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F ederal Reserve Bank
DALLAS. TEX A S

of

Dallas

75222

Circular No. 73-7*+
April 10, 1973

To All Member Banks
in the Eleventh Federal Reserve District:

There is attached a copy of a letter dated March 21, 1973?
from Governor Mitchell of the Federal Reserve System to Representative
St Germain, Chairman of the House Subcommittee on Bank Supervision and
Insurance, regarding the participation of savings and loan associations
in automated clearing house arrangements.

Also attached is a statement

entitled "Evolution of Payments Mechanism,” issued in December 1972 by
the Federal Reserve System Steering Committee on Improving the Payments
Mechanism.
This material is furnished for your information.
Yours very truly,
P. E. Coldwell
President
Attachments

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

B O AR D OF G O V E R N O R S
or THE

FEDERAL RESERVE 5Y5TEM
W A SH IN G TO N , □ . C. 2 0 5 5 1

G E O R G E W. M I T C H E L L
M EM BER OF THE BOARD

March 21, 1973

The Honorable Fernand J. St Germain, Chairman
Subcommittee on Bank Supervision and Insurance
Committee on Banking and Currency
House of Representatives
Washington, D. C.
20515
Dear Mr. Chairman:
I
am writing in further response to your letter of
January 24 regarding the relationship of savings and loan asso­
ciations to the various developing systems for the electronic
transfer of funds.
More particularly, you inquire about the
participation of California savings and loan associations in
the program developed by the Special Committee on Paperless
Entries (SCOPE) in California, now known by its operational
title of California Automated Clearing House Association (CACHA).
The SCOPE program was undertaken, with the cooperation
comof the Federal Reserve Bank
mercial banks in California U U I l l l g U i i C p C i . J . U U JL?
It
represents one approach developed by banks working together to
achieve a system for electronic transfers of funds.
This system,
which covers legal and administrative arrangements as well as
extensive software design for electronic equipment, provides for
the creation of an automated clearing house to be operated by

I f Subsequently, SCOPE-type programs were set up in 22 additional
areas:
Atlanta, Baltimore, Boston, Buffalo, Chicago, Cleveland,
Columbus, Dallas, Denver, Detroit, Houston, Indianapolis,
Kansas City, Long Island, Milwaukee, New York, Philadelphia,
Pittsburgh, Richmond, St. Louis, Seattle, and the Twin Cities.
The Atlanta System, referred to as "COPE," is expected to begin
operations in 1973.
The Twin Cities committee includes
Minnesota's only mutual savings bank as an associate member.
A large Minneapolis savings and loan association has also
applied for associate membership.
The Twin Cities project is
expected to become operational in early 1974.
(Associate
members participate in planning discussions, but do not have
voting rights or participate in costs.)

The H onorable Fernand J . S t Germain

-2 -

the Federal Reserve Bank of San Francisco, as an interface among
banks.
The arrangement is intended to provide a mechanism whereby
bank depositors can transfer funds into, and out of, their demand
deposit accounts through the use of "paperless entries’ rather
1
than checks, and whereby banks can exchange such entries and make
settlements among themselves with respect to them.
Such an
electronic system recognizes the inefficiencies and limitations
of the existing check system.
Its planning was encouraged, and,
in limited ways, supported by the Federal Reserve Bank of San
Francisco.
The electronic system parallels the existing check
clearing system in its clearing and settlement arrangements among
banks and the Federal Reserve.
Access to this new mechanism is
provided by magnetic tapes, or punched cards, generated by a par­
ticipating institution.
The tapes or cards contain instructions—
substituting for checks— concerning debit and credit transactions
on behalf of the banks' customers.
According to our information, the California Savings and
Loan League approached the California Automated Clearing House
Association in July 1972 and inquired about participation as
financial intermediaries in the newly-formed electronic system.
We are informed that since that time, CACHA has received several
applications for membership from savings and loan associations,
but has held them in abeyance pending consideration of a number
of legal and technical questions.
We understand that CACHA plans
further discussions with the California Savings and Loan League.
In the light of these plans, we have no reason to believe at this
time that CACHA members have engaged in an unlawful boycott in vio­
lation of the letter or spirit of the antitrust laws.
I can assure
you that the Federal Reserve System does not intend to permit
Federal Reserve facilities to be used in any arrangements which
violate these laws.
As we understand it, savings and loan associations in
California wish to participate in the CACHA arrangements primarily
for the purpose of receiving credits to customer accounts arising
out of direct deposit of payrolls.
Presumably, at some future
time they might wish to use the SCOPE system for preauthorized
disbursements or debit transfers.
It may be of interest to note
that presently there exists a system, known as "Transmatic," under
which a savings and loan association with prior authorization can
draw checks on its customers' commercial bank checking accounts,

