking
industry.?
Two major research efforts,
by the
Stanford Research Institute in 1966 and the Bank
Administration
Institute in 1969, estimated the savings that could be realized by replacing checks with a
nationwide
commercial
bank electronic
payments
system)
In the early 1970s the Atlanta Payments

Origins
EFT-Electronic
Funds Transfer-includes
a
wide variety of new developments in the payments
industry . To some it means a system to replace
checks, cash, and credit card vouchers with a
nationwide
network of computer-linked
terminals
that instantaneously
keep track of each penny spent
everywhere. To others it simply means getting cash
out of a machine. EFT is a worldwide phenomenon,
further advanced in some other industrialized nations
than it is in th is country."
In one way or another
EFT refers to the application
of computer
and
telecommunication
technology
in making
or
processing payments.
Electronic communication
has been used in
making payments
since the introduction
of the
telegraph in the 1840s. The addition of computers
has made EFT possible. Financial institutions began
to turn to computerized
information
storage and
retrieval techniques after World War II to manage
their massive accounting and record keeping needs.
Blending communication
and computer technologies
into remote access computer networks now allows
financial institutions to form true electronic payment
systems that link payers with payees and their
respective accounts.

1See Proceedings of International Payments Symposium,
National Commission 0 n Electronic
Fund Transfers, June
1977.
2George W. Mitchell,
"Effects
of Automation
on the
Structure and Functioning of Banking,"American Economic
Review 56 (May 1966): 159-66.
3See A Techno-Economic Study of Methods of Improving
the Payments Mechanism (Menlo Park, California: Stanford
Research Institute, 1966) and An Electronic Network for
Interbank Payment Communications: A Design Study (Park
Ridge, Illinois: Bank Admin istration Institute, 1969).

3

Project made more refined cost estimates for new
electronic systems and existing paper-based systems
by investigation of specific electronic systems designed for different kinds of payment
needs.4 By this
time, automated
teller machines were operating at
several banks, payment terminals had been used in a
small number of stores, and, in 1972, the first
automated clearinghouse for paperless payments began operating in California.
EFT has provided a new means of competition
not contemplated
when the existing regulatory structure of financial markets was developed. Banks have
used electronic networks to provide nationwide payment services to their corporate
customers
even
though regulation restricts bank offices to local or
state market areas. Thrift institutions
have offered
retail payment services to savings account customers
using telephone transfers and electronic terminals in
stores, although most state regulation prohibits thrifts
from check payment services. Banks, thrifts, and
retail establishments
are using terminal systems to
compete for customers
through more convenient
access to deposit and credit accounts.
The Federal government's
role in the financial
system has also fostered development
of EFT systems. The Federal Reserve has rei ied on new computer and telecommunication
technology to reduce
costs and to improve its traditional
cash, check
processing, and wire-transfer services, and to operate
automated clearinghouses. The Treasury has initiated
its own checkless recurring payments program.
In 1974, Congress created the National Commission on Electronic Fund Transfers to undertake a
comprehensive
review of EFT. Four major considerations emerged from the review. Recognizing that
EFT is an evolutionary concept in its early stages, the
Commission
held that no comprehensive
policies
could be adopted now that would satisfy the needs of
future EFT development.
Second, the Commission
concluded
that EFT should be developed
in a
competitive environment free of unnecessary regulation. Third, the Commission found that, even though
EFT provides alternative
payment systems, those
systems will not immediately replace existing ones.
Finally, the Commission concluded that EFT could
not realize its potential unless it was permitted to

develop to meet consumer needs. 5
EFT has emerged from a technological possibility to a growing, if ill-defined, force creating
institutional change. Initially conceived as a nationwide replacement for paper documents in the banking
system, EFT has evolved into a wide variety of
innovations introduced
by banks, thrifts and retail
institutions that are changing the way payments are
made and the traditional structure of the market for
financial services.

4See
Research on Improvements
of
the Payments
Mechanism: The Final Report on Phase I-An Analysis of
Payments Transactions and Phase II-Payments Flow Data. 3
vols. (A tlanta:
Prepared
for the Federal
Reserve Bank of
Atlanta by Georgia Tech Research Institute,
Georgia Institute
of Technology,
1971);
Research on Improvements of the
Payments Mechanism: Phase III-General
Systems Design
and Analysis of an Electronic Funds Transfer System, 6 vols.
(Atlanta:
Prepared
for the Federal Reserve Bank of Atlanta
by
Atlanta
Payments
Project,
Georgia
Institute
of
Technology,
1972); and Phase IV-A
Technical, Marketing,
Organizational and Cost Evaluation of a Point-of-Sale
Terminal System, 5 vols.
(Atlanta:
Prepared
for The
Committee
on Paperless
Entries
by the Atlanta
Payments
Project, 1973).
5See EFT in the United States: Policy Recommendations
and the Public Interest (Washington,
D. C.: National Commission on EFT, 1977).

4

How ACH and POS Transactions

The Variety of EFT Services

Are Made
In an ACH transaction,
a payer-for
example, a business preparing a payroll or an
individual paying a bill-can send a payment
instruction directly to his bank rather than to
the payee. The paying bank then makes a single
magnetic tape file containing
the payment
orders of all its customers and forwards the file
to the ACH. The ACH computer sorts incoming
files from all paying banks and creates outgoing
tape files for receiving banks. Then the ACH
delivers the files containing
payees' account
numbers and payment amounts. The process
follows a precise time pattern so that payments
are credited to payees' accounts and debited to
payers' accounts on a prearranged schedule.

EFT services are used for retail, business, and
government
payments in the United States. Each
group uses two kinds of service. True EFT systems
substitute electronic payment instructions for cash,
checks credit card vouchers, or manual wire transfers. Quasi-EFT
systems provide some form of
computer/telecommunication
service to facilitate
payments that still retain a paper document as the
actual payment instrument.

RETAIL SYSTEMS
Individuals make and receive payments through
two kinds of true EFT systems: Automated Clearing
Houses (ACHs) and Point-of-Sale (POS) networks. An
ACH processes batched payments, while POS systems
are designed for single payments.
Thirty-two
commercial
ACHs now blan ket
most of the nation with facilities to accommodate
individual and business initiated local payments.
Federal Reserve Ban ks provide computer processing
facilities for all but one ACH and distribute ACH files
using existing Federal Reserve check courier and bulk
data communication
facilities.

Another ACH service handles recurring
bill payments on a preauthorized
basis. The
billing company-for
example, a public utility
collecting monthly budget payments-initiates
the collection through its own ban k rather than
the payer's. Its bank makes a magnetic tape file
of payers'
banks, account
numbers,
and
payment amounts and sends the tape to the
ACH. Again, the ACH computer sorts incoming
tapes and creates outgoing tape files which the
ACH delivers to the paying banks.
A typical POS system transfers funds
between accounts at a single deposit institution
on the basis of information
keyed into
computer files from a POS terminal. A clerk
accepts a payment or deposit or completes a
cash withdrawal for customers with accounts at
the institution operating the service. Thus, a
typical POS system functions as a network of
retail tellers who use the retailer's account and
cash as the vehicle for customer transactions.

5

ferred electronically
for long-distance
eliminate transportation
of vouchers.

