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Autumn 1996 News and Views for Eighth District Bankers Getting Ready for the Year 2000 Fed, NACHA Approach Comeanies on Direct Deposit https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A s part of its joint campaign with the National Automated Clearing I-louse Association to increase the electronic initiation of payments, the Federal Reserve System is approaching co1vorations nationwide to educate them about the benefits of direct deposit. Later this month, the Fed and NACHA will send out roughly 15,000 informational brochures about direct deposit to the human resources directors or controllers at companies with 200 to 500 employees. The brochure explains the benefits the century changes is that their operating systems and programs are set up for sixdigit date fields, with two of the digil'i allocated for the year. If a bank employee enters the year as 00 for 2000, most computers will read it as 1900, causing obvious problems in date-sensitive calculations. \\'hat should financial institutions be doing? The Board of Governors advises the following: 1) Perform a risk ,:L'isessment to determine which systems and applications must be modified, how long it wi ll take to do so and how much it will cost: 2) Investigate the computer S\'Stems of service bureaus and vendors to see if the\' are addressing the issue and how to compensate for them if they're not: 3) Complete all reprogramming efforts in time for adequate testing-Dec ..1l, 1998 at the latest. Infom1ation systems exrn11iners will be looking at each financial institution's awareness of the year 2000 issue during the regularly scheduled examination process. direct deposit can bring businesses and how they can go about increasing usage at their own organizations. Corn pan ies also wi 11 receive a second brochure titled, "A Consumer's Guide to Direct Deposit." which they can reproduce and distribute to their customers. In addition to the direct company mailing, the Fed and NACHA will also send 13,000 of the corporation-oriented brochures to the American Payroll Association, which will insert copies of it into its members' magazine. The point of both mailings is to increase the use of direct deposit for payroll and to encourage its use for other types of recurring payments, such ,L'i tuition reimbursement and expense settlements. .. Our goal is to see companies begin to approach their financial institutions for help with direct deposit ser\'ices ... says Kathleen Paese, AC! I officer at the St. Louis Fed. Feditorial ~ The Electronic Challenge lectronic payments are hot news today and gaining more coverage as consumers become increasingly comfortable with the technology that s pawns them. Despite the well\ publicized benefits of e lecHank Bourg aux tronic payments, howev e r, we're not anywhere close to being the checkles s society experts predicted 20 years ago. So what's holding us back? I believe one of the bigges t challenges financial institutions face is the uncertainty that emerging payment methods present. By investing in innovative technology, such as virtual banking and electronic cash, bankers must take a chance that a particular payment syste m will become widely accepted. If a financial institution pre fe rs a surer route, however, it could s tart expanding its existing ACH systems and electronic payme nts portfolios to include more advanced applications, such as electronic data interchange. The time is also ripe for financial ins titutions to encourage customers to make or receive pay m ents using basic ACH se rvices. Banks Get Creative with Check Imaging https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis E I t's been just over eight months since the St. Louis Fed began offering its check imaging service, and the number of uses for image continue to multiply. The service was originally envisioned as a way for financial institutions to reduce backroom expenses such as paper handling and postage costs, item retrievals and storage. Now, some institutions are discovering additional benefits-those that even Fed employees hadn 't thought of. "Some of our best ideas come from customers," says Rick Revenue is another concern. Financial institutions have made significant investments in their curre nt pape r-based payment processing syste m s, and purchasing new technology is expens ive . Although revenues from paper-based products aren't eas ily replaced with income from e lectronic services, institutions can achieve cost s avings by building electronic payment volumes. While there are risks in the electronic payments arena, there are also many incentives and opportunities. As a banker, you have the ability to provide payments expertise, offer products individually or through alliances with others and supply the s e ttle m e nt services that nonbank e ntities lack. The se advantages put you a step ahead of your nonbank competitors in offering customers new ele ctronic products and services . And as electronic p ayment mechanisms become as accepted as ATMs in the n ext 10 years, you will be in a prime pos ition to take advantage of these opportunitie s. flank Bo111gau.r is senior t•ice /)residen t <!