The H onorable Fernand J . S t Germain

-3 -

p a y a b le t o t h e s a v i n g s and l o a n a s s o c i a t i o n , f o r such p u r p o se s as
m o rtgag e p aym ents, d e p o s i t s to s a v i n g s a c c o u n t s , and f o r c e r t a i n
o t h e r t y p e s o f t h i r d - p a r t y payments r e l a t e d g e n e r a l l y t o h o u s in g
e x p e n s e s , i n c l u d i n g such ite m s as u t i l i t y b i l l s .
The F e d e r a l R e s e r v e r e g a r d s i t s r o l e i n e x p e d i t i n g and
accommodating money t r a n s f e r s as h i g h l y im p o r t a n t . C on gress has
a u t h o r i z e d t h e F e d e r a l R e s e r v e t o p r o v id e a c l e a r i n g sy s te m f o r
t h e h a n d lin g o f c h e c k s drawn on one bank and p r e s e n t e d t o a n o t h e r .
T h is c l e a r i n g s y s te m , h o w ev e r , i s n o t a l l i n c l u s i v e .
For exam p le,
c h e c k s drawn on a few banks t h a t do n o t c l e a r a t par m ust be p r e ­
s e n t e d t o t h o s e banks d i r e c t l y o r through a n o th e r com m ercial bank.
L arge volum es o f c h e c k s , i n a d d i t i o n , a r e d i r e c t l y exchanged or p r e ­
s e n t e d through c i t y c l e a r i n g h o u s e s o p e r a t e d by com m ercial b a n k s.
T h ese ite m s a r e n o t r o u t e d through th e F e d e r a l R e se r v e System ;
a lth o u g h i n c i t i e s where t h e F e d e r a l R e s e r v e h as an o f f i c e , th e
F e d e r a l R e se r v e o f f i c e i s o r d i n a r i l y a member o f th e c l e a r i n g
h o u s e fo r th e purpose of p r e s e n t i n g and r e c e i v i n g c h e c k s .
The
n e t t r a n s f e r of funds may som etim es be s e t t l e d i n c o r r e s p o n d e n t
b a l a n c e s , b u t s e t t l e m e n t s o f any s i g n i f i c a n t volume a r e made on
t h e books o f t h e F e d e r a l R e s e r v e .
These s e t t l e m e n t s and payments a r e made p o s s i b l e a t
m inim al c o s t t o th e economy b e c a u s e member banks keep a c c o u n ts
a t F e d e r a l R e s e r v e Banks, and t h e R e se r v e Ban ks, i n t u r n , m a in t a in
b a l a n c e s f o r n a t io n w id e s e t t l e m e n t s .
Thus, a bank i n New York
o r P r o v id e n c e can buy bonds i s s u e d by t h e S t a t e T r e a su r e r o f
C a l i f o r n i a i n S acram ento, and pay fo r them by a s k in g th e New York
o r B o sto n R e se r v e Bank to t r a n s f e r funds by w i r e from i t s r e s e r v e
a c c o u n t to t h e r e s e r v e a c c o u n t o f t h e S t a t e T r e a s u r e r ’ s bank a t
t h e F e d e r a l R e se r v e Bank o f San F r a n c i s c o .
The f i n a l s t e p i n
paym ent, or s e t t l e m e n t , is made by t r a n s f e r s w i t h i n t h e i n t e r ­
d i s t r i c t s e t t l e m e n t fund by th e R e se r v e Banks i n v o l v e d . S i m i l a r l y ,
an a u to m o b ile d e a l e r i n P r o v id e n c e or New York can pay fo r a
sh ip m en t from a D e t r o i t m a n u fa ctu r e r by a c h e c k t h a t w i l l be
c o l l e c t e d through th e F e d e r a l R e s e r v e Banks, w it h s e t t l e m e n t made
th rou gh th e i n t e r - d i s t r i c t s e t t l e m e n t fu n d , j u s t as i t was f o r th e
b o n d s.
Thus, th e reserve b a l a n c e s required o f member banks a t
t h e F e d e r a l Reserve Banks, i n a d d i t i o n to p r o v id in g a fu lcru m fo r
t h e o p e r a t i o n of m onetary p o l i c y , c o n s t i t u t e a fundam ental i n s t r u ­
ment fo r e f f e c t u a t i o n of th e t r i l l i o n s o f d o l l a r s i n money payments
made a n n u a lly i n our economy.
Turning to your i n q u i r y about th e B oard ’ s p o s i t i o n on
t h e g e n e r a l q u e s t i o n o f i n c l u d i n g s a v i n g s and lo a n a s s o c i a t i o n s
i n e l e c t r o n i c funds t r a n s f e r s y s t e m s , we b e l i e v e t h r e e g e n e r a l