Thirty-one retail POS systems operated in local
areas in the United States in 1976. An additional 19
projects provided some combination
of POS and
check authorization/guarantee
services.
Computer and telecommunications
technology
is also being used in various quasi-EFT systems.
Electronic networks provide check and credit card
authorization
and guarantee services. One type uses
a toll-free telephone call to verify that a credit card
account is not on a centralized bad-card list. Another
provides a check-guarantee
card to participating
customers and access to computerized
verification
files for retailers. A third, in conjunction
with POS
services, verifies that an account has sufficient funds
to cover a check and, in some cases, places a "hold"
on funds to cover that check. And a number of
regional and nationwide
retail chains use terminal
systems to authorize credit extensions and to update
both customers'
accounts
and inventory
records
directly from POS terminals.
Two types of telephone transfer service can
initiate payments.
In less sophisticated
form, an
employee of the deposit institution records payment
instructions.
The institution
debits accounts and
prepares a single check for each payee, consolidating
the amounts paid by individual payers. Through a
more sophisticated system, customers use touch-tone
phones to enter account numbers and amounts to be
paid directly to computer
terminals from which
deposit accounts are updated and checks prepared.
Automated
teller machines at financial institutions and retail locations facilitate the use of cash and
checks. Customers
can withdraw cash from their
accounts by inserting a plastic identification card and
keying in a personal identification
number. More
frequently, extended service machines complete cash
withdrawals, deposits, account balance inquiries, bill
payments,
and transfers among a customer's
accounts. Transactions entered directly into computerized account systems give customers access to cash
and other financial transactions 24 hours a day rather
than only during business hours.
The list of quasi-EFT systems extends further.
Many deposit institutions
use on-line terminals for
customer account information and updating at teller
stations.P
Credit-card purchase information is trans-

clearing

to

FEDERAL GOVERNMENT
PAYMENTS
The Federal government
increasingly has replaced checks with payments through ACH facilities.
Payments are credited to recipients' accounts on a
predetermined
day, eliminating mail delivery or deposit of checks. The Treasury records transaction
information on magnetic tape files. Federal Reserve
Banks then sort the files by geographic area and receiving institution, distribute files to local areas, and
deliver payments to receiving institutions using the
Federal Reserve's transportation
and communication
networks.
The service currently is offered to recipients of several kinds of Social Security payments;
railroad, civil service, and Veterans Administration
retirement payments; Air Force payroll and retirement
payments;
and revenue-sharing
payments.
Eventually, all recipients of Treasury payments will
be able to use the service.
Treasury checks themselves are processed by a
unique quasi-E FT system. Many are truncated at the
Federal Reserve Bank to which they are presented for
collection. Information on the checks is recorded on
magnetic tape and routed to the Treasury for account
reconciliation.
Microfilm copies of the checks also are
returned to the Treasury, while the checks are stored
at regional storage centers.

6"On-line" is used to refer to interactive
which a message initiated at a terminal
by a response from a host computer
messages to other terminals.

6

computer systems in
is followed promptly
and, in some cases,

Western Union. Prescribed message formats and codes
for Bank Wire participants
simplify message transmission and provide more security than ordinary
telex transmission.
Bank Wire enables an originating
bank to transfer funds on deposit at another bank to
the account of a third party'? SWI FT, linking over
500 banks around the world, offers a similar service
through an on-line message-switching network.
Computerized
cash management and lock-box
reporting networks represent an important quasi-EFT
service for large regional, national, and international
corporations.
Businesses receiving numerous recurring
payments from customers over a wide geographical
area use lock-box systems to accelerate and to control
receipts. Rather than mailing payments to a central
location, customers send payments directly to local
post office boxes where local banks pick up the
checks, enter them in the local check-collection
system, and gather accounts-receivable
information.
Lock-box banks use a telecommunication
network to
provide information
about collected balances to a
centralized
office that consolidates
funds into a
disbursement
account by wire transfers or paper
drafts drawn on the local banks.

BUSINESS PAYMENTS
EFT systems have emerged as indispensable
means of payment among businesses, especially for
international and national money market transactions
that have for many years relied on manually operated
telephone and telegraph facilities for rapid transfers
of funds.
CHIPS (Clearing House Interbank
Payments
System) began on-line operation in 1970 and now
handles interbank money transfers among 75 U. S.
and foreign banks in New York City. Telephone lines
link terminal computers of participating
banks to a
central computer system at the New York Clearing
House. The System eliminates paper check preparation, messenger delivery, and manual input into bank
accounting
systems for payments
that must be
completed in a critically short time span. Computer
name and address files for frequently used accounts
facilitate input of information about transactions by
identity codes. Terminal computers or magnetic tapes
from the clearinghouse
are the links to banks'
computerized
accounting
systems. Next-day settlement for transfers is performed through the reserve
deposit accounts of New York banks that are Federal
Reserve members. Daily transfers total over $75
billion for 45,000 to 50,000 payment messages.
The Federal Reserve communication
system,
Fed Wire, transfers funds among reserve deposit
accounts of member banks, for banks' own accounts
or indirectly for third parties. The current service
links 379 on-line member banks through 37 Federal
Reserve Bank offices via a central computer switch in
Culpeper, Virginia. Member banks that are not on-line
use the service by telephone or wire instruction to a
Federal Reserve office. On-line banks accounted for
an estimated 90 percent of the 5'8,000 daily transfers
totaling over $80 billion daily in 1976.
Quasi-EFT
systems are also important
for
business payments. This category includes Bank Wire
and SWIFT (Society for Worldwide Interbank Funds
Transfer) and Fed Wire when used in the off-line
mode. Bank Wire originated in 1952 as a wire transfer
service for some New York and Chicago banks.
Currently, 194 banks throughout the country use the
cooperative
message-switching
service operated by

7Bank Wire II is the planned successor to the existing Bank
Wire and will be operated by Collins Radio. It is expected to
be an on-line system offering single message and bulk data
transfer, value-dating,
and net settlement
for member ban ks
on the books of the Federal Reserve.

7

EFT IN THE FOURTH DISTRICT
Fourth District financial institutions and the Federal Reserve Bank have earned a reputation for being
alert to the advantages of automation and EFT in the payments system. One of the very first experimental
POS systems, providing valuable market testing of the concept of paperless retail payment, was operated by a
member bank in the Columbus area in 1971. Since then most retail EFT development in the District has
emphasized automated
teller machines (A TMs ). A recent survey shows that 70 ATM systems are now
operated
by 63 commercial
banks and 7 thrift institutions.*
Commercial
banks also operate 12
authorization/guarantee
and 7 telephone transfer systems. Thrift institutions are involved in an additional 2
POS and 8 telephone transfer systems. All of these systems combined operate almost 800 terminals and
processed over 1,600,000 transactions last year.
Automated clearing houses in the District were among the first 10 ACHs operating in the country. Even
before the recent national pilot project for inter-ACH exchanges of payments, District ACHs were exchanging
payments to provide customers with the advantages of larger geographical coverage. The District's ACHs were
among the 7 participants in the national pilot program for inter-ACH payments.
During 1977 the District's 4 ACHs processed 1.5 million commercial transactions and 4.4 million
Federal payments. These amounted to 5.8 percent of all ACH payments made nationally. While commercial
payments represented
12 percent of all ACH transactions for the nation, such payments in the District
represented 25 percent of all ACH transactions. This relative success of Fourth District ACHs in commercial
transactions may be attributed in part to the early linkage of the 4 ACHs. Last year 200,000 transactions were
made among these facilities.
Both Fed Wire and Bank Wire are actively used by District commercial banks. Eighteen banks use Bank
Wire, and 27 of the 460 District member ban ks are on-line users of Fed Wire. The number of on-line and
off-line Fed Wire payments was almost 1,300,000 at the main office and branches last year.
The Federal Reserve Bank of Cleveland has itself been a pioneer in payment system automation.
Prototype high speed check-sorting equipment was tested in the Cleveland office in the early 1970s. The
communication
links for District inter-ACH payments were put in place in 1975. And the Data Systems
Support staff of this Bank had a major role in developing the computer software to generate the ACH national
pilot program.
*Also, 4 out-of-District

credit unions use a computer

center

in Dayton

Corporations
can use office terminals to gain
access to their banks' corporate cash management
networks.
Services include balance and account
activity
information,
a terminal-based
means of
making intracorporate
funds transfers, and additional
information teatures such as interest- and exchangerate quotations.
On-line and telephone
inquiry
customers rely on these bank or third-party-operated
networks to collect information from all of a corporation's banks, including lock-box banks handling
receipts.