/!he Fedeml Resen·e Bank <!/SI. Louis. Johns, a St. Louis Fed account executive. "They'll say, ·can you do this for me?' and we'll say 'Not yet, but give us a little while.· " One use that h~L'i blossomed considerably is image-enhanced co,vorate cash management, which enables banks and credit unions to provide their customers with online histories of their check transactions in CD-Rm! format. Some institutions are using the service :L'i a source of fee revenue by obtaining it from the Fed and then upcharging it. Others are beginning to use image to store their official checks. And at least one credit union h;L'i decided to have all of its customers· items imaged so that it has an e:L'i)' and efficient long-term storage method. Johns says that because the image service is flexib le by nature, it can help banks and credit unions streamline operations in many ways. For a demonstration of the Fed ·s check imaging service, contact your account executive. Should Nonbank E·Cash Providers Be Treated Like Banks? T I{ Alton G'ilber/ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis he recently completed Olympic games in Atlanta not only showcased great athletic competition, they also unveiled a new means of making payment through the use of what is commonly called electronic cash. Although it has yet to be determined whether Atlanta's experiment with \'isa's version of a stored value or "smart" card was a success, we do know that some larger issues must be examined before the countt)' makes a full-scale shift toe-cash. Among the most salient is what to do about the nonbank firms that have begun offering electronic payment se1vices directly to the public. Should these new entrants to the payments business be required to get bank charters, and be supe1vised and regulated as banks by government agencies? ~1y answer to this question is based on the impact these new entrants could have on the safeW and soundness of the payments system. One view is that market forces will ensure a stable payments system by limiting the risk assumed by nonbank providers. Therefore, according to this view, no government supe1vision or regulation of these nonbank payment se1vice providers would be necessary to ensure the safety and soundness of the payments system. I disagree. My views are based on U.S. banking history. Prior to the formation of the Federal Rese1ve in 1914 and the creation of federal deposit insurance in the 1930s, the U.S. payments system was vulnerable to major disruptions whenever depositors lost confidence in the soundness of their ban ks. For example, between the Civil War and the formation of the Federal Reserve System, major banking panics occurred in the United States in 1873, 1893 and 1907. During these panics, banks suspended payment of currency to their depositors, which created major disruptions in economic activity. Market discipline clearly did not ensure a safe payments system in these cases. In contrast, consider the performance of the payments system in the United States since the 1930s: No major disruptions have occurred. Extension of govern1nent supervision and regulation to e-C,l)h providers is a logical step. Almost all nations have government safeguards-central banks and agencies that supervise and regulate all payment service providers-in place to prevent such disruptions. Even the non bank providers of small denomination payment instruments, such as travelers checks and money orders, are supervised and regulated-by state governments. Governments have established these institutions to deal with the vulnerability of their economies to disruption in their payments systems. Thus, extension of government supe,vision and regulation to all providers of electronic money is a logical step in the progression of banking history. Is it, therefore, necessary to subject all providers of payment services to government supervision and regulation at this time? Probably not. Currently, there is a significant amount of research and development in the payments systern, and the dollar amounts of payments settled through electronic cash are small. The government should limit any actions that would discourage this research and development. If electronic money does sueceed, however, I expect the firms in thee-cash business to be supe1vised and regulated as banks-a point that may be reached either through deliberate planning, or through some future crisis brought on by the inclusion of new entrants to the payments business. With foresight, we could increase the chances of the former and decrease those of the latter. R. Alton Gilbert is a t•ice president i11 the Research /Ji1 isio11 al the Federal Resen·e Bank q/St. Louis. 