The H onorable Fernand J . S t Germain

p r in c ip le s a p p ly .
F i r s t , t h e Board b e l i e v e s t h a t so f a r a s p u b l i c
p a r t i c i p a t i o n and su p p o r t a r e c o n c e r n e d , t h e r e sh o u ld b e a s i n g l e ,
i n t e g r a t e d n a t io n w id e mechanism f o r e f f i c i e n t t r a n s f e r o f fu n d s .
The e x i s t i n g s y s t e m , u s i n g c h e c k s and d r a f t s and f u n c t i o n i n g
th ro u g h com m ercial banks and t h e F e d e r a l R e se r v e Banks, i s sub­
s t a n t i a l l y o f th a t ch aracter.
In t h i s c o n n e c t i o n , t h e F e d e r a l
R e s e r v e ' s S t e e r i n g Committee on Im proving t h e Payments Mechanism
i s s u e d a s t a t e m e n t i n December e l a b o r a t i n g on t h i s and o t h e r
p o i n t s , and I am e n c l o s i n g a copy o f i t f o r your u s e .
S e c o n d , even a l l o w i n g fo r th e e x i s t e n c e o f p r i v a t e
c l e a r i n g a r r a n g e m e n ts, t h e Board b e l i e v e s t h a t th e p u b l i c sy ste m
u s i n g c h e c k o r e l e c t r o n i c t r a n s f e r s o f fu nds from one i n s t i t u t i o n
t o a n o t h e r s h o u ld be such a s t o i n s u r e t h a t th e c o n d i t i o n s o f e n t r y
i n t o a g e n e r a l c l e a r i n g arrangem ent ar e f a i r , and t h a t e q u i t a b l e
t r e a t m e n t i s a s s u r e d f o r i n s t i t u t i o n s w i t h s i m i l a r powers and
r e sp o n s ib ilitie s .
The p r e s e n c e o f a p u b l i c a g e n c y , such as th e
F e d e r a l R e s e r v e , i n any c o o p e r a t i v e arrangem ent f o r t r a n s f e r r i n g
funds b e tw e e n i n s t i t u t i o n s s h o u ld be one way o f i n s u r i n g th e p u b li c
i n t e r e s t w i l l b e ta k en i n t o a c c o u n t , and t h a t no p r i v a t e c l e a r i n g
arrangem ent may be u sed t o p r o t e c t or enhance th e m arket p o s i t i o n
o f t h e p a r t i c i p a t i n g banks a t t h e e x p e n s e o f o t h e r s . Whatever
p u b l i c a c t i o n i s t a k e n , th e i n n o v a t i v e c a p a b i l i t i e s o f banks and
o t h e r f i n a n c i a l i n s t i t u t i o n s t o improve money t r a n s f e r s e r v i c e s
s h o u ld be r e c o g n i z e d and g i v e n o p p o r t u n i t y f o r d e v e lo p m e n t. And
o f n e c e s s i t y , some i n n o v a t i o n s w i l l i n v o l v e c o o p e r a t i o n among
p r iv a te fin a n c ia l in s titu tio n s e x c lu s iv e ly .
T h ir d , t h e c o s t s o f th e t r a n s f e r sy ste m and t h e b e n e f i t s
o f p a r t i c i p a t i n g i n i t sh o u ld be e q u i t a b l y d i s t r i b u t e d among a l l
o f t h e i n s t i t u t i o n s i n v o l v e d . As i m p lie d a b o v e , t h e Board
b e l i e v e s i n com parable t r e a t m e n t f o r i n s t i t u t i o n s h a v in g l i k e
p o w er s, b u t t h e e x i s t i n g s i t u a t i o n f a i l s t o m eet t h i s s ta n d a r d .
Some i n s t i t u t i o n s , namely nonmember b a n k s, have a c o m p e t i t i v e
a d v a n t a g e .—
These banks do n o t m a in t a in r e s e r v e a c c o u n t s i n th e
2J E x e m p lif y in g th e e x i s t i n g a d v a n ta g e e n jo y e d by nonmember banks i s
t h e p r e s e n t s t r u c t u r e o f r e s e r v e r e q u ir e m e n ts imposed on such banks
by t h e i r r e s p e c t i v e S t a t e s . A lth o u g h i n most S t a t e s t h e nom inal
r e s e r v e p e r c e n t a g e i s com parable to t h a t imposed on member b a n k s - and i n some S t a t e s may e v e n be h i g h e r than F e d e r a l R e s e r v e r e q u i r e m e n t s - - i n a l l S t a t e s nonmember banks a r e p e r m it te d t o c a r r y t h e i r
r e s e r v e s i n th e form o f what a r e e f f e c t i v e l y e a r n in g a s s e t s :
Government o b l i g a t i o n s and c o r r e s p o n d e n t b a l a n c e s .
These c o r r e ­
sp o n d e n t b a l a n c e s , a lth o u g h t e c h n i c a l l y n o n i n t e r e s t - b e a r i n g , ar e
a form o f i n d i r e c t c o m p en sa tio n to t h e c o r r e s p o n d e n t b a n k s, which
i n t u r n com p en sates th e nonmember bank through p r o v i d in g s e r v i c e s
such a s c h e c k p r o c e s s i n g , a c c o u n t i n g , in v e s t m e n t a d v i c e , and t h e l i k e *

