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Summer 1996
News and Views
for
Eighth District Bankers
National Check Service Debuts
New
Account
Structure
Announced
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
ffecti ve Ian. 1, 1998, the
Federal 1-{eserve will implement a new flexible account
structure that is designed to
meet the needs of deposito1)·
institutions ~L'i they branch
interstate. The new structure
was developed based on a series
of interviews with a broad crosssection of bankers nationwide.
l lnder the new structure,
depositOt)' institutions will
maintain a single, m~L-;ter
account at a designated Reserve
Bank. The account will be
used to settle all credits and
E
all 46 Reserve Bank check processing offices. The cash letter
fee is $4.00, and the per-item
fees are 2.2 cents for low-cost
endpoints and 3.2 cents for
high-cost endpoints. While
pricing is consistent nationwide, the endpoints included in
the tiers vary by Reser\'e office.
CS is the first national check
product the Fed has introduced
and is a continuation of the
Reserve Banks' move to have
consistent check product
names and definitions across
Fed Districts.
!lank Bourgaux, the St. Louis
Fed's operating officer, says
that the time is ripe for product-;
like CS. "\\'ith interstate
branching and industry consolidation, Nationwide City Sort is
a way for the Fed to respond to
the changes in the marketplace," Bourgaux says.
For more information on
Nationwide City Sort, contact
Frank Blacharczyk at CH"±)
444-8960 or your account
executive.
debits arising from financial
transactions with any Reser\'e
Bank, regardless of location.
Reserve administration and
risk management activities
also would be conducted from
this single location.
Additionally, institutions,
regardless of whether they have
an interstate presence, can set
up subaccounts to define subsets of information . For example, a depository institution
could track financial activity in
a given geographic region by
designating a subaccount for a
group of branches. lnstitutions
could also use subaccounts to
identi~· activity by type of
financial transaction, such as
J\Cl I, Feclwire, etc.
Further details 011 how the
account structure can be used
will be provided via a series
of educational materials and
seminars that will be offered
in early 1997. Questions should
be directed to Jeff Dale at (.~ l '+)
444-8400 or 1-800-:m-0810,
extension 8'--100.
Feditorial
Balancing Advances in Retail Payments
with the Public Interest
n researching the topic
for our 1995 annual
report, which describes
some of the recent technological advances in retail
payments, one thing became
Thomas C. Melz er
clear: The transformation
of the U.S. payments system raise s a numbe r of
complex and difficult public policy questions.
Tied in with virtually every new payments
technology----smart cards, cyberbanking,
electronic cash, etc.-are a host of issues that
have yet to be fully addressed. Who s hould
be authorized to issue electronic currency?
What happens if an issuing agent fails? Is the
"money" loaded onto s mart cards insured?
What safeguards are being instituted for
Internet purchases? And so on.
It is the Federal Reserve's responsibility-as
spelled out in the Federal Reserve Act-to
improve the efficiency and reliability of the
nation's payments system. Thus , we generally
I
How Will
Reg E
Apply to
Stored-Value
Cards?
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
A
proposal for making many
types of stored-value card
systems exempt from Regulation E w~L'i made available for
public comment in the Fedf'ml
Neg{c;/er on ~lay 2. The Federal
Reserve will accept public
comments on the proposal
through Aug. 1.
The proposal's recommendations can be summarized into
the following four points:
1) Any stored-value system
that limits the maximum value
on the card to S100 at any given
time would be complele(r
e.rem(JI from Regulation E;
support payment innovations that contribute
to this goal. In the meantime, as market forces
develop and refine new technologies, the appropriate role for the Fed is to tackle questions like
those just posed, without unnecessarily impeding payments system progress.
I believe the Fed is uniquely positioned to
accomplish this task effectively. Because of the
expertise we have gained over the years in providing financial services at the regional Reserve
Bank level, our centralized regulatory function
in Washington is better able to write regulations
with full knowledge of their likely effects on the
industry. As long as both the Fed and industry
players remain flexible and committed to
collaboration, our payments system will evolve
in a way that will enable the entire nation to
reap the economic rewards.
Tb omas C Melzer is pres idl'11f of tb e Fede ral Resert •e Ba11k
<~( St. Lo11is.
2) Stored-\'alue systems that
do not require authorization
from a central database at the
point-of-sale and do 110/ link
individuals to an account
('"off-Iine unacco un tab le")
would also be completely exempt
from Regulation E, even if they
al low a maximum value above
$l00 to be stored on the care!;
5) Stored-value systems that
do not require authorization
from a central database at the
point-of-sale, do link individuals to an account ("off-line
accountable") and allow
greater than $100 to be stored
on the card wou ld only be subject to Regulation E's in itial
disclosu re limit~; and
4) Stored-value systems
that requi re authori zation
from a central database at the
point-of-sale ("on- line") are
subject to Regu lation E"s provisions with the exception of: (a)
the period statement requi rement, if an account balance
and summary of recent transactions are provided upon
req uest; (b) the annu al erro r
resolution notice requirement;
and (c) the notificatio n of a
change in te rms.
