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) I that is slightly Reserve lower check a wholesale prices. EFT Federal advantage would terminals by electronic account and credit allow debit message captured directly on a merchant's POS terminal. choice is available between every on-line to a wholesale switch, and retail off-line and forward" mitting of These with operating mode receipts routing POS terminal technology, to a wholesale to two technologies each for accounts. may have quite risk costs, technology but high has low credit- hardware-software- line-charge costs so that wholesale currently available mental in only local systems. are difficult ber of institutions sale system merchant On-line to organize same system experi- because a large num- the probability customer is high enough to produce to whether MasterCard However, or any large already wholesale facility tial for relatively Automated quire actions an ACH or VISA or in existence with can net- provide immediate a poten- high volume. teller no wholesale facility (ATMs) re- if ATM trans- are all "on us" and, therefore, lower than prices retail EFT? Does the rela- dangling from the has and consumers various services? been, floor see models "no." zero. What we need to see on these deposit via like the following: ACH cheaper than o o o pure by check than a branch-teller cheaper via ATM unit. withdrawal A check via ATM cheaper than via a wholesale one cashed house at a branch- teller unit. paid via ACH cheaper than bill sale paid house by check cheaper via a branch-teller The advent than of Federal seen as providing ways. Explicit actions might can be much wholesale prices per of retail costs-on to 10 percent set their inducing ATMs the for check branch-teller for ACH. Banks will Somehow, repricing There Control tute is more, cost-based The Monetary Fed both to insti- because of the guarantee banks of a maximum is passed sulting credit credit two-day for checks. prior to actual Reserve float either of credit value plan presentment checks, up present- cost of check alternative only means widespread systems payments not reflected aspect features is that depository-institution accurately reflects duction might industry rapidly electronic Reserve move toward wholesale reliance by competing on "free" in availcosts of of the pricing wholesale problem prices units ser- pricing that costs the an services of even test of Federal ~ ) I l In this issue: Reprici ng Payments and Incent ives for the Development of Electronic Funds Transfer 1 Federal Reserve Bank of Cleveland Research Department P.O. Box 6387 Cleveland, OH 44101 Address correction BULK RATE U.S. Postage Paid Cleveland, OH Permit No. 385 requested one Continued deposit institutions EFT I ECONOMIC COMMENTARY including are only however. full-service retail cost institution users advantage. suppliers may then be the vehicle for free market competition ciency existing of the of pro- payments a market may prevent by non-deposit of payment payments payment services and convenient 'recognizing Inroads Act, Prices services, and Control Rational all relative then technology. delay in cost-based of the Monetary vices will be repriced. in the relative receipts and disbursements. A second hope will be the result of NOW accounts other will repre- of check a substantial What no one can quite believe, but many from management of for from EFT. direction, of many corporate methods to realize in that may produce down. Conclud ing Comments or ACH re-evaluation for optimal institutions step availability Or, branch- services must happen for large- wire and making be closed and elimination, to and superfluous. simply to offthereby of ACH tags pricing relative of payment use price float in the effective a short trans- one or both of these branch-teller with immediate with float increase This change availability Especially loss of free a substantial the re- is to eliminate by speeding to the payee. sent When called float. The cur- creation, Federal most in units might cost advantage services. Most of Fed float arises in receiving credit the prices and to price float to depositing delay however. Act directs of branch-teller intensive payment deposit in two to customers, lower units pay- happen be raised high enough more Fed prices to justify their prices to consumers. prices with teller quite costly could October 6, 1980 charBranch- in an EFT-based This convenience 10 percent a bill paid a cost justifica- Fed- more than ability. Reserve pricing is service. is undoubtedly industry. need much transfer unit. "convenience" payment residual ments and perhaps via a whole- 4. Some shared ATM networks exist, and others are planned, for which wholesale services are required. estimates of 3 percent transfer a bill paid by check. A because and efficient it retail payment ment to the payer or by delaying cashed bill with various rent than by check. A pricing, prices released to the paying bank, the Fed finances A deposit A cash stimu- in relative item of check and ACH are trivial compared in check collection are uni- might to rational prices formly A service cost-based its payment and frequently price tags are