The H o n o rab le Fernand J . S t Germain

-5 -

F e d e r a l R e s e r v e S y s t e m - - a c c o u n t s w hich do n o t earn i n t e r e s t —b u t
n e v e r t h e l e s s a r e a c c o rd ed c e r t a i n F e d e r a l R e s e r v e c h e c k c l e a r i n g
s e r v i c e s deemed e s s e n t i a l t o th e p u b l i c ' s need f o r prompt money
paym ent.
I f , i n th e f u t u r e , e x t e n s i v e c h e c k in g a c c o u n t powers
a r e d e v e lo p e d f o r s a v i n g s i n s t i t u t i o n s , t h e e x t e n s i o n o f t h e
b e n e f i t s o f t h e payments m echanism , w h eth e r c o n v e n t i o n a l o r
e l e c t r o n i c , t o such i n s t i t u t i o n s , w i t h o u t t h e i r assum ing a f a i r
s h a r e o f t h e c o s t s , would e x a c e r b a t e e x i s t i n g i n e q u i t i e s .
I n t h e p r e s e n t framework, d i r e c t a c c e s s t o t h e p o r t i o n
o f th e n a t i o n ' s payments mechanism t h a t depends on F e d e r a l R e se r v e
f a c i l i t i e s i s l i m i t e d t o com m ercial banks and t h e U .S . T r e a s u r y .
Member banks o f th e F e d e r a l R e s e r v e System c u r r e n t l y may send a l l
o f t h e i r checks d i r e c t l y to F ederal R eserve p r o c e ssin g c e n te r s
for c le a r in g .
Nonmember banks may send c h e c k s drawn on banks
w i t h i n a l i m i t e d c l e a r i n g zone t o t h e F e d e r a l R e s e r v e , b u t payment
or r e c e i p t f o r c h e c k s g o in g th rough th e F e d e r a l R e s e r v e c o l l e c t i o n
s y s te m i s t y p i c a l l y made by d e b i t or c r e d i t to an a c c o u n t m ain­
t a i n e d by a member com m ercial bank a t a F e d e r a l R e s e r v e Bank. For
p r o v i d i n g c l e a r i n g s e r v i c e s t o nonmembers, member banks g e n e r a l l y
r e c e i v e c o m p e n sa tio n through th e m a in te n a n c e by nonmember banks
o f " com p en satin g" b a l a n c e s a t t h e member b a n k s. The e f f e c t i v e
c o s t s o f t h e s e arran gem en ts a r e d e te r m in e d by c o m p e t i t i o n among
t h e v a r i o u s c o r r e s p o n d e n t banks o f f e r i n g t h e s e r v i c e s .
One method o f p r o v i d i n g a s a v i n g s i n s t i t u t i o n a c c e s s
t o e l e c t r o n i c t r a n s f e r s - - a method which i n v o l v e s a m inim al change
from p r e s e n t p r a c t i c e s - - w o u l d be f o r t h e i n s t i t u t i o n to a r r a n g e
f o r a member bank to r e c e i v e e l e c t r o n i c d e b i t s and c r e d i t s f o r
t h e a c c o u n t o f th e s a v in g s i n s t i t u t i o n and to p r o v id e t h e d e t a i l e d
e l e c t r o n i c a c c o u n t in g e n t r i e s r e q u i r e d to e f f e c t t h e t r a n s f e r s to
c u s to m e r s ' a c c o u n t s a t t h e s a v i n g s i n s t i t u t i o n .
T h is i n d i r e c t
p r o c e d u r e i s e n t i r e l y f e a s i b l e from a t e c h n o l o g i c a l s t a n d p o i n t ,
and i s a s e r v i c e t h a t c o u ld be s u p p l i e d s a v in g s and lo a n a s s o c i a ­
t i o n s on a c o m p e t i t i v e b a s i s by v a r i o u s member b a n k s.
A p o s s i b l e f u t u r e a l t e r n a t i v e would be t o p r o v i d e s a v in g s
and l o a n a s s o c i a t i o n s , o r any b an k in g o r t h r i f t i n s t i t u t i o n , w ith
d i r e c t a c c e s s t o an autom ated c l e a r i n g h o u s e o p e r a te d by th e
Federal R eserve.
Such a c c e s s c o u ld be c o n d i t i o n e d on membership
( o r perh ap s some more l i m i t e d p a r t i c i p a t i o n ) i n th e F e d e r a l R e se r v e
S ystem .
In a d d i t i o n to c l e a r i n g f a c i l i t i e s , such p a r t i c i p a t i o n