How Good Will Price Stability Be for
Banks' Bottom Lines?
B
William R. Emmons
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
oom and bust cycles in
financial markets and
bank lending have often been
driven by cycles of accelerating
inflation followed by decelerating inflation. The Federal
Reserve recognizes that a moneta,y policy geared toward
achieving price stabi lity, which
is simply a long-term commitment to annual inflation rates
very close to zero, is one of the
best ways to prevent disruptive
financial cycles. While market
speculators may deplore lessened volatility in asset prices,
banks and other deposit0t)'
institutions are sure to be
among the winners in a world
of price stability.
Or are they? Price stab ii ity
also contains a subtle, but
potentially far-reaching, threat
to depository institutions. In
short, price stability translates
into lower nominal interest
rates, which in tum reduce the
value of float to checkwriters
and credit-card users. This
matters to commercial banks,
thrifts and credit unions
because they have been the primary purveyors of checking
accounts and credit cards.
These transaction accounts
have, in turn, long ser\'ed w;
the basis upon which customer
relationships are built.
Any threat to the competitive
viability of depository institutions' unique payment services
is, therefore, also a threat to
their overall customer base.
The key to understanding why
price stability will affect businesses' and consumers' incentives to choose various payment
methods and instruments lies
in the arcane notion of float.
Simply put, float is the grace
period during which a checkwriter or credit-card user retains
control over interest-earning
funds C(/ier a payment is tendered to a merchant or supplier
but before the payer's deposit
account is actually debited.
Float is not the only reason
why individuals and businesses
use checks and credit cards, of
course, but it no doubt plays a
role. Check float is typically a
few days, while convenience
users of credit cards-those
who pay off accrued charges
each month--€njoy up to
several weeks of float because
of monthly billing cycles.
AFederal Reserve study a few
years ago estimated that U.S.
businesses earn about $35 billion annually from check float,
while consumers who pay off
their credit cards each month
earn, on average, 44 cents per
transaction on the funds they
eventually use to pay off each
charge. Checkwriters and
credit-card users benefit more
from float when interest rates
are relatively high because the
value of each day of float is
greater; conversely, float is of
less value when rates go down .
The simple fact that float
works to the advantage of the
consumer or business choosing
among float-rich and float-free
payment instruments leads to
the competitive dilemma that
price stability poses for deposi tory institutions. Instead of
relying primarily on checks
and credit cards, which generate sizable amounts of float,
consumers facing very low
interest rates might increase
their use of float-free payment
instruments such as cash or
stored-value cards, which
might be issued by non-bank
firms. ~leanwhile, businesses
might write many fewer checks
and, instead, carry out the bulk
of their payments via ACHanother float-free payment
method-provided perhaps by
a computer-services firm with
only basic transactional input
from a bank. Thus, banks'
ability to enhance their lnsic
payment ser\'ices with more
lucrative financial offerings,
such as lines of credit and
cash-management services,
is reduced if many payment
transactions byp~Lss their payment instruments.
Declining float benefits associated with checks and credit
cards need not, however, mean
the end of financial relationships based on transaction
accounts. For example, depository institutions could themselves promote float-free
payments instruments as the
best way to simpli~ ush-management functions, since there
is never any doubt about when
funds will be paid or received.
Price stability will undoubtedly benefit depository institutions through decre~Lsecl asset
volatility. 'le) maintain their
role in the financial system of
the future, however, depositot)'
institutions must safeguard
their financial relationships by
offering the payment services
their customers want.
1
William R. E111111011s ism, cco110111isl
al the Federal Nescrt'e /Jank q/
SI. Louis.
RegionalRoundup
OUT FOR
COMMENT
The following are Federal Reserve
System proposalscurrently out for
comment:
■ Request for public comment
on proposed amendments to
Regulation E, Electronic Funds
Transfers. The amendments
address the rules for treatment of stored-value cards.
Comments due by Aug. 1,
1996. (Docket No. R-0919)
■ Request for public comment
on additional amendments to
Regulation T, Credit by Brokers
and Dealers, pertaining to margin regulations. Comments are
due by July 1, 1996. (Docket
No. R-0923)
Direct all comments to William
W Wiles, Secretary, Board of
Governors of the Federal Reserve
System, 20th St. and Constitution
Ave., NW, Washington, D.C.