8

to operate

their ATMs.

How Widespread

IS

Table 1

EFT?

PAYMENTS IN THE UNITED
Approximate Number and
in 1976-1977*
Number
(millions)
per year

Payments are made with cash, checks, credit
cards, and a variety of EFT services in the United
States. A comparison of the number and value of the
major kinds of non-cash payments
made in the
country suggests the extent to wh ich payments are
made or facilitated
by EFT svsterns.f True EFT
systems have made significant inroads on the number
and value of business and Treasury payments, but not
retail payments. Discussion of EFT tends to focus on
retail systems, especially POS, and creates an inaccurate impression that EFT is a fledgling innovation
with an uncertain future. A broader view-one that
includes business and Treasury payments and quasiEFT systems-corrects
this impression.

Retail Payments:
Check
Credit card
Bank card
Other
ACH
POS

27,720
5,000

U. S. Treasury:
Check
ACH
Business:
Check
Wire: off-line
Bank Wire
Fed Wire
Wire: On-line
CHIPS
Fed Wire

Private retail payments account for over 96
percent of the number of non-cash payments made in
the United States, but only about 4 percent of the
dollar value. These relatively small payments primarily involve consumer purchases, bill payments, and
income receipts. Checks and credit cards dominate in
this category,
dwarfing ACH and POS payments
(Table 1).
Commercial
ACHs handled about 12 million
retail payments last year and the 31 standard POS
systems about 3 million payments in 1976. These
EFT systems together currently comprise about 1/20
of one percent of the number and 2/10 of one
percent of the value of all retail payments.

"For sources,

STATES
Value
Value
(billions)
per year

$ 2,106
71
1,103
3,897

12
3

33
38
3
0.1

768
89

400
23

280

8,424

2
1

5,100
2,040

12
11

19,200
18,530

see Appendix.

8Cash payments are not included in the comparison because
little is known about them. According to an Arthur D. Little
study "The number of cash transactions
conducted annually
is difficult to measure, but we estimate over 200 billion (well
over 80 percent of all payment transactions)
of which the
majority are for less than $1." See The Consequences of EFT
(Cambridge, Mass: Arthur
D. Little, lnc., 1975), p. 7.

The number of payments made on true EFT
systems is a conservative measure of the use of EFT
for retail payments. The number of authorization/
guarantee
inqu iries and automated
telephone and
teller machine transactions is easily 10 times greater
than the number of retail ACH and POS transactions
(Table 2). In addition, proprietary POS credit systems
of major retailers and electronic clearing of vouchers
in some bank credit card systems suggest even more
widespread EFT use. Nevertheless, it is clear that true
EFT payment systems process only a tiny portion of
the enormous number of retail payments.

9

The U. S. Treasury makes almost 3 percent of
the annual number of non-cash payments in the
country. Over 10 percent of these Federal payments
are channeled through ACH facilities and account for
5 percent of the value of Federal payments.
In
addition, it is expected that all Treasury checks will
be truncated at Federal Reserve Banks by the end of
1978.

Table 2
QUASI-EFT:

RETAI L
Number of
Transfers of
Inquiries
Number of
Systems
(millions
1976
per year)

Automated on-line systems among banks now
playa key role in business payments, although large
checks and drafts represent over 90 percent of the
number of business payments. CHIPS and on-line Fed
Wire carry 7 percent of business payments. However,
the two systems account for over 70 percent of the
value of business payments.
Quasi-EFT systems are also an important component of business payment systems. Bank Wire and
off-line Fed Wire carry about the same number of
messages as retail POS systems, but account for about
14 percent of the value of business payments. In
add ition, many large nonfinancial
corporations
are
adopting on-line links to their banks for cash management purposes.
True EFT payments
represent
less than 1
percent of the number of all non-cash payments made
annually in the United States, but they include 68
percent of the value of all these payments because of
the enormous
sums transferred
on business EFT
systems. Quasi-EFT systems, some of which may be
precursors of true EFT systems, play an even more
pervasive role in processing payments.

Automated Telephone
Transfer*
Check/Credit Card
Author iza tio n-G uaran tee
Automated Teller Machines
"Excludes

teller-assisted

telephone

20
40**
195

3
103
58

transfer.

""This
includes 19 systems offering
a combination
of POS
transfer and CA/G
service, but excludes proprietary
POS
credit authorization
systems.
Source:

Peat, Marwick,
Mitchell
& Co., "Summary
of Data
on Major Terminal Based Electronic
Funds Transfer
Projects

Adopting EFT
Payments are a means of buying things, not a
direct source of enjoyment in themselves. Therefore,
users-payers
and payees-are
only likely to adopt
new ways of making payments that are cheaper or
more convenient.
Similarly, producers would only
invest in new payment services that are expected to
be profitable through cost con trol or market development.

10

in the U. S.," March 1977, NCEFT

IWD 37.

between the two modes of transmission. Once an
on-line communication
system was available for Fed
Wire, therefore, a single bank could convert to on-line
use unilaterally whenever its volume and cost made
the investment worthwhile. Within this framework no
new organization
or new collective action was
required.
Initial CHI PS participants
previously
were
organized as members of the New York Clearing
House Association. The CHI PS network accommodated international
payments
messages among a
readily identifiable
small group of domestic and
foreign banks that had a large daily recurring volume
of payments flowing among them. The initial decision
to create the CHI PS system required collective action,
but the Clearing House organization already existed
to provide a vehicle for that action.
Retail POS systems have proved more difficult
to organize. In addition, at least for the foreseeable
future, POS systems will not eliminate cash, checks,
and credit cards. Adoption of a POS system will not
supplant present systems and their operating costs.
Payers and payees therefore
must decide whether
investment in an additional means of payment can be
justified,
and that decision will depend on the
number of other users who adopt the system.

Differences in the rate of adoption of EFT
systems have been significant. As previously indicated, about 10 percent of business and U. S.
Treasury payments but less than 1 percent of retail
payments are made on true EFT systems. The lag in
adoption of EFT for retail payments is largely the
effect of two differences between retail and business
or Treasury EFT systems. One difference is in the
time, effort, and cost involved in organizing a
sufficient number of payers and payees to create a
usable payments system. New organizations have had
to be created for retail payments, whereas existing
organizations
have been the basis for business and
Treasury payments. The other difference is in the
gain that users and producers can expect to realize by
shifting payments to new systems. Business payments
are for relatively large amounts and therefore provide
more incentive for a relatively small number of users
to incur the operating costs of an additional payment
system. In addition,
traditional
cash, check, and
credit card payments are frequently priced in such a
way as to obscure the benefit of retail EFT to some
users.