The Honorable Fernand J . St Germain

- .6 -

m ig h t be d e s ig n e d t o i n c l u d e o t h e r im p o r ta n t s e r v i c e s , such as
l i m i t e d a c c e s s t o th e F e d e r a l R e s e r v e ’ s d i s c o u n t window and c o i n
and c u r r e n c y d i s t r i b u t i o n a r r a n g e m e n ts.
I t s h o u ld , how ever, e n ­
t a i l conform ance t o a p p r o p r i a t e i n t e r e s t r a t e c e i l i n g s and System
r e s e r v e r e q u ir e m e n ts .
Should Congress d e c i d e on a major move o f
t h i s k in d , th e Board w ou ld, o f c o u r s e , r e v ie w i t s r e s e r v e r e q u i r e ­
m ents and i n t e r e s t r a t e c e i l i n g s t r u c t u r e w ith a v iew toward th e
p o s s i b i l i t y o f g r e a t e r d i f f e r e n t i a t i o n among ty p e s o f a c c o u n t s ,
and th e e a s i n g o f th e t r a n s i t i o n t o th e m a in te n a n c e o f r e s e r v e
b a la n c e s.
With reg a rd t o r e s e r v e r e q u ir e m e n ts , t h e F ed era l R e se r v e
h a s f o r some tim e recommended t h a t a l l d e p o s i t o r y i n s t i t u t i o n s
t h a t o f f e r c h e c k in g a c c o u n t s e r v i c e s be r e q u ir e d to m a in t a in
r e s e r v e a c c o u n ts w it h th e F e d e r a l R ese r v e System . As th e payments
mechanism e v o l v e s , and i f i t becomes n e c e s s a r y fo r a l l t y p e s o f
d e p o s i t o r y i n s t i t u t i o n s t o p a r t i c i p a t e more f u l l y i n i t , t h i s
recom m endation o f th e Board t a k e s on a more p r e s s i n g a s p e c t .
The
Board t h e r e f o r e u r g e s t h a t , i n any i n v e s t i g a t i o n i n t o th e p l a c e
and r o l e o f f i n a n c i a l i n s t i t u t i o n s i n t h e payments mechanism, th e
e x t e n s i o n o f r e q u ir e m e n ts fo r m ain ten an ce o f r e s e r v e b a l a n c e s a t
t h e F e d e r a l R ese r v e b e c o n s id e r e d fo r a l l i n s t i t u t i o n s p r o v i d in g ,
o r s e e k in g to p r o v i d e , t h e t r a n s f e r o f funds on a demand b a s i s .
P a r t o f th e F ed eral R e s e r v e ' s c o n c e rn t h a t r e s e r v e
r e q u ir e m e n ts ap p ly to a l l d e p o s i t o r y i n s t i t u t i o n s has b een th e
grow ing volume o f f i n a n c i a l t r a n s a c t i o n s o u t s i d e o f member banking
i n s t i t u t i o n s . With r e s p e c t t o com m ercial b a n k s, f o r i n s t a n c e ,
f u l l y o n e - q u a r t e r o f th e i n c r e a s e i n demand d e p o s i t s o v e r th e
p a s t decade h as b een a t nonmember i n s t i t u t i o n s . Yet a l l demand
d e p o s i t s , w h ether th e y be i n member ban k s, nonmember b a n k s, mutual
s a v i n g s b an k s, or s a v in g s and lo a n a s s o c i a t i o n s , a r e e q u a l l y a
p a r t o f th e n a t i o n ' s money s u p p ly . Uniform a p p l i c a b i l i t y o f r e s e r v e
r e q u i r e m e n t s - - a s w e l l as uniform a p p l i c a b i l i t y o f i n t e r e s t r a t e
c e i l i n g s to th e v a r io u s d e p o s i t c l a s s e s - - i s u r g e n t l y n e e d e d , on
t h e d u al grounds o f :
( 1 ) e q u i t y and ( 2 ) th e a c c e p ta n c e o f p u b li c
r e s p o n s i b i l i t y a t t e n d a n t upon p a r t i c i p a t i o n i n t h e n a t i o n ' s money
t r a n s f e r s y s te m .
I f , i n th e lo n g ru n , t h e r e i s to be an i n t e g r a t e d , n a t i o n ­
w id e payments mechanism, w ith p a r t i c i p a t i o n by a l l f i n a n c i a l
i n s t i t u t i o n s on an e q u a l f o o t i n g , th e n l e g i s l a t i o n seems i n d i c a t e d .

-7 -

The H onorable Fernand J . S t Germain

Such l e g i s l a t i o n presum ably would r e c o g n i z e t h e need f o r an
e q u i t a b l e s e t o f ground r u l e s .
To t h e e x t e n t t h a t f i n a n c i a l
i n s t i t u t i o n s become more com parable i n t h e i r a c t i v i t i e s , t o
t h a t e x t e n t t h e y s h o u ld be e x p e c t e d t o m eet com parable s ta n d a r d s
and r e q u i r e m e n t s .
S in c e r e ly yours,
(Signed)

George W. Mitchell

George V . M i t c h e l l
T

E n c lo s u r e

Evolution of the Payments Mechanism
T h e f o l l o w i n g s t a te m e n t w a s p r e p a r e d b y the
F e d e r a l R e s e r v e S y s t e m S te e r in g C o m m it te e on
I m p r o v in g the P a y m e n ts M e c h a n i s m to in form
the N a t i o n ’s b a n k e r s a n d the p u b l i c o f the
g e n e r a l d ir e c tio n o f p a y m e n ts m e c h a n is m d e ­
v e lo p m e n t a s c u r r e n tly e n v i s io n e d b y the C o m ­
m ittee.

large g eo g r a p h ic areas. T h e se transactions e n ­
c o m p a s s use o f an electro n ic c o m m u n ica tio n s
netw ork to transfer p ay m en ts o rigin ating (a) at
a point o f sa le, (b) w ith a w a g e , salary, or other
in c o m e p a y m en t, or (c ) w ith an authorization
to charge a d e p o sito r ’s accou n t. T h is netw ork
w o u ld serv e all accou n ts from w h ic h , or to
w h ic h , p ay m en ts are m ad e.

