View original document

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


Feditorial: Reports of the Death of Banks are
W. LeGrande Rives
A century ago this month, Missourian Mark Twain responded to rumors of his death and impoverishment by
quipping, "The report of my death was an exaggeration." Just as Twain was alive and well in 1897 when he
made this now-famous remark, banks, too, are alive and well in 1997. Over the past five years, banks have
been extremely successful when measured by profitability and return to shareholders. But given the headlines
and publicity surrounding the Internet, electronic transactions, changes in the payments system and the
delivery of financial services, one might not think this is the case.
According to some reports, technology firms and use of the Internet will soon dominate the payments industry.
A famous technology company CEO even went so far as to call banks "dinosaurs" and suggested that their
days as viable players in the payments and financial services industry were numbered. I disagree. While I
recognize that technological and institutional change is occurring at a rapid pace in the banking industry, I
don't believe the fundamentals of banking services, such as deposit taking, lending, personal investment and
trust, will change in the near future.
What will change are the access and delivery channels for banking services, through the increased use of
electronic networks, personal computers, stored-value cards and other forms of electronic money. Headlines
about "exchanging" electronic money on stored-value cards or "downloading" electronic money to computer
disks are prevalent in today's financial publications, but the reality is that these are not new forms of money.
Rather, they are new ways to exchange ownership of credit money. If you follow these new electronic
transactions from beginning to end, it becomes clear that depository institutions are still required to convert
electronic "credit money" to "base money," or currency.
My forecast is that, over the next 10 years, payment alternatives will indeed proliferate, but bank customers
will also continue to use traditional payment forms like checks. What will emerge is a more diverse payments
environment with more high-tech choices for customer payment streams, perhaps creating an increase in
total transaction volume. As more individuals demand electronic access to their deposit accounts, depository
institutions must be ready and willing to aggressively compete for these customers. The challenge for bankers
will be to profitably integrate electronic and paper-based payments streams-not replace one with the other.
To meet this challenge, depository institutions must stay in touch with their customers' needs and be willing to
offer new electronic services and delivery channels. If they don't, their customer base—perhaps their most
profitable customers—will begin to erode. However, if banks are able to offer the benefits of a more electronic
payments system, along with those of the more traditional legacy payments and banking services, then
reports of their demise, like Twain's, are indeed exaggerated.


Accounting for the Growth of Credit Card Debt
Peter S. Yoo
Much has been made recently about the growth and size of the credit card debt of American households.
Consumer revolving credit outstanding, which includes credit card debt, totaled more than $480 billion in
March of this year, growing at a 13 percent annual rate since the end of the last recession. Unfortunately,
such aggregate data combine the behavior and circumstances of many households into a single statistic that
is hard to interpret because they do not reveal which households, lower- or upper-income, contributed more to
the growth of credit card debt. They also do not indicate which factor—the increasing number of households
with credit cards or rising average balances per household—played a larger role in expanding the size of
credit card debt. Without such information, inferences about the continued growth of credit card debt and its
burden on households are hard to make.
The Surveys of Consumer Finances are a source of data collected from individual households that spans the
period between 1983 and 1992—10 years that correspond roughly to the last complete business cycle.
During that decade, consumer revolving credit outstanding grew at an average annual rate of 14 percent,
which is faster than the current rate. The data from the surveys suggest, however, a more sanguine picture
about the growth of credit card debt during the last business cycle, and perhaps for the current period as well.
The individual household data indicate that total credit card debt grew 243 percent between 1983 and 1992.
The same data show that the number of households with credit cards increased only 25 percent during that
time period, while the number of households grew 14 percent, suggesting a very small increase in the
proportion of households with credit cards. In fact, the fraction of households with credit cards increased just 6
percentage points to 72 percent between 1983 and 1992. These figures indicate that only 9 percent to 26
percent of the growth of credit card debt was attributable to the increase in the number of households with
credit cards. Because households with credit card experience are presumably more aware of the potential
pitfalls of credit card ownership, the growth of credit card debt should therefore have been less troublesome.
Moreover, the household data indicate that the growth of credit card debt between 1983 and 1992 was due in
large part to the households in the upper half of the income distribution. According to the data, upper-income
households were more likely to have credit cards; in 1992, nearly 90 percent of households in the top half of
the income distribution had credit cards, compared with 54 percent in the lower half. The upper-income
households also held larger balances; the top half of the income distribution held nearly 74 percent of all
credit card balances, with the top 10 percent of households accounting for 17 percent of all credit card debt.
The increase in the number of upper-income households holding credit cards, coupled with the increase in the
average balances of upper-income households, accounted for 72 percent of the rise in credit card debt
between 1983 and 1992. Again, presuming that upper-income households have the wherewithal to finance
their credit card debt, the household data would appear to present a less pessimistic view of the growth of
credit card debt.