ORGANIZATION
Organization of payers and payees is a way of
dealing with interdependence
in payments. Payers
and payees are interdependent
because both must
agree on a means of payment and because the
advantage of adopting a new means of payment may
depend on the number of other users.
Organization
of payment
systems takes a
variety of forms. For example, governments enforce
acceptability of cash to settle debts by defining legal
tender. Private clearinghouses
are organizations
of
banks that make check payments more acceptable by
standardization
of clearing and settlement
procedures.
The early success of on-line Fed Wire was due
in part to the action of the Federal Reserve, as an
organization of member bank users, that eliminated
interdependence
as an impediment to on-line use of
Fed Wire. Even when a bank becomes an on-line user
it can still make and receive payments from all other
Federal Reserve member banks, on-line or off-line,
because Federal Reserve Banks transfer messages

11

a number of institutions
with independent
POS
networks. This has raised the specter of merchants
being forced to install a different terminal for each
network and has spurred development of a common
terminal that could serve all networks and standardization of customer identification devices.
An alternative strategy would organize consumers and retailers in a common POS network
shared by a number of deposit institutions.
The
network could be developed by a special organization
Iike a credit card association
or by a deposit
institution that markets participation to other institutions. But an organization for sharing presents problems. If a shared system becomes successful, must it
admit latecomers who have avoided some of the
initial costs? A shared system might welcome latecomers as a means of expanding the customer base.
But if not, or if the terms for entrance were
prohibitive, what alternative would latecomers have?
Some states have enacted legislation that requires
statewide sharing. But the Justice Department
has
objected to mandatory
sharing because it might
preclude competition
among systems before sufficient experience
with POS has been gained to
determine the feasibility of competitive svsterns.f

Retail POS systems have not been developed by
preexisting organizations
of banks, and in fact, the
antitrust interpretation of such organizations is uncertain. Development of POS systems must bring together a large number of participants with recurring
needs to pay one another. This involves identification
of locations where both a retailer and substantial
number of consumers have a deposit relationship with
the deposit institution
that installs the terminal
system. A single deposit institution in a competitive
market is unlikely to have a substantial base of both
retailer and consumer depositors.
But without a
substantial
base, low daily volu me of transactions
makes it difficult for producers and retailers to justify
investment in an additional means of payment.
Developing a Customer Base-POS developers
are exploring various strategies to build the necessary
customer base. One means is to identify retailers who
serve a sizable number of depositors of a financial
institution. Another is to develop a deposit relationship with the customers of particular retailers. The
expectation has been that by installing a POS facility
in heavily trafficked retail locations-frequently
a
chain of supermarkets-customers
would open a
deposit account to take advantage of the POS facility
serving that retailer. EFT thus becomes an innovative service marketed to enlarge the customer base
for EFT and other financial services.
A variant of this strategy is reflected in widespread nervousness among financial institutions that
one of the large general merchandise retailers might
develop a deposit-like account, either directly or by
affiliation with a deposit institution. These retailers
already use POS terminals to manage their proprietary credit relationships with a very large customer
base. A deposit-like relation that could be used to
make payments to others could provide a serious
challenge to the market shares of traditional deposit
institutions.
The customer base for POS systems also could
be increased without changing consumer deposit
relationships through retailer affiliation with several
systems. Credit cards provide an example. An independent retailer can affiliate with several credit card
companies to assure that all cardholders can charge
purchases. Similarly, retailers could hold accounts at

9For a useful discussion
91-101.

12

of sharing see EFT in U.s.,

pp.

In the case of ACHs, the Treasury has surmounted
the problem of interdependence
more
readily than have private users. The Treasury is the
only payer whose bank has a nationwide network of
branches, the 12 Federal Reserve Banks and their 36
branches and other offices. The Treasury is the
common focal point for convincing agency administrators to make required changes in payment procedures and to obtain authorizations from employees,
retirees, and beneficiaries for ACH payments. While
ACH payments have not eliminated the Treasury's
need to prepare and to reconcile paper checks, they
have replaced enough checks to make them efficient
add itional means of payment for the Treasury.
Commercial ACH programs rely on voluntary
associations
of deposit institutions
to direct the
organization of payment recipients and thousands of
individual payers. The relatively small initial scale of
ACH payments
within each payer's organization
discourages many payers from using an ACH. Firms
that already provide a direct deposit arrangement are
most likely to be able to justify the cost. For others,
the cost of an additional payment system operating in
tandem with their cash or check systems may be
difficult to justify until a relatively large portion of
payments
can be routed through an ACH. An
additional constraint on ACH payments will soon be
eliminated. In the past, commercial ACH use has been
confined largely to payments within the geographical
area defined by each of the 32 ACHs. Nationwide
ACH payments are becoming possible as the Federal
Reserve implements
inter-ACH clearing and settlement of commercial payments.
Organizing
interdependent
participants
into
new payment systems has been easier in some EFT
applications than in others. Business systems evolved
from preexisting organizations of a limited number of
potential users. Treasury ACH benefited from ease of
administration
and unlimited geographical coverage.
But retail POS and ACH systems have had to define
and organize potential users in local areas in order to
develop systems.

payment process. Because of the way payments
traditionally have been priced, some key participants
may not be able to identify a gain from adopting
EFT. In particular, prohibition of interest on demand
deposits has supported
the ban king practice of
providing payment services which are priced implicitly and indirectly. Businesses and consumers have
less incentive to adopt ACH or POS payments
because cash, check, and credit card payments carry
no explicit price.
Business Systems-Users have adopted business
EFT systems because on-line systems reduce their
costs of monitoring and controlling the progress of
large value payments during a banking dayJO On-line
business payments have a very high dollar value per
payment and per user (Table 3). To control float and
assure timely delivery, such payments traditionally
have been made by wire and messenger-delivered
check.' 7 Ban ks that send and receive hundreds of
these transfers daily found that the possibility of lost
transfers was significant when the messages were
received by telephone or telegraph, noted by a clerk,

lOOne frequently
cited reason for the spread of on-line Fed
Wire is that the service is free. This is not precisely true.
Access to Fed Wire is available only to banks that become
members of the Federal Reserve System, and membership
is
not free. There is a charge of $1.50 per message for
small-value
payments;
there is no charge for large-value
payments
regardless of whether
the member
bank is an
on-line or off-line user. Thus, there is no pricing incentive to
become an on-line user; users must bear all development
and
operating
costs of on-line
use at their
end of the
telecommunication
line. Further, CHIPS, accounting for half
of business terminal-based
EFT payments,
is not provided
free. Users bear the entire resource
cost of the system,
allocated on a per- message basis.

GAINS FOR USERS
Gains from increased efficiency of EFT systems
are scattered
among all the participants
in the

11The value of one day's interest on the average $1,700,000
Fed Wire transfer is $232.88 at an interest rate of 5 percent.

13

Table 3
ACTIVITY

IN PAYMENT SYSTEMS IN THE UNITED STATES
{1976-1977}

Number of End
Points or
Accounts

Number of
Transactions
per Account
or End Point
per Day

Value of Average
Transaction per
Account or End
Point per Day

Value
per
Transaction

1. Bank Credit Cards
Merchant Outlets
Active Card Holders

3,284,444

1.3

33,956,308

$

39

0.1

$29.92
$9.75

2. ACH
Private Payers

10.8

4,402

U. S. Treasury
Paying
Receiving

353,288
0.05

7,418,833

2,800

92,000,000
13

$260

$260
$260

3. Retail Terminal
POS
Authorization/Guarantee
Automated Teller Machine
Automated Telephone
Transfer

718
7,412
2,197

16.6
55.4
104.8

65,975

0.2

497
n.a.*
n.a.

$29.92

n.a.

4. Business
Fed Wire
On-line

Off-line
CHIPS
Bank Wire

138
1.04

379
5,321

235,000,000
1,800,000

$1,700,000
$1,700,000

75

635

1,000,000,000

$1,600,000

194

61

104,000,000

$1,700,000

*n.a. - Not available.
For sources, see Appendix.