T h e essen tia l features o f the p a ym en ts sy stem

C H A N G E S IN P R O S P E C T

that is e v o lv in g in resp o n se to elec tro n ic te c h ­
n o lo g y are reason ab ly clear. T h e se features are

T h e N a tio n ’s p ay m en ts m ec h a n ism can be e x ­

not lik ely to ch a n g e drastically u n less a n ew

pected to e v o l v e in the direction o f a sy stem

te c h n o lo g y d e v e lo p s . Private and p ublic roles
in this sy ste m probably w ill be very sim ilar to
th ose in b e in g today w ith financial institutions
interfacing w ith the p ub lic and the Federal R e ­
serve m ain tain ing the interface a m o n g financial

w here credit to the p a y e e ’s a ccou nt is m ade at
the sam e tim e the p a y o r ’s acco u n t is charged.
In crea sin gly, these transfers w ill be m ad e over
a co m p uter-directed c o m m u n ic a tio n s n etw ork.
A s electr o n ic transfers b e c o m e te c h n o lo g ic a lly

institutions. T h e Federal R eser v e has indicated

and e c o n o m ic a lly superior, c h e c k s w o u ld be

its intent to a c c o m m o d a te v isib le ev o lu tio n in
the p a ym en ts m ec h a n ism by co n tin u o u sly im ­

largely d isp la ced . T h e use o f the credit card,
or a sim ilar m ean s o f activatin g elec tro n ic p a y ­

p rovin g and updating its fa cilities to handle a

m ents transfers, should ex p a n d greatly. M uch
o f to d a y ’s paper-oriented operation w o u ld be
d isp laced by ele ctro n ic term inals at the point

g ro w in g v o lu m e o f fu nd s transfers a lo n g the
c h an n els o f lik e ly d e v e lo p m e n t. T h u s, the re­
g io n a l p r o c essin g cen ters and ex p an d ed c le a r in g ­
h o u se arrangem ents n o w b ein g esta b lish ed by
the Federal R eser v e S y ste m in so m e 4 0 trade
centers for h andling c h e c k s m ay b e c o m e the
n u c le i o f in te r c o n n e c te d reg io n a l c o m ­
m u n i c a t i o n s n e t w o r k s fo r h a n d l i n g w ir e
transfers o f funds and financial data.
T h e S y s t e m ’s role in facilitatin g the d e v e lo p ­
m en t o f autom ated clearin g fa c ilities and the
lin k age o f such fa cilities to provid e a n ation w id e
n etw ork for autom ated crediting s y ste m s or
preauthorized d eb itin g sy ste m s m ay p ion eer a
sim ilar role in the exp erim en ta l p o in t-o f-sa le
term inals. S u c h term in als, n o w linked to a
sin g le b a n k ’s com p u ter and en erg ized by a
unique credit-card authorization sy ste m , with
appropriate standards and in terlin kage, m a y p o ­
tentially p rovid e m erchants and c o n su m e rs w ith
a c o n v e n ie n t m ea n s o f c o n su m m a tin g transac­
tio n s at the poin t o f sale ov er a broad range
o f m erchants and financial institutions and over

o f sale for m ak ing direct fu n d s transfers, w ith
the related a c cou n tin g b ein g d o n e by com p u ters.
Significant reductions in the v o lu m e o f transac­
tions m ade through the use o f paper currency
m ay also take p la c e — by the use o f p o in t-o f-sa le
term inals and through other ele ctro n ic te c h ­
n iq ues.
T h e electro n ic funds transfer sy stem is e x ­
p ected to e v o l v e in a m odular fash ion through
the d e v e lo p m e n t and interlinkage o f a c o m p r e ­
h en siv e series o f com pu ter-d irected c o m ­
m u n ication s n etw ork s. At the local le v e l, the
system w o u ld includ e c o m m erc ia l banks and
p o ssib ly other dep ositary institutions linked to
p o in t-o f-sa le term inals in retail esta b lish m en ts,
to com p u ters in b u sin e s s e s , and p o ssib ly to
term inal d e v ic e s in h o m e s . T hrou gh these fi­
nancial in stitu tion s, co n n ectio n w o u ld be m ade
to r eg io n a l, nation al, and international n et­
w o r k s, en a b lin g the m o v e m e n t o f fu n d s nearly
e v er y w h e r e in the w orld .

R EPRINTED FROM
F ED ER A L RESERVE B U L L E T IN
FOR DECEMBER 1972

1009

1010

FEDERAL RESERVE BULLETIN □ DECEMBER 1972

storage, and retrieval o f a sso ciated inform ation;

O BJECTIV ES
T he p aym en ts system as it e v o lv e s w ill need
to be aim ed at p roviding the p ublic with a
c o n v e n ie n t, e c o n o m ic a l, and secure m ean s o f
m o v in g funds. In c om p a riso n to the present
check and other funds transfer sy s t e m s , the n ew
p aym en ts system should:
•

•

•
•

be more efficient, as electronic data processing and
com m unications technologies replace la bor-inten­
sive processing procedures.
provide a more secure method o f payment, less
subject to theft, loss, fo rg e ry, and alteration of
payments data, and a method o f tracing all trans­
actions.
assure a more equitable balance o f the debit and
credit effect on participants.
accommodate both debit and credit transfers.