Although it is clear that credit card debt has grown considerably during the current expansion, aggregate
statistics do not provide enough information about why it has grown. Without such knowledge, it is difficult to
assess if the debt will excessively burden individual households or if these households may actually know
what they are doing.


Feds Form Electronic Partnership
The St. Louis, Kansas City and Chicago Federal Reserve Banks have formed an alliance with the MidAmerica Payment Exchange to increase the awareness and use of electronic payments among financial
institutions, corporations, nonprofit organizations and consumers.
Known as the Automated Payments Partnership, the alliance is a multiyear effort that will make use of various
communication channels to promote electronic payments across Arkansas, southern Illinois, Indiana,
southwestern Iowa, Kansas, Kentucky, Missouri, Nebraska and Oklahoma.
The partnership has three main goals:
to convince at least 100 companies and 50 nonprofit organizations to begin offering electronic
to persuade 200 companies that already offer direct deposit to market it to their employees and
customers; and
to encourage 40 utility companies to establish joint marketing campaigns for automatic consumer bill
For information on becoming a partner in the campaign, contact Cheryl McCarthy of the St. Louis Fed at (314)


Electronic Directions: EDI
A CB series covering electronic payment forms and the Fed's efforts to promote them over paper-based
Thanks to two major government initiatives that are currently under way, the term EDI—which stands for
electronic data interchange—is no longer an acronym that bankers can afford to ignore.
Because of the timing, the most pressing of the two initiatives is the Social Security Administration's move to
include remittance information in its electronic payments to organizations and individuals who receive the
payments on behalf of beneficiaries. Implemented this June, the change in payment method applies to all
recipients who are newly eligible for Social Security benefits—those who receive payments on the second,
third or fourth Wednesday of each month.
This means that, for example, a nursing home that has been used to handling Social Security payments for its
patients will now have to divide up a lump sum electronic payment according to the addenda information
attached to it. If the nursing home's financial institution is unable to translate this information into readable
characters, the home will have no idea how much to credit each resident's account.
Although the amounts received by beneficiaries are generally stable and well known, they will vary when the
government's cost-of-living adjustments go through at the first of each year, making it essential for a nursing
home, hospital or similar facility to have a financial institution that's EDI-capable.
The second major government initiative that is bringing EDI to the forefront is EFT 99—the government's plan
for converting nearly all of the 40 million paper payments it issues annually to electronic form by Jan. 1, 1999.
The plan also calls for payment and remittance information to accompany vendor payments. This information,
which is included in addenda records, will be indispensable to vendors since they'll need to determine which
invoice the payment is for or if the payment is intended to cover more than one invoice.
The upshot of both of these initiatives for bankers is simple: A financial institution that is not EDI (FEDI)capable stands a good chance of losing business to one that is. With that in mind, the Federal Reserve Bank
of St. Louis this fall will continue a campaign explaining to Eighth District bankers the business opportunities
brought by EFT 99—one of the biggest of which is EDI.
To become EDI-capable, contact your software vendor.

Key EDI Terms
EDI: Stands for electronic data interchange, which refers to the electronic exchange of business
information between or within firms using standard, machine-processable structured data formats.

FEDI: Stands for financial electronic data interchange, which is a subset of EDI that combines the
actual payment for goods or services with the conveyance of remittance data, such as invoice
numbers, payment terms, etc.
EFT: Stands for electronic funds transfer, which occurs among companies, consumers and
VAN: Stands for value-added network, which facilitates the exchange of payment information between
firms that use different communication protocols, transmission speeds and hardware.
VAB: Stands for value-added bank, which provides EDI and FEDI services including payment posting
and translation of addenda records.
ANSI X12 Standard: A technology standard for electronic data interchange. Named after the
committee that developed it, the ANSI standard has since been adopted by several industry groups.

CENTRAL BANKER | SUMMER 1997$50-bill-to-roll-out-soon

New $50 Bill to Roll Out Soon
In an effort to further reduce counterfeiting and make U.S. currency easier to recognize, the Treasury
Department will issue a redesigned $50 note this fall. The new $50 is the second in the U.S. currency series
to include enhanced security features; the redesigned $100 note was issued last year. As with the $100 note,
$50 notes from the old series will continue to be honored at full face value while the new notes are being
phased in Reserve Banks will retire the old notes as they are returned through the banking system.