14

and manually processed. Corporate financial officers
and bankers alike have been frustrated
by the
difficulty and expense of finding lost payments in
this manual system. Therefore, banks spend more
than a million dollars a year for CHI PS and plan to
pay an estimated
60 cents per message for the
proposed Bank Wire II system.

from bad checks and credit cards. Retailers could
receive funds faster through same-day or next-day
credit for POS transactions. Reduced bank costs for
processing POS payments rather than checks and
credit card vouchers should be reflected in reduced
compensating
balance requirements
and merchant
discounts that would provide an incentive to adopt
the lower cost system.
Many consumers
would not see the same
incentives to adopt POS systems because of the way
cash, checks, and credit cards are priced. Free or
low-priced checki ng services are used to attract
customers because banks cannot pay interest on
checking account balances. In addition, check payments are only deducted from an account when the
check has cleared, providing float to the payer. This
float is valuable to a consumer who can take advantage of any interest-bearing or interest-saving alternative for the duration of the float.
The value of consumer check processing and
float is substantial, costing the banking system about
$7 billion a year for 27.7 billion retail checksJ3 The
average individual with "free checking" would receive
a value of about $50 yearly for 15 checks each month
that had an average amount of $76. This value is
real ized if an account user avoids all account charges
and values float at 5 percent.

Retail Systems: POS- Retail POS systems
currently
process only about $500 per merchant
terminal daily as compared to almost $200 million
daily for the average on-line Fed Wire user and $1
billion daily for the average CHIPS user. Assurance of
timely payment through a POS system is of little
value when a day's interest, at 5 percent, totals only
four-tenths of 1 cent for the average transaction and
7 cents for an average day's payments on a terminal.
A POS user would have to benefit from some other
feature of the system.
Another benefit might be lower resource costs
of producing POS payments, reflected in lower prices
to users. Of course, POS systems may not currently
operate at lower resource costs. Because most POS
systems are new and in large part experimental, it is
difficult to evaluate their costs. Still, the cost per
transaction
on some of these systems has been
notoriously
high, ranging from $1.07 to $3.90 in
those surveyed by the NCEFT. On the other hand,
analysis of cost data submitted to the NCEFT for 20
retail terminal systems suggested that a POS project
would provide a competitive return on investment if
revenues or cost savings of 15 cents per transaction
could be realized. That is, 15 cents per transaction
was an estimate of full operating costs for a POS
system. 72 This finding differs from the actual cost
experience of POS systems in that actual volume has
averaged only about 17 payments per terminal per
day (Table 3), while the analysis assumed daily
volume of 100 payments per terminal. However, even
if producers expected high-volume POS systems to
operate at lower resource costs than other payment
systems, some users still might not have an incentive
to adopt POS.
Retailers might see attractive payment alternatives in POS systems. Automated
systems could
reduce the costs of processing payments and losses

12See Russell D. Morris,
POS Systems,"
NCEFT
(May 1977).
13Cost
two-day

15

"Cost and Revenue Requirements
of
Internal Working Document
No. 43

is based on 25-cents
processing
float on payments
of $2 trillion.

cost

per check

plus

The value of consumer credit card processing
and float is also sign ificant. A few card issuers levy an
annual fee, but in general no per-item charges are
involved. Neither is float priced. Interest begins to
accrue on unpaid balances many days after transactions take place. Credit card processing and float
have a value of about $700 million in the two major
bank card svstems.I " An average bank credit cardholder receives a value of about $21 per card each
year.
Pricing POS services so that consumers would
have some incentive to substitute them for check and
credit card payments has been handled in several
ways in initial POS projects. The convenience of POS
'has been emphasized, and terminals have been installed in supermarkets
where float is a minimal
advantage. POS services have been offered on interest-bearing accounts, distinguishing them from checks
drawn on non interest-bearing
accounts. And a few
deposit institutions
have offered a 1- or 2-percent
discount on the monthly value of purchases paid for
by POS direct debit to customers'
accounts.
In
general, however, it has been difficult to price POS
services to make them visibly cheaper than free
checks and credit card payments.

Adoption of true EFT payment systems reflects
the gains available to users. Business on-line systems
create efficiencies from improved control of the flow
of large-value payments. The Treasury has been able
to realize reduced processing costs by using ACH
payments rather than checks. Adoption has been
slower in retail payments. Gains from ACH and POS
systems can be identified and may be realized by
some users and by producers when high volume is
achieved. But other users may not have adequate
incentive to adopt EFT systems until pricing practices
in the payment industry change and payments that
are cheaper to produce can show a lower price to
users.

GAINS FOR PRODUCERS
Adoption of retail ACH and POS payments has
lagged, and costs have been high. Still, banks, thrift
institutions, and independent producers are investing
in retail EFT services.
Retail EFT services may yield immediate gains
to producers. ACH service or a retail terminal system
may attract users who have no deposit accounts or

Retail Systems: A CH-Gains from ACH payments have been harder to realize for retail users than
for the Treasury. The Treasury can realize the net
sum of gains and losses accruing to the government as
payer, as the paying bank, as check-clearing agency,
and as ACH operator. Private ACH users find these
gains and losses distributed
among the corporation
arranging payments, its bank, the Federal Reserve
Banks, and other banks involved in the check collection process. ACH computer processing and transportation have been provided without charge by the
Federal Reserve. But this component of ACH costs is
too small to assure the economic feasibility of ACH
payments for corporations and banks, in part because
the Federal Reserve also provides check-collection
services without charge.'5
In addition, the distribution of check payment costs among corporations,
their customers, and various banks may be quite
different from the distribution of ACH costs. Some
redistribution
of gains and losses through ACH
pricing may be necessary to promote adoption.16

'-'
14Cost is based on 50-cents processing costs per item plus
30·day float valued at 5 percent. Processing cost estimates are
reported
in
"The
Economics
of
the
Payments
System-1976,"
Division
of
Federal
Reserve
Bank
Operations,
Board of Governors
of the Federal
Reserve
System, 1977.
15Federal
Reserve costs represent about 10 percent of the
total cost of processing a check and of processing a Treasury
ACH payment.

16ACH pricing is currently
being discussed
Automated
Clearing
House
Association.
Quarterly Update (January 1977), pp. 7-8.

16

by the National
See
NACHA

who might shift account relationships.
The possiblity
of capturing
recipients'
accounts
for new Treasury
and commercial
direct-deposit
programs has probably
been an important factor spurring ACH participation.
Some POS system developers
expected
to reap a
larger market share from shoppers attracted
by the
new payment
alternative,
although
experience
frequently
has proved disappointing.
Also, electronic
networks may reduce costs even when they provide
only quasi-EFT services that do not actually connect
retail payers and payees. Automated
teller machines
(ATMs), for example,
can reduce the volume of
"on-us" checks cashed over-the-counter
and written
to cover loan payments,
thereby eliminating
costly
processi ng.
Nevertheless,
high costs and low volume in
present EFT retail systems suggest that investment
decisions are being based on expectations
of profitability
over a longer period.
Entrepreneurs
may
expect much more intensive reliance on EFT systems
in 10 to 20 years. This expectation
can be supported
by the fact that business and Treasury systems already are secure within the payment
mechanism.
Furthermore,
the declining
cost of technology
is
likely to promote additional
EFT development.
An
institution
may decide to develop EFT services now
rather than wait and react to the innovations of competitors. Technical and marketing systems can be "de-

REGULATION
Deposit and asset specialties of banks and thrift
institutions
defined by national chartering and regulatory agencies in the 1930s limited the institutional
"territory"
within which deposit institutions
would
compete.
Banks would issue payment accounts and
thrifts
would not. But thrifts have acquired
NOW
account
powers in New England and offer similar
non-interest-bearing
accounts
in a few other states.
They can offer interest-bearing
electronic
payment
accounts
everywhere.
Commercial
banks can offer
interest-bearing
telephone
payment
accounts,
but
their ability to offer electronic payment accounts is
otherwise restricted by branching regulations that do
not apply to thrifts and by the prohibition
of interest
on demand deposits.