20551.
Software to
Cut On-Site
Exam Time
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Electronic Federal
Payments Mandated
Part of the recently enacted
1996 federal budget law mandates that all federal payments
-which total roughly 600
million per year-be made by
electronic funds transfer. The
law calls for individuals and
businesses that become eligible
for federal payments after July
26, 1996, to receive their payments electronically. Those
already receiving federal payments by check will continue
todosounti]Jan.1, 1999; after
that date, they wi ll receive their
payments electronically, too.
New Money
Laundering Rules
On :v1ay 28, 1996, two regula-
must be retained by all parties
involved in processing a payment order. The travel rule,
which WcL'i issued solely by the
Treasury, defines the information that must flow with the
payment order.
rf you have questions about
the recordkeeping rule, call
Jerry ~1cGunnigle of the
St. Louis Fed at (314) 4448732. Questions about the
travel rule should be directed
to either Charles Klingman,
(703) 905-3920, or.Joseph
Myers, (703) 905-3590, at
the Treasury.
Electronic Tax Filing
Required
tions that implement the Bank
Secrecy Act's money laundering
provisions beGune effective. The
recordkeeping rule, which WcL'i
jointly issued by the Treasury
and the Federal Reserve System,
defines the information that
An estimated 1.3 million corporate taxpayers that had at
lecL'it $50,000 in annual tax
liability in 1995 will be required
to file their taxes electronically
starting no later than Jan. 1,
1997. Those in this categot)'
will soon receive official notice
from the TrecL'iUI\ cL'i well cL'i
xaminer Workstation, a
series of PC-bcL'ied modu Jes
expected to cut examiners' onsite time significantly, will be
put into use by the St. Louis
Fed after testing hcL'i concluded
later this summer.
llere's how it works: The Fed
examiner will meet with the
banker several weeks before
the scheduled examination
to explain the new process.
The examiner will cL'ik the
banker to download all of the
institution's loan information
on to diskettes. The examiner
will then take the diskettes
back to the Fed and analyze
the information there, rather
than at the institution. When
the examiner does go to the site,
he or she will be able to spend
more time 011 risk cL'isessrnent
since the preliminary work will
al ready be completed.
"You'll be able to step right in
to the banks and start working
the credit files right away,"
says Carl White, <Lssistant field
director at the St. Louis Fed.
"The capabilities of Examiner
Workstation are amazingthere's so much you can do."
From the bank's standpoint,
this means less distraction.
"The fewer days the examiners
E
an enrollment form that must
be processed in part by their
financial institution. Taxpayers
may choose either an ACH
credit or ACH debit option to
file and pay their taxes.
Tax payments made in this
manner wil l be transmitted
directly to the Treasury's account,
bypassing depository institutions' TT&L accounts. These
dollars are then invested back
into the note accounts of those
institutions participating as
note option TT&L depositaries.
f nstitutions in Missouri,
Illinois and Indiana should
call 1-800-945-7900 for questions and 1-800-945-8400 to
enroll. Institutions in Arkansas,
Mississippi, Tennessee and
Kentucky should cal I l -800605-9876 for questions and
l-800-555-4477 to enroll.
are here, the more time we're
able to spend on our customers,
and that's what we' re here for,"
say Larry Wilson, president and
CEO of Jacksonville Bank &
Trust in Little Rock, Ark., which
was one of the test sites for the
software. "It looks to be a winwin situation for the examiner
and the bank."
for more information on
Examiner Workstation, contact
Carl White at (314) 444-8734.
Bankers' feedback will be considered in the development of
future versions of the software.
ACH or Fedwire: Which Is Right for You
and Your Customers?
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
ith the
increasing
use of
electronic
payments,
you may
want to consider the various
aspects of the Automated
Clearing House (ACH) and
Feclwire to ensure that you
choose the one best suited to
the transaction . This goes not
only for bank-to-bank payments, but also payments you
originate for your customers.
Here are some guidelines to
follow when choosing between
the ACH and Fedwire. With
both systems, the factors to
consider are: value, volume,
settlement and security.
ACH
The Automated Clearing
House was developed in the
1970s to handle recurring payments, especially payrol l payments. Although payroll use
remains popular todayroughly one-third of workers
receive their paychecks this
way-use of the /\CH has
broadened to include a wide
range of other debit
and credit payments. These
include: alimony and child
support, cable TV, charitable
contributions, taxes, credit
card bills, state lottery payouts,
investment distributions,
membership clues, loan payments, utility payments and
church tithing.
All told, more than five billion
commercial and government
ACH transactions, worth more
than $10 trillion , are originated
each year in this country. The
largest single originator is the
U.S. government.