Features of the new bill include:
a larger, off-center portrait of Ulysses S. Grant; a watermark to the right of the portrait;
color-shifting ink on the number that appears in the lower right-hand corner on the front of the bill;
fine concentric lines printed behind both the portrait and the building; and
an oversized "50" printed on the lower right-hand corner on the back of the note to accommodate
people with low vision.

Features that have not changed include:
size of the bill;
ink colors; and


Regional Roundup
Automated Adjustments System Implemented
Since April, the St. Louis Fed has been using an automated system to research and monitor all customer
adjustments requests. The new system offers a variety of features to improve efficiency and enhance
customer service.
In addition, the automated system includes an interface to Fedline, enabling all Fedline requests to be
handled same-day. The Fedline connection also provides other check reporting options, including mixed cash
letter availability and autocharge reports.

Fedline Advices Altered
On May 23, all Eighth District customers began receiving telephone and paper advices of Fedwire funds
transfers credited to their accounts in a slightly different format. The new, more comprehensive, format offers
increased opportunities for automation of funds transfers; eliminates the potential for truncation when
payment orders are received from other large-dollar payment networks; and permits the inclusion of more
complete information. The origination of funds transfer messages in the expanded format is scheduled for
implementation in the second half of 1997.

New Contingency Service Available
The St. Louis Fed is now offering a service that enables area financial institutions to provide their customers
with uninterrupted payments processing in the event of a disaster. Through this new contingency service,
institutions are able to receive MICR transmissions of their customers' check data and image files of the
actual checks at a predetermined back-up site.
To activate the service, institutions must pay a one-time set-up fee of $500 and a monthly maintenance fee of
$25. In return, they receive an initial test of the connection and systems to ensure workability, as well as
biannual check-up tests. If a disaster were to occur, institutions could receive MICR line transmissions, check
images or both. If these processing services are ever provided, the normal fees will be charged.

Accounting Contact Changes
Accounting contacts have changed for Federal Reserve account holders in the Little Rock, Louisville and
Memphis zones. To ensure that we continue to maintain a high level of customer support in an interstate
branching/automation consolidation environment, all Eighth District institutions will now be assisted by St.
Louis staff.
Questions on payments system risk policies, overnight overdrafts, reserve and clearing requirements, account
management and balance monitoring should be directed to the Payments Risk Management staff in St. Louis.

Questions on accounting and billing statements, mergers, account reconciliation, signature cards and Fedline
should be directed to the Customer Accounts and Access Support staff in St. Louis. All Little Rock, Louisville
and Memphis account holders should have received a detailed list of accounting contacts and their telephone
numbers earlier this year. If you did not receive the list, or if you have questions, call Hillary Debenport at
(314) 444-8488 or your current Fed Accounting Department.

Little Rock Branch Names New Officer
The St. Louis Fed has announced the appointment of Andrea Eddy to officer in its Little Rock Branch. In her
new position, Eddy is responsible for the Branch's Check/Data Processing Department, as well as
Accounting/Personnel and Community Affairs. Eddy will also accompany account executive Danny Wilson on
visits to Little Rock-area bankers. Eddy has been with the Federal Reserve System since 1990.


Community Affairs Revamps, Renames Newsletter
The St. Louis Fed's Community Affairs Department has expanded and redesigned its quarterly newsletter.
Bridges is now twice the size of its predecessor, which was called Community Affairs, and features color
photographs. Bridges is intended to encourage greater participation and cooperation in public/private
partnerships that support community development lending. The publication contains news of interest,
regulatory changes that affect community development activities, and a calendar detailing upcoming
community affairs conferences and events. To receive Bridges, call Diana Judge at (314) 444-8761.

New Publication Lists Applications, Notices
The Federal Reserve Board of Governors has launched a publication, called H.2A, that provides a weekly
listing of applications and notices that have been filed under the Bank Holding Company Act or the Change in
Bank Control Act. The publication is available in three forms:
by fax-on-demand by calling (202) 452-3655;
on the Board's web site, which is at;
by mail, which can be set up by either calling (202) 452-3245 or writing to: Publications Services, MS127, Federal Reserve Board, Washington, D.C., 20551.

New Annual Report Online
The St. Louis Fed's 1996 Annual Report is now available on the Internet. The report discusses social security
systems throughout the world, as well as the adjustments needed to keep these systems solvent into the next
century. Pension systems in the following countries are also compared and contrasted: Canada, France,
Germany, Italy, Japan, the United Kingdom and the United States. The report can be found at