something increase adjustment is hard to see how the recently and explicitly consistently their Payment priced, o price retail prices of check and ACH. However, of The answer up until of course, are not in the non-price of retail and would be scaled down to some necessary wholesale order Reserve check services. sometimes machines EFT prices businesses funds to ac- nationwide wholesale price tags that o is no way to know other at least when Reserve of EFT show through the has high credit- the payer has sufficient cept a debit. work there zero, Federal but slightly cheaper technology risk costs, because namely by the tive efficiency now Cur- the wide service, of Federal volume and low cost. The off-line available. involves acteristic teller technology of an inducement provided o of both belonging POS-are services- by check. POS systems must use the same whole- before and services are a few EFT service pricing. Reserve ACH prices be lower than check prices, but also the industry- eral Reserve services ferent costs. The on-line off-line for such retail payment Not only will Federal they carry a price equal to wholesale retail payment dif- having tion late an industry-wide wholesale What about tape of reflects institutions wholesaler. will be positive switch customer apparently depository house. Next year, these wholesale (or trans- of) a magnetic debits check in a "store and sending the contents the day's retail POS of the number this retail service without In summary, rently, A on-line nation of many ACH and telecommunications POS merchant in the ability to use a common to a payee's with the payment with the to account technology, of ATMs be to provide (POS) payment items." Rapid growth retail institutions. Point-of-sale a payer's average In this case, at least, cost visible to deposit paperless than ISSN 0428-1276 to test the effi- technology of the industry. NOTE: No Economic Commentary was published on September 22, 1980. Address Change o Correct o Remove as shown from mailing list Please send mailing label to the Research Department, Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland, OH 44101. domestic States, Repricing by definition, Neither of Electronic Funds Transfer Historically, payment Although nificantly eroded meated the payments industry States, the dominant ments has not changed means of effecting turn of the century. funds and, systems in fact, dominate where delayed appreciably Sophisticated transfer actions ments needs could be since the prices. Market forces would have been developed efficient forms of payment. trans- of lost earnings on teller units portation. system predicted creased branch- under a mountain long before the relative Electronic (EFT) regarded that could efficient replace payments payments rising energy prices in- transportation. is widely and air trans- of paper was being costs paper of branches funds trol Act of 1980 has made sweeping removing among both depository rational institutions modifi- Competition demonstrated steel and automobiles. adviser, Federal ReserveBank of Cleveland. The opinions stated herein are those of the author and not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal ReserveSystem. payment of payment EFT countries competition as well as to services. The ex- right services as we A recently systems import import published in 11 developed clearly shows a more advanced in the payment systems role of such as Belgium, the Netherlands, France, West Germany, and Sweden.1 However, the 1. Bank for International Settlements, Payment Systems in Eleven Developed Countries (Bank Administration Institute, 1980), to offer interest have pro- At tween ac- must be understood present, non-interest-bearing counts of carry an implicit or underpriced free bearing accounts market quire increased costs checking ability. Competition on these bal- of the without explicit paper to member fees or charges. will dismantle The Monetary major latory shelter, institutions with explicit issuing Nationwide thrift below of pricing NOW accounts market been an important industry. of industry. course, have of EFT development. loopholes structure avenue may dampen has for entry Initially, in the long into the NOW account the incentive by thrifts via the paper-based for by permitting technology. costs balance services, customers perceive the with the the Monetary tional institutions to Free incen- by minimumof free be expected advantage of EFT. Control Only rates, permitted by Act in six years, will be discouraged. and thrifts pricing practices mired in tradi- for transactions, will have difficulty driving inefficient services. payment to Q ceil- of Regulation interest banks margin cannot these pricing practices With earnings and the offer elimination ings on deposit below-market will dampen obscured cost of EFT. As long as trans- requirements if traditional For example, see E.J. Stevens, "Electronic Funds Transfer Systems," Federal Reserve Bank of Cleveland Annual Report, 1977. are mode services at cost. services action payments deposit payment or underpriced likely, how- will be with minimum enables pricing lower services The primary rate. The resulting avoid then