• Value- The ACH was
designed for check-like payments; that is, those that are
low-risk and low-dollar.
• Volume- The ACH was
designed to handle a high
volume of payments.
• Settlement-Settlement
on the ACH takes place a day
or two after the payment is
originated. As a result, an ACH
originator has time to reverse
an error in a transaction.
• Security- Securi~' on
the ACH is sufficient for those
types of payments for which
it is intended - low-value,
high-volume.
Fedwire
Feclwi re, the Federal Reserve ·s
wire transfer system, was developed in 1918, using ~1orse
Code as a way to communicate
messages. The system converted to an electronic format in
the rnid-1960s and has grown
substantially over the years. In
1995, almost 130 million credit transactions worth roughly
$340 tril lion were sent over
Feclwire. The transactions were
for: settlement between financial institutions; settlement
between corporations; and
settlement between the federal
government and states or
corvorations.
Institutions can access Feclwire
directly if they have an account
at the Federal Reserve. The
most common type of direct
access is made online, with the
financial institution connecting
to the system from its own
mainframe computer, or personal computer with Feclline.
Online access saves institutions
time because they receive
immediate confirmation of
funds availability. It also saves
institutions money on transfer
fees, if they make at least one
or two transactions a clay.
• Value-Feclwire was
designed for high-dollar and
therefore high-risk payments.
• Volume-Fedwi re was
intended for a low volume of
payments.
• Settlement- Once a
transaction enters the Fed's
computer, the charge or credit
is complete and considered
final settlement. Therefore, the
transaction is irrevocable.
• Security-Because Fedwi re
is designed to handle extremely
large-dollar payments, the
Federal Reserve System maintains very strict security measures to minimize the chance
of error. Online access also
eliminates the need for handling information manually
and communicating on
the telephone.
"We encourage bankers to
evaluate these criteria and
determine if they are using the
most appropriate mechanism
for meeting their settlement and
security needs," says Kathleen
0. Paese, operations officer at
the St. Louis Feel. "Institutions
would also benefit from educating their corporate customers
on the dimensions of each
mechanism to ensure that they
are submitting payments in the
most appropriate manner. "
For more information on
using ACH or Feclwire at your
institution , contact your
account executive.
Calendar
FedFacts
A Faster Way to File
FR Y·9SP
Financial institutions looking
to cut down on the time it takes
to prepare and send the semiannual FR Y-9SP report can
now file it electronically. To
do so, you must have both
a Fedline connection and
FR Y-9SP computer software.
If you've already purchased
software to prepare the quarterly
call report, you probably already
have the FR Y-9SP package.
The software enables institutions to do quick mathematical
cross-checking and real-time
financial analysis. In addition,
confirmation of receipt is
immediate.
If you would like to enroll for
the June 30 report deadline, or
have questions about the electronic filing of any regulatory
Post Office Box •-1'±2
St. Louis, ,\lissouri 6.)166
CB is published quarterly by the
Public Information Office of the
Federal Reserve Bank of St. Louis.
\'iews expressed are not necessaril y
official opinio11s of the Federal
l\eserve S~·stem or the Federal
Reserve Ba11k of St. Louis.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
report, call Jim Mack of our
Statistics Unit at (314) 444-8599.
Annual Report
Available
In our just-published 1995
annual report, the Federal
Reserve Bank of St. Louis takes
a historical look at the U.S.
payments system - from the
archaic bartering system right
through to today's high-tech
mechanisms like smart cards
and electronic cash.
St. Louis Fed President
Thomas C. Melzer introduces
the report by pointing up the
host of public policy questions
that new technologies raise.
The best answers to these questions, Melzer says, will arise
from experimentation and
collaboration among parties
working together to set common
standards and safeguards.
To request a copy of the report,
call Debbie Dawe of our Public
Affairs Office at (314) 444-8809.
More Fed Publications
Online
1\vo of the St. Louis Fed's
Research Department publications, The Regional Economist
and the Rez•iew, have been
added to our Internet site,
which is at http:www.stls.frb.org.
77:;e Regional Economist is a
quarterly magazine that covers
Eighth District business and
economic issues. The Rez 1iew
is a bimonthly economics
journal that addresses national
and international economic
topics. For questions on either
publication, or our web site in
general, contact Lora Holman
at (314) 444-8553.
Upcoming
Fed-sponsored Events
for Eighth District
Depository Institutions
District Dialogues
Sept. 25 - St. Louis, Mo.
Oct. 22 - Springfield, Mo.
Oct. 23 - Fort Smith, Ark.
For more infom1ation on
District Dialogue meetings,
call Bernie Berns of our
Public Affairs Department
at (314) 444-8321.
@FedFRASER