1 lhis article is based 11/)011 a longer l'ersio11. Ll'hicb is amilableji'()Jll !be author upon request. as !l-efl as 011 this Bank's /11/emel site, hlljJ:/1 ll'll'll'.s/l.1-Ji·b. OJ;r,lresearcbl,r;ilbert. bl 111/ RegionalRoundup New Memphis Account Exec Named Susan Bivens h~Ls been hired ~Ls the Eighth District's new ~lemphis Branch account executi\'e. Bivens brings O\'er Lueckenhoff's previous experience, both ~Ls an account executive and as a manager of the Fed's ACH and Wire Transfer Department, h~Ls prepared him well for his new duties. Rickjohns has replaced Lueckenhoff as the account executive who will serve Illinois institutions. Johns will also retain responsibility for his current customers. Rick Sires will continue to serve as account executive for institutions in the :\1issouri portion of the St. Louis Zone. 25 years of commercial banking experience to the District. :\lost recently, she served as assistant vice president/manager at \'ictory Bank & Trust Co., in Cordova, Tenn., where she directed daily operations. Before that, Bivens spent seven years in a similar position at NationsBank of Tennessee. In her new position, Bivens will be responsible for servicing the 300 financial institutions in the St. Louis Fed's :\lemphis area. 199 5 HMDA Data Available Reports of 1995 mortgage lending activity are now available to the public at central depositories throughout the nation. The reports include individual disclosure statements and aggregate data for each metropo Ii tan area. They reflect the lending activity for more than 9,500 institutions covered by the Horne Mortgage Disclosure Act. The 1995 figures include 11.2 mil lion reported loans and applications-a decre~se of 8 percent from 1994 that largely reflects a drop in refinancing activity. Despite the overall decrease in the number of conventional home purchase loans, however, those made to Black, Hispanic and Native American applicants increased. For a copy of the 1995 !-1:\lDA data, contact the Federa] Financial Institutions Examination Council at (202) 634-6526. St. Louis Account Execs Swap Assignments J\ndy Lueckenhoff, the St. Louis Fed account executive who formerly visited Illinois institutions, has been ~Lssigned new duties :Ls Automated Clearing House account executive for the entire Eighth District. In this capacity, Lueckenhoff \\'i 11 promote Fed J\CH ser\'ices District-wide, including helping financial institutions explain J\CI I to their customers. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis New Louisville VP Named On :\lay 16, Ron Byrne w:Ls appointed vice president of the St. Louis Fed's Louisville Branch. As such, Ron is responsible for the Eighth District's marketing and product development activities, as well as serving as managing officer over the Louisville Support Services and Check/Data Processing departments. Ron comes to the St. Louis Fed with 30 years of commercial banking experience. :\lost recently, he was president of Liberty Payment Services Inc. in Louisville. Fedline to Warn of Late Postings :\lany account holders have taken advantage of the Fedline Monitor Balance Reports to supplement their internal records. We realize, however, that occasional operational delays can cause transactions to be posted later than normal and that institutions may have difficulty reconciling the totals reported through Fedline with their own internal reports. To minimize confusion, when we know that there will be a significant delay in the posting of transactions-especially one in the late afternoon-the St. Louis office will send a broadcast to all online institutions alerting them of the situation, so they can accurarely compute their end-of-day balances. If the Fedline system is not operating, we will send the broadcast to institutions by fax. As always, institutions that are having difficulty in reconciling their account totals are encouraged to contact Payments Risk ;v1anagernent in St. Louis or their Accounting Department in the Branch offices. Second Chance for Risk Management Planning The Federal Financial Institutions Examination Council is conducting a second risk management planning conference on Sept. 26-27 in Kansas City, :\lo. Executives and officers from banks, thrifts and credit unions who would like help establishing or improving institutional risk management standards are encouraged to attend. For more information, contact the FFIEC at (703) 516-5487. Word-of-Mouth Grows Fed's Truncation Service https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis hen :\faxine Pako\'ich, president of the SWIC SI ll Credit llnion in Edwards\'ille. Ill., first heard the cost savings the Fed's truncation service would bring her institution, she was skeptical. "It just sounded to good to be true," she says. "We kept saying, 'There's got to be a catch somewhere.'" Three years later, Pakovich h:L-; yet to find that catch and is eager to provide a ringing endorsement of the Fed's truncation service to any credit union willing to listen- and even those who won't. .. , can't understand why anyone in their right mind wouldn't do this, " she tells them. Pako\'ich h:L-; e\'en gone so far as to become a sort of satellite St. Louis Fed sales office, showing other interested credit unions how the Fed service works before they make the decision to switch O\'er. At least three ha\'e signed on with the Fed so far. "We keep waiting for our commission." Pakovich jokes. \\'hat is it about the Fed 's truncation service that Pako\'ich finds so irresistible? • Cost- Pako\'ich says that this is \\'hat initially con\'inced her to make the Feel her trun cation