Branching-Electronic
payment instructions
replace customers'
trips to the ban k. An ACH can be a
substitute
for maintaining
a banking
office convenient to people receiving paychecks or government
income payments.
Because POS terminals or ATMs
can substitute
for banking offices, terminals might be
subject to the same regulations as branches.

bugged;" personnel and organizational
development
for an electronic
future
can be initiated;
market
positions
can be molded
by developing
customer
habits
and account
relationships.
This long-run
developmental
view in part explains the variety of
POS strategies for organizing payers and payees and
the growing number of true and quasi-EFT systems
being introduced for retail payments.

The Future Environment for EFT
Market forces have promoted
EFT. Experimental introduction
and competitive
reaction will
continue
to gu ide investments
in EFT systems, but
subject to two important
environmental
influences:
changes in regulation and in technology.

17

In 1974 the Comptroller of the Currency ruled
that branch applications were not required for national banks that establish terminals. But, two years later,
the Supreme Court let stand a lower court ruling that,
in effect, a terminal is a branch. Many states have
legislated that terminals are not branches. But the
Supreme Court in 1969 held that Congress intended
national and state banks to compete on equal terms
with respect to branching, thereby requiring national
banks to follow state bank branching regulation.

check and POS payment features. Thrifts could
compete more effectively with banks' check service if
they cou Id do the same. Payment of interest on
demand
deposits and nationwide
NOW account
authority would promote a common framework within wh ich to offer interest-bearing payment accounts
that might be extended to POS facilities. But if
regulation of interest payments changes, the future
environment for EFT will change. Not only the competitive standing of ban k and thrift deposit accounts,
but also the competitive cost situation of banks and
thrifts would be affected indirectly for both electron ic and paper payment services.
Paying interest on all payment accounts would
promote "unbundling,"
or explicit pricing of payment services that ban ks have offered in lieu of
interest. Explicit pricing of payment services would
concentrate pressures for change on regulations that
affect the cost of producing those services. This
pressure is likely to be extended to the regulatory
framework governing the present operation of the
payments-clearing
mechanism which makes costs of
production for some kinds of payment or for some
kinds of institutions lower than for others.

Unlike commercial banks, federal savings and
loans and credit unions are not subject to such
uncertain
branching
regulations.
Therefore,
the
branch-terminal
distinction
has not been a crucial
constraint on thrifts. If terminals are branches, then
thrift institutions
will be in a better position than
banks to market certain retail EFT services. But if
terminals become clearly distinguished from branches
by regulation or legislation, then both banks and
thrifts might be subject to new regulatory guidelines
on establishment
of terminals. No matter how this
regulatory issue is resolved, it will clearly influence
future organization of the EFT market.
One other thing is clear. Consumer telephone
bill-paying services and corporate cash management
on-line networks effectively provide national, if not
international,
payment service to account holders
who have telephone or computer terminal connections to their deposit institutions.
EFT systems can
operate in a national and international
market,
making regulatory restrictions on branching increasingly irrelevant.
Interest on Checking Accounts-Commercial
ban ks offer checking accounts, but can't pay interest
on them. They pay interest on savings accounts, but
can only offer telephone payment services on them.
Thrifts pay interest on accounts and offer both
telephone and POS transfer service, but can only
offer check-like payment services in New England and
a few other states.
EFT is one source of pressure to alter these
regulatory distinctions.
Banks could compete more
effectively with thrifts' POS service if ban ks could
offer interest-bearing
payment accounts with both

18

Federal Reserve Banks clear an estimated 57
percent of all interbank checks collected annually.
The collecting bank pays no direct charge for this
service, whether it is a member ban k with complete
access to nationwide Federal Reserve check-clearing
service or a non-member
bank with access only to
local clearing service. Federal Reserve Banks do not
charge for ACH processing and delivery, and access is
available to any bank or thrift institution. Fed Wire
service is provided only to member ban ks and at no
charge (except for small transfers).' 7 Thus, the
Federal Reserve provides payment services without
charge to various groups of deposit institutions,
ranging from all deposit institutions in some cases to
member banks only in other cases. Institutions that
complete
payments
in other ways, such as POS
systems, private ACHs, CHIPS, and Bank Wire, must
share costs. These differences among types of payment and institution would prevent potential users of
alternative payment methods from recognizing true
cost differences even if unbundling led to competitive
per-item pricing of payments to users. Both the
Justice Department and the NCEFT have supported
the view that the Federal Reserve should charge for
clearing services and make them available to nonmembers.
Charging for Federal Reserve clearing services
would focus pressures for change on reserve requirements. Banks that are members of the Federal
Reserve System face reserve requirements
that are
more costly than analogous requirements imposed by
other regulators on non-member
ban ks and thrifts.
Member ban k access to free clearing services is an
important, though only partial, offset to the reserve
requirement
cost differential. Charging for clearing
services would increase the cost burden of membership and focus pressures for change on reserve
requirements.
Interest might be paid on reserves,
comparable reserve requ irements might be developed
for non-member deposit institutions, or member bank
reserve requirements
might be lowered after reduction of statutory minimum levels.
Regulatory change promoting interest on payment accounts, unbundling, and equalized access and
cost of Federal Reserve services would have several
effects on E FT. Pricing of checks and EFT services

would allow producers to promote EFT use by price
incentives. Producers themselves would have a basis
for promotion of EFT service if costs of clearing and
settlement were lower for electronic payments than
for checks and credit cards. Banks and thrifts would
move toward comparable positions in providing EFT
services.
Future development of EFT and the organization of markets for deposit and payment services are
inextricably bound up with complex financial regulations. Regulatory changes are likely to affect opportunities
for individual
deposit
institutions
to
introduce EFT services and position themselves in
financial markets.

TECHNOLOGY
The most recent ABA automation
survey
(1975) found that 90 percent of banks were computerized to some degree, including 85 percent of
banks smaller than $100 million in deposits.'8
Automated customer services were being offered or

17Technically,
access is granted to member banks and Edge
Act subsidiaries and to the Treasury, foreign central banks,
and international
institutions
for which the Federal Reserve
is fiscal agent.
lS"Changing
1975): 32.

19

Face of Automation,"

Banking 67 (September

tion in their computer systems.
In its current state EFT differs substantially
from the single nationwide network of computers and
terminals envisioned a decade ago. Existing EFT and
quasi-EFT
systems
provide
a menu of different
services that banks might produce. Banks may make
investment
decisions
that treat each service as an
independent
addition
to their product
lines. This
piecemeal approach to EFT investment may be best,
especially for short-lived investments
and for banks
that must rely on outside vendors to acquire expertise.
But it may create
problems.
Customer
activities
on separate
systems
may be costly to
consolidate.
Hardware,
software,
and marketing
efforts may overlap. A bank may become technologically locked in to service designs made obsolete by
regulatory or competitive
changes.

planned
by 98 percent of large banks (over $500
million in deposits),
83 percent
of medium-sized
banks
($100-$500
million
in deposits),
and 34
percent
of small banks. However,
most of these
automated
services
were not EFT systems,
but
primarily payroll processing
and correspondent
services.
Most commercial
banks have not yet built EFT
services on their existing automation
foundation,
although
electronic
payment
systems have gained
acceptance
since 1975.19 Growth of EFT banking
services, therefore, will result from the investments of
many individual banks in computer and telecommunication technology.
Decisions
to invest will be influenced by the cost of that technology,
access to it,
and the technological
strategies employed.
Computer
costs in general are expected
to
decline into the 1980s. In a world of inflation,
computers
stand out because their undeflated
prices,
averaged over a wide array of services, have been
declining for years. Some estimates suggest that this
decline in costs has been proceeding at a rate close to
30 percent
a year.20
This trend is expected
to
continue
into the next decade even without
any
fundamental
breakthroughs
that would solve presently foreseen limitations
on computer
technology.
EFT costs may not parallel these declining prices
because they emphasize
telecommunications,
where
tariffs will play an important
role in operating costs.
However, the real cost of acquiring EFT capability
directly and from system vendors will surely continue
to decline in coming years.