T he system w ou ld co n tin u e to:
•
•
•

provide for the continuation o f com petition among
financial institutions.
involve public participation and surveillance over
private in stitu tio ns’ money role.
be capable o f p ro vid in g tim e ly and detailed data
on money flows, trade volumes, and other payments-related in form ation fo r use in monetary
p o licy and other relevant applications.

FEDERAL R ES E R V E INVOLVEMENT
T he Federal R eserv e A ct directs the Federal
R eserve S ystem to provid e an efficient p a ym en ts
m e ch an ism for the public. T h e p o lic y statem ent
of the Board o f G ove rn ors on June 18, 1971,

and that p rov id es better integration o f b u sin ess
electro n ic data p ro c essin g cap a b ilities w ith the
p a ym en ts m e c h a n ism .
F in a n c ia l in stitu tio n s need a m ore efficient
system o f transferring fu n d s— o n e that is less
labor in ten siv e— a sy stem that w ill en ab le them
to offer c u sto m ers a w id er variety o f se r v ic e s,
in clu d in g inform ational serv ices based on the
im proved data generated by the p aym en ts s y s ­
tem .
G o v e r n m e n t n eeds are sim ilar to those of
b u sin e ss, but with the additional sp ecial need
for greater security against theft o f c h e c k s issued
to the public.

ROLE OF THE FEDERAL
R E S E R V E SYSTE M
It is anticipated that the Federal R eserve w ill
in s t a ll a n d m a n a g e a n a t i o n w i d e c o m ­
m u n ication s netw ork through w h ich interre­
gional settlem en ts b etw een financial institutions
w ill be m ad e.
A num ber o f other n etw orks m ay ex ist. In
part, these w ill be local and regional funds
transfer netw ork s in w h ich Federal R eserve in ­
v o lv e m e n t m ay be m in im a l. T he total of
transfers internal to banking institutions may
exp an d if d em and d ep o sit market shares b e co m e
m ore concentrated . Thrift institutions m ay set

called for “ basic ch a n g e s in the N a tio n ’s system

up their o w n

for handling m o n e y p ay m en ts [as] essen tia lly

netw ork s m ay b e c o m e more w id esp read.
T he level o f Federal R eserve in v o lv e m e n t in
different regional or local netw orks for transfer
o f funds w ill vary d e p en d in g on the banking

transitional steps toward replacing the use of
ch eck s with e lectron ic transfer o f f u n d s .”
In further d e v e lo p m e n t o f the p aym en ts
m e c h a n ism , the c o n v e n ie n c e and n eed s o f the
participants should con tin u e to be the primary
con sid eration s. T h e se
m arized as fo llo w s:

needs

may

be

su m ­

C o n s u m e r s need an e c o n o m ic a l m ea n s of
paym ent that is a ccep tab le an yw h ere; is less
subject to theft than cash; is less subject to lo s s,
forg ery, and alteration than ch eck s; fa cilitates
the keep in g o f n ecessary personal records; and
en a b les them c o n v e n ie n t a c c e ss to a w id e range
of serv ices from financial institutions.
B u s in e s s e s need a sy stem that red u ces the
tim e, c o sts, and risks in m ak in g and re ceiv in g
paym ents; that facilitates the transm itting.

netw orks.

Credit-card

clearing

structure. T h e Federal R eserve should ex p e c t to
m onitor the regional and local n etw orks to a s ­
sure that a satisfactory degree o f security is
b ein g m aintained and that the cap ab ility for
interfacing w ith the national network is o b ­
tained.
S in ce the pay m ents m ech a n ism w ill e v o lv e
c o n tin u o u sly , the Federal R eserv e should ex p ect
to con tin ue its participation in this evolu tion a ry
p ro cess in order to assure the desired d e v e lo p ­
ment and co ord ination o f the p ay m en ts sy ste m ,
to insure the co n tin u ed co m p etitio n a m o n g pro­
viders o f financial s e r v ic e s, and to protect the
p ublic interest.

1011

EVOLUTION OF THE PAYMENTS MECHANISM

ROLE OF FINANCIAL INSTITUTIONS
It is anticipated that private financial institutions
w ill con tinu e to play the predom inant role in
local and regional c o m m u n ic a tio n s n etw orks
through w h ich intraregional p a ym en ts w ill flow.
T he number o f private fa cilities e n g a g ed in
p ro cessin g p aym en ts transactions m ay d eclin e
as branching sy stem s and h o ld in g co m p a n ies
cen tralize their a ccou ntin g o p eration s, or as
correspondent banks exp an d their acco u n tin g
se r v ic e s, or as sm aller institutions use s p e c ia l­
ized service bureaus or band together to perform