service provider. "We sa\\' a definite sa\'ings," she says. When she looks at other credit unions· charges now. she is ;L-;tounded. ·'Their cost-; are :L-;tronorn ical compared to ours ... • Efficiency- The time and paperwork saved by having the Fed truncate her credit union ·s Maxine E. Pak01 •ic/J, jJresident, srnCS/l.: Credit l '1lio11 checks after processing them is significant, Pakovich says. "All we eliminated w:L'i a middle man. \X'hen \\'e had to retrie\'e anything, it got cumbersome. Why deal with going through a third partyt· • Serl'ice- Pako\'ich says that although the cost of the Fed's truncation sen·ice is what hooked her. the good customer ser\'ice she gets is \\'hat keeps her. "You develop a personal kno\\'ledge of the people \\orking there," she says. • Ease of transitionFor those who are concerned that S\\'itching to the Fed \rnuld he too much trouble. Pakorich says not to worry. "One beautiful thing was that the change w:L'i transparent to us, " she says. "\\'e didn ·thaw to do a lot of work to prepare for it. We didn 't hare to make a lot of changes ... With all of that in mind. Pako\'ich says there's no wa~ she could keep her knowledge of the Fed's truncation se1Yice to herself. "Credit unions e:-.:change ide;L) all the time. and if you ha\'e a good idea. you want to spread the news, .. she sa\'s. Ron Iladorn, account e:-.:ecuti\'e at the St. Louis Fed's Louisville Branch, says that ne\\'s of the Fed's truncation service has spread around the Louis\'ille area, too. Since the beginning of the year. the Branch ·s customer b;Ls;e h:L'i incre;L-;ed by 60 percent. and the volume of items processed has more than doubled , thanks in large part to the addition of L&'.\ Credit l 'nion- one of the biggest credit unions in the state. "J\nd \\·e·re still going strong, " Iladorn says. For more information on the Fed's truncation service, contact rnur account ewcuti\'e. Calendar FedFacts Fed to Answer Taxing Questions The Eighth District will hold several half-day seminars this fall to help those who have questions about EFTPS, the Electronic Federal Tax Payment System. Internal Revenue Service code requires taxpayers who made deposits of more than $50,000 in federal employment taxes for calendar year 1995 to begin making payments using EFTPS startingJan. 1, 1997. This summer, the IRS began notifying the 1.2 million taxpayers who will be mandated to file and pay their taxes electronically. The seminars will give an overview of EFTPS and address topics such as EFTPS reporting methods, the enrollment process, the tax payment process, the impact on financial institutions operations, and the way to send EFTPS over Fedline. For more information on seminar dates, times and locations, check the Calendar section at right or contact Susan Hackney of the ■ Post Office Box 442 St. Louis, \lissouri 63166 CB is published quarterly by the Public Affairs Office of the Federal ReserYe Bank of St. Louis. \'iews expressed are not necessari ly official opinions of the Federal Reserve System or the Federal Reserve Bank of St. Louis. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis St. Louis Fed's Treasury Relations Department at (314) 444-8485. District Advisory Council Members Sought The Eighth District has several openings available on its Economic Advisory Council, an eight-member body that advises the St. Louis Fed and its Branches on small business and agriculturally related matters. The council meets twice a year with St. Louis Fed President Thomas C. Melzer and other senior officers to offer advice and observations on emerging District conditions. Those interested in being nominated to the council should contact Randy Sumner at (314) 444-8644. Members are also needed to serve on the Board of Governors' Consumer Advisory Council, which represents consumer and community interests and the financial services industry. Those interested in serving on the Consumer Advisory Council should contact Deanna AdayKeller, council secretary, at (202) 452-6470. Positions for both councils begin in January 1997 and run for three years. Board Weaves Wider Web The Board of Governors has expanded its Internet World Wide Web site to include: • the Humphrey-Hawkins report and testimony; • pictures and biographies of Board members and Fed presidents, both current and former; • the Beige Book; • a calendar of Federal Open Market committee meetings, as well as recently released FOMC minutes; and • five additional statistical releases. The Board's web site can be found at http://www.bog.frb.fed. The St. Louis Fed's web site, which links to the Board's site, is at http://www.stls.frb.org. Upcoming Fed-sponsored Events for Eighth District Depository Institutions Community Affairs Meetings Oct. 7 - Columbia, Mo. Oct. 22 - Little Rock, Ark. District Dialogues Sept. 25 - St. Louis Oct. 22 - Springfield, ~1o. Oct. 23 - Fort Smith, Ark. EFTPS Seminars Oct. 28 & 29 - St. Louis Nov. 5 & 6 - Little Rock, Ark. Nov. 13 & 14- Louisville, Ky. Nov. 18 & 19 - Memphis, Tenn. Treasury Issues/ ACH Origination Seminar Oct. 16 - St. Louis For more information on the above meetings, contact Bernie Berns of Public Affairs at (314) 444-8321.