19For example,
two-thirds
of the retail terminal projects
covered in the 1976 NCEFT survey began operating in either
1975 or 1976, including 90 of the 172 ATM projects and 88
of the 95 non-A TM projects.

Access to EFT technology is within reach of all
banks. ACH receiving
banks need not have any
technological
sophistication
because items can be
received in paper form. ACH originating banks must
be able to prepare magnetic tapes, but service bureaus
and correspondent
banks will provide this service. In
addition,
direct
wire communication
may soon
eliminate any requirement
for magnetic tape receiving
or originating
capability.
The technology
for corporate cash management
is available from vendors who
now provide packages that banks may use to enter
the market. Hardware, software, and marketing programs for operating retail terminal systems are available, and some existing networks
market participa-

20See
York:

20

Rein
Columbia

Turn,
Computers
in
University Press, 1974).

the

80's

(New

Investments in EFT systems will continue as these
parameters are redefined and producers find profitable innovations
that provide cheaper and more
convenient payment services to payers and payees.

An alternative approach would require looking
at EFT as an integrated technological foundation of
computer,
communication,
and other capabilities,
plus specific enhancements to provide a flexible line
of services. These services would not be restricted to
EFT because application
of computer
and telecommunication
technology is a process common to
all aspects of banking organizations.
The major
difference between this and a piecemeal approach to
EFT is that it requires integrated long-range planning
involving the whole bank. But this may be the best
way for any institution to pursue long-run profitability in the midst of technological and institutional
turmoil.
The costs of EFT are declining and access to
the technology is open. The approach banks take to
investment in that technology will playa significant
role in determining future EFT services. Banks may
invest in computer and telecommunication
systems
embodied in currently available EFT designs, replicating present services over a growing number of local
markets. Or banks may invest in systems that have
flexibility for experimentation
with new EFT designs,
expanding the range of future services.

Concluding Observations
EFT has become more than an experimental
application of computer and telecommunication
technology in the payment system. In some sectors of the
economy it is an essential way of conducting business, while in other sectors it is one among many
ongoing changes in the financial structure that does
not yet have a predictable outcome.
EFT also involves much broader questions than
those of organization and pricing of viable payment
systems. Replacement
of paper documents
with
electronic impulses is prompting redefinition of such
parameters of economic life as documentation
of
transactions, security of funds from fraud and theft,
and privacy of records. These are not just issues of
EFT, bu t issues of a modern computerized
society.

21

terminal volume are for POS systems that do not
include
a check authorization/guarantee
service
because separate item counts are not provided for
payment and authorization/guarantee
in combined
systems.
Value is imputed using the per-item value of
bank card payments.
5. Wire Systems: Volume
and value of
transfers on Fed Wire, Bank Wire, and CHIPS were
obtained from the respective organizations. On-line
Fed Wire volume is a Federal Reserve staff estimate,
valued at the average per transfer value of all Fed
Wire payments.

APPENDIX

Number and Value of Payments
1. Checks: The NCEFT estimated that about
28 billion private checks were written in 1976, based
on a recent FD IC study. These are allocated between
retail and business payments using the A. D. Little
finding (based on a 1966 Bank Administration
Institute small survey) that 1 percent of checks
written are for amounts in excess of $10,000. These
large-value checks are reported as business payments
and the other 99 percent are reported as retail
payments. U. S. Treasury checks collected by the
Federal Reserve Banks numbered
768 million in
1976.
Value of check payments
is imputed
by
valuing total non-Treasury
checks at the $376.05
per-check amount of checks cleared through the
Federal Reserve in 1976. Large-value checks account
for 80 percent of the value of check payments,
according to the same Little report. U. S. Treasury
check value is the value of Treasury checks collected
by the Federal Reserve in 1976.
2. Credit Cards: The NCEFT estimated
5
billion credit card payments in 1976. Visa and Master
Charge volume, reported in the ABA Bank Card
Letter,
was deducted
from the total to derive
non-bank card value.
Value of credit card payments was reported to
be $71 billion by the NCEFT. Bank card value,
reported in the same ABA source, was deducted to
determine non-bank card volume.
3. ACH: Volume
of U. S. Treasury
and
commercial ACH payments is reported in the NACHA
Update.
Value of ACH payments is based on a surveyor
average per-item value of Treasury ACH payments,
excluding revenue sharing, at the Federal Reserve
Banks of Boston, Cleveland and Atlanta. Commercial
items are valued at the same per-item amount.
4. POS: Volume of POS payments
is an
annualized number of transactions per terminal times
the number of terminals in use, reported in the
NCEFT survey conducted
by Peat, Marwick and
Mitchell in 1976. Both number of terminals and per

22

Comparative Statement of Condition
ASSETS

Dec. 30 1977

Gold Certificate Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special Drawing Rights Certificates
.
Federal Reserve Notes of Other Banks ......••................
COin ................................•.................
Loans to Member Banks
Federal Agency Obligations - Bought Outright
U.S. Government Securities:
Bills
Notes
_. _
Bonds
Total U.S. Government

Securities

Tetal Loans and Securities

$

933,870,100
107,000,000
- 039,702,072

Dec. 31,1976

$

939,388,200
103,000,000
63,793,713
46,208,019

.
.

1,550,000
669,970,000

-0 560,153,000

.
.
.

3,478,894,000
4,227,966,000
740,668,000

3,180,233,000
3,955,325,000
554,496,000

8.447 .528.000

7,690,054,000

9,119,048,000

8,250,207,000

.............•.....

...............••........

Cash Items in Process of Collection
Bank Premises
Other Assets ....................................•.......
Interdistrict Settlement Account

.
.

460,882,397
22,825,499
140,423,451
(41,750,722)

.

604,290,443
24,054,463
130,151,006
215,460,395

$ 10,782,000,797

$ 10,376,553,239

$

Total Assets ..........................•..........

$

LIABILITIES
Federal Reserve Notes
Deposits:
Member Bank - Reserve Accounts
...................••..
Due To Other FR Banks - Collected Funds ..........•.....
U.S. Treasurer - General Account ......................•.
Foreign
Other Deposits
Total Deposits
Deferred Availability
Other Liabilities

7,382,250,855

1,649,739,882
-0 450,724,792
23,710,200
43822984

1,327,438,555
26,468,675
788,564,949
20,505,900
40758742

2,167,997,858

.
.

..............•.•.............•...

2,203,736,821

.
.

Total Liabilities

361,023,439
92199543

.

Cash Items

CAPITAL

7,986,742,657

$ 10,607,963,497

549,153,562
72983 501

$ 10,208,124.739

ACCOUNTS

Capital Paid In
Surplus

_

.
.

Total Liabilities and Capital Accounts

.

23

87,018,650
87,018,650

$ 10,782,000,797

84,214,250
84,214,250

$ 10,376,553,239

Comparison of Earnings and Expenses
1977

$ 523,648,517
39,189,411
484,459,106

1,026,394

335,816

1,026,394

335,816

4,185,456
12,589,053
48584

(2,662,918)
2,181,447
44675

16,823,093

(436,796)

15,796,699
·0·

.

1976

$ 564,269,128
40.378,337
523,890,791

Total Current Earnings ...............•...............•....
Net Expenses

·0·

Current Net Earnings ....................•............
Additions to Current Net Earnings:
All Other ............................•..........•..
Total Additions

................................•

Deductions from Current Net Earnings:
Loss on Sales of U.S. Government Securities (Net)
Loss on Foreign Exchange Transactions (Net)
All Other

.
.
.