Float w ill largely disappear and w ill not be a
significant factor to co n sid er in d eterm in ing inv estab le funds. Corporate treasurers w ill be able
to obtain more tim ely inform ation from financial
institutions on the status of corporate b alan ces,
and the tim ing o f certain c la sse s o f f u n d s ’ re­
ceipts and disb u rsem en ts w ill b e c o m e more
predictable.
Informational serv ices provided by financial
institutions w ill en ab le sm all- and m e d iu m -sized
b u sin e sses to m a n ag e in vestm en t o f funds in a
manner p reviou sly practicable only in large

d em and d ep osit and other accou n tin g serv ices.
N early all financial institutions w ill be linked

b u sin esses.

together through lo cal, reg ion a l, or national
c o m m u n ic a tio n s netw orks by m ean s of co m p a t­
ible input and output d e v ic e s. C u stom ers with
larger v o lu m e s of transactions w ill interface into

ROLE OF THE INDIVIDUAL

their b a n k s’ eq u ip m ent. C o m p etitiv e m arketing
o f co lle c tio n and p aym en ts serv ices m ay b e ­
c o m e less lo c a liz ed . T hrough the use o f a d ­
vanced eq u ip m en t, more and better ser v ice s w ill
be available to cu stom ers.

ROLE OF B U S I N E S S
T he e v o lu tio n o f the p aym en ts system w ill e n ­
able b u sin ess and g ov ern m en tal units to utilize
electron ic data p rocessin g e q u ip m en t more fully
and stream line their p aym en ts p rocedures. It
w ill be p o ssib le to subm it p aym en ts data to and
receive p a ym en ts data from financial institutions
in elec tro n ic a lly transferable form . B u sin e s se s
can n ow use com p uter-oriented input to initiate
p aym ent from their o w n d ep osit a cco u n ts or,
through preauthorization a gr eem en ts, initiate
paym en t from the dep osit accou n ts o f c u s t o m ­
ers. T h ey w ill be able to send to their cu sto m ers
m a ch in e-read ab le in v o ic e s that, w he n for­
warded to the issu in g c o m p a n ie s or the c u s t o m ­
e r s ’ banks, w ill be transform ed into electron ic
paym en t m e s sa g e s.
Larger b u sin ess and gov ern m en ta l d ep ositors
w ill establish com p u ter-to -com p u ter c o n n e c ­
tions w ith the financial institutions that hold
their a tc o u n ts. T h is option w ill permit greater
co m p etitio n for a ccou nts b ecau se d istan ces w ill
hav e a d im in ish in g cost im pact.
Instantaneous funds transfers w ill sig n ifi­
cantly sim p lify corporate funds m an ag em en t.

It is anticipated that, due to rising costs and
d elay s and g iv e n a m ore c o n v e n ie n t, cheaper
alternative, m ost in divid u als w ill m in im ize their
w riting o f c h eck s. S a laries, w a g e s , p e n sio n s,
d iv id en d s, and other in co m e item s w ill p re­
d o m in an tly be credited directly into in d iv id u a ls’
acco u n ts and, through preauthorization, recur­
ring p aym en ts w ill be d ed u cted au tom atically
from a cco u n ts. In a d dition , a co n su m e r w ill be
able to pay so m e bills sim p ly by sig n in g a
m a ch in e-read ab le in v o ic e and forw arding it to
the issu in g co m p a n y or the financial institution
h o ld in g the c o n s u m e r ’s accou n t. Other p a y ­
m ents w ill be m ade through p o in t-o f-sa le term i­
nals. w ith either the in d iv id u a l’s dem an d dep osit
accou nt or p o ssib ly an interest-bearing
ferred-paym ent accou n t b ein g d ebited.

de-

T he co n su m e r w ill be able to co m p le te finan­
cial transactions through the use o f a card or
sim ilar iden tify in g d e v ic e , and this procedure
w ill be a cco m p lish e d through autom ated teller
units c o n v e n ie n tly located in sh op p in g centers,
in other p lace s handling num erous con su m er
sa le s, and in the h om e.

FUTURE S T E P S
A s the electro n ic p aym en ts sy stem co n tin u es to
d e v e lo p , so m e areas that m ay need con tinu in g
attention by the Federal R eserve S y ste m are as
fo llo w s:
•
•

public reaction and changes in public attitudes
toward payments system im provements.
impact o f payments system im provements on the
p u b lic ’ s use of coin and currency.

1012

•

•
•
•
•

FEDERAL RESERVE BULLETIN □ DECEMBER 1972

hank cards and their relationship to the payments
m echanism; the com petitive im pact o f bank cards
w ith respect to retail credit cards.
international electronic funds transfer develop­
ments.
im pact of payments system developments on Fed­
eral Reserve System operations and policy.
technological developments in data handling and
transmission.
developm ent of the standards necessary fo r e ffi­

•

cient transmittal and interchange o f payments in ­
form ation.
legal considerations surrounding actions designed
to im prove the payments system.

T h e Federal R e serv e S y ste m w ill need for
so m e tim e to contin u e

to d e v o te

significant

resources to the d e v e lo p m e n t o f the N a tio n ’s
p a ym en ts m e c h a n ism .
□

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