Total Deductions ........•.............•.•.......
NET DEDUCTIONS ..............••••....................
NET ADDITIONS
..........................•.....•.•....

772,612

Assessment for Expenses of Board of Governors

.

4,057,700

3,623,500

Net Earnings before Payments to U.S. Treasury

.

$ 504,036,392

$ 481,608,218

Dividends Paid .......................................•.•
Payments to U.S. Treasury (Interest on F .R. Notes)
Transferred to Surplus " .................................•

.

$

$

Total

$ 504,036,392
Disposition

1977

1977

1976

90.5%

~

90.2%

Operating

0.5

Surplus

$ 481,608,218

1976

.
To U. S, Treasury

4,953,406
473,075,662
3,579,150

of Gross Earnings

1977

To Board of Governors

5,142,729
496,089,263
2,804,400

0.7

Dividends

0.7

0.7

24

Expenses

1976

7.4

7.5

0.9

0.9

As of April 7, 7978

Federal Reserve Bank of Cleveland
DIRECTORS-1978
Chairman

ROBERT

E. KIRBY, Chairman and Chief Executive
Westinghouse
Electric Corporation
Pittsburgh,
Pennsylvania

Officer

Deputy Chairman

OTIS A. SINGLETARY,
President
University of Kentucky
Lexington,
Kentucky
JOHN W. Alford, President
The Park National Bank
Newark, Ohio

CHARLES Y. LAZARUS, Chairman
The F. & R. Lazarus Co.
Columbus, Ohio

JOHN J. DWYER, President
Oglebay Norton Company
Cleveland, Ohio

RICHARD P. RAISH, President
The First National Bank
Bellevue, Ohio

JOHN A. GELBACH, Chairman
and Chief Executive Officer
Central National Ban k
Cleveland, Ohio

HAYS T. WATKINS,
and President
Chessie System
Cleveland, Ohio

Chairman

ARNOLD R. WEBER, Provost
Carnegie-Mellon
University
Pittsburgh,
Pennsylvania
M. BROCK

WEIR, President and Chief Executive
The Cleveland Trust Company
Cleveland, Ohio
Member, Federal Advisory Council

25

Officer

As of April

7, 7978

Federal Reserve Bank of Cleveland
OFFICERS-1978
WALTER

WILLIS J. WINN, President
H. MacDONALD,
First Vice President

JOHN M. DAVIS, [r., Senior Vice President and Economist
ROBERT D. DUGGAN, Senior Vice President
WI LLiAM H. HENDRICKS,
Senior Vice President
ROBERT E. SHOWALTER,
Senior Vice President
DONALD G. BENJAMIN, Vice President
JOHN E. BIRKY, Vice President
GEORGE E. BOOTH, Jr., Vice President
PAUL BREIDENBACH,
Vice President and General Counsel
R. JOSEPH GINNANE, Vice President
HARRY W. HUNING, Vice President
R. THOMAS KING, Vice President
ELFER B. MILLER, General Auditor
THOMAS E. ORMISTON,
Jr., Vice President
LESTER M. SELBY, Vice President and Secretary
HAROLD J. SWART, Vice President
PONALD G. VINCEL, Vice President
OSCAR H. BEACH, Jr., Assistant Vice President
MARGRET A. BEEKEL, Assistant Vice President
THOMAS J. CALLAHAN,
Assistant Vice President and Assistant
GEORGE E. COE, Assistant Vice President
PATRICK V. COST, Assistant General Auditor
ROBERT G. COURY, Assistant General Counsel
JOHN J. ERCEG, Assistant Vice President and Economist
ROBERT J. GORIUS, Assistant Vice President
NORMAN K. HAGEN, Assistant Vice President
JAMES W. KNAUF, Assistant Vice President
BU RTON G. SH UT ACK, Assistant Vice President
ROBERT D. SYMONDS, Assistant Vice President
ROBERT VAN VALKENBURG,
Assistant Vice President
ROBERT F. WARE, Assistant Vice President and Economist
CHARLES F. WILLIAMS, Assistant Vice President

26

Secretary

As of April 7, 7978

Cincinnati Branch
DI RECTORS-1978
Chairman

LAWRENCE H. ROGERS, II
President and Chief Executive Officer
Omega Communications,
Inc.,
Cincinnati, Ohio
MARTIN B. FRIEDMAN,
Formica Corporation
Cincinnati, Ohio

J. L. JACKSON, President
Falcon Coal Company,
Lexington,
Kentucky

President

ROBERT
and
Winters
and
Dayton,

LAWRENCE C. HAWKINS
Senior Vice President
University of Cincinnati
Cincinnati, Ohio
WALTER W. HI LLENMEYER,
[r., President
First Security National Bank
and Trust Company
Lexington; Kentucky

A. KERR, Chairman
Chief Executive Officer
National Bank
Trust Company
Ohio

WILLIAM N. LIGGETT
Chairman of the Board
and Chief Executive Officer
First National Bank of Cincinnati
Cincinnati, Ohio

OFFICERS-1978
ROBERT E. SHOWALTER,
Senior Vice President
CHARLES A. CERINO, Vice President
ROSCOE E. HARRISON,
Assistant Vice President
DAYI D F. WEISBROD, Assistant Vice President
JERRY S. WILSON, Assistant Vice President

27

Inc.

As of April

"

1978

Pittsburgh Branch
DIRECTORS-1978
Chairman

Consolidated

G. J. TANKERSLEY,
Natural Gas Company,

President
Pittsburgh,

Pennsylvania

WILLIAM E. BIERER
President
Equibank, N. A.
Pittsburgh,
Pennsylvania

LLOYD M. McBRI DE
President
United Steelworkers
of America
Pittsburgh,
Pennsylvania

R. BURT GOOKIN, Vice Chairman
and Chief Executive Officer
H. J. Heinz Company
Pittsburgh,
Pennsylvania

WILLIAM E. MIDKIFF,
III
Chairman of the Board
First Steuben Bancorp, Inc.
Toronto, Ohio

WILLIAM H. KNOELL
President
Cyclops Corporation
Pittsburgh,
Pennsylvania

PETER MORTENSEN,
F. N. B. Corporation
Sharon, Pennsylvania

OFFICERS-1978
ROBERT D. DUGGAN, Senior Vice President
WILLIAM R. TAGGART,
Vice President
PAUL E. ANDERSON,
Assistant Vice President
JOSEPH P. DONNELLY,
Assistant Vice President
CHARLES A. POWELL, Assistant Vice President

28

President

As of April

"

1978

Pittsburgh Branch
DIRECTORS-1978
Chairman

Consolidated

G. J. TANKERSLEY,
Natural Gas Company,

President
Pittsburgh,

Pennsylvania

WILLIAM E. BIERER
President
Equibank,
N. A.
Pittsbu rgh, Pen nsy Ivan ia

LLOYD M. McBRIDE
President
United Steelworkers
of America
Pittsburgh,
Pennsylvania

R. BURT GOOKIN, Vice Chairman
and Chief Executive Officer
H. J. Heinz Company
Pittsburgh,
Pen nsy Ivan ia

WILLIAM E. MIDKIFF,
III
Chairman of the Board
First Steuben Bancorp, Inc.
Toronto, Ohio

WILLIAM H. KNOELL
President
Cyclops Corporation
Pittsburgh,
Pennsylvania

PETER MORTENSEN,
F. N. B. Corporation
Sharon, Pennsylvania

OFFICERS-1978
ROBERT D. DUGGAN, Senior Vice President
WI LLiAM R. TAGGART,
Vice President
PAUL E. ANDERSON,
Assistant Vice President
JOSEPH P. DONNELLY,
Assistant Vice President
CHARLES A. POWELL, Assistant Vice President

28

President