on NOWs are held interest on deposits to If EFT ser- is not and (3) enabling accounts. relative other a regulated, in- regulatory 2. rates. of thrift paper-based entry ever, if rates of interest large numbers the for result to to all financial EFT a better use of EFT. tives to shift toward of electronic direct would encourage are institutions, development than powers Exploitation authorization EFT This efficient system provide services, carrying prices been at the forefront payments for profit- less costly than traditional and branch-teller prices re- reflecting maintain of balances transactions to enter to could NOW account likely to prompt roughly limits on NOW and Reserve to offer payment institutions EFT accounts the phase-out and savings accounts, services of this regu- (NOW) Q interest-rate the Federal Act to offer interest- (2) scheduling Regulation time portions transactions households, Control by (1) allowing all commercial banks and thrift bearing banks would paper in this new environment. vices were indeed Replac- NOW accounts of interest efficiency system services in the form services. in order payment has provided Re- test return prices service checking with rates banks have had the payments realize a cost advantage EFT development. has been sig- accounts, tions vices, may encourage ing checking in the if ser- a regulatory forces NOW accounts, prices for payment serve, in turn, Some might have been by market of EFT. hand, with explicit The Federal stitutions long ago if we could and assure a more for by and Regulation An EFT cost advantage countries may of this Economic Commentary. is the subject study that this shelter had coupled other ances have been prohibited. that test is likely to take place domestic industry. to pricing of payment tent to which and transfer barriers as the technology E.J. Stevens is an economic Con- test to proceed institution of this and Monetary allow this market financial collapse The Depository finally extensive The Deregulation less- Most pay- through by surface EFT for other structure distributed Iinked assure the sub- in the regulatory are still made by cash and of lower cations ments, networks at the cost and settlement. checks Institutions be in- if basic pay- satisfied of lower-cost in large-value should economy pay- of rapid clearing paper in a market stitution of funds can justify however, evitable of EFT electronic avoidance receipt of the United Implementation within commercial and explicit has per- banks services shelter.2 exclusive change from for- competition commercial past decade, by ~.J. Stevens technological is protected has domestic On the in the United free rein to test the cost advantage duced Although mechanism eign competition. Payments and Incentives for the Development payments transaction out EFT higher-cost, Moreover, pricing even practices change, the efficiency of EFT may only be re- flected prices if deposit in transaction institu- settling EFT payments. retail and wholesale of alternative payment be- services before investigating technologies posit institutions in clearing and The distinction perceived costs by de- and their customers. actions posit payment that enable institution about the services account balances vices may be rendered face-to-face, automated point-of-sale terminal, presentment lay credits, or inquire Ser- by a branch-teller unit teller machine (ATM), payment debits, between institutions. telephone, services or the that re- and account-balance payer These United are operations and payee are crucial have been controversial of the of a de- accounts. and settlement quiries trans- by a wholesaler. Wholesale clearing debit, mail, in- deposit services that since the First Bank States originally performed the services for state banks almost 200 years ago. These United services States independent Indeed, Act, banks soon issue payment particular will accounts. have quite the institutions. Control depository the ability The chances payer holding an account same institutions are thrift 25,000 existing than institutions ket. and because of many small, as a result of the Monetary more normally are critical has a tradition as any particular to of any with the payee are low, even within a local mar- On a nationwide substantially basis, lower. are just as crucial those chances Wholesale services for EFT payment mech- anisms as they are for paper checks. Wholesale quently market payment controversial operations services because and localities form national purely are fre- private have not always been ade- clearing and set- among required system. of payments telephone assure payer dustries, in other and access provide ac- utilities to whole- network-dependent industry. correspondent wish. payee public in- this has not been the solution payments mail of independent regulated nondiscriminatory sale services Clearing calls or sorting holding Although uni- are as complex of the large number counts. all institu- for a truly payments and settlement institutions are the in their tions the timely of all payments because holders to credit, to provide as switching Retail and Wholesale Payment Services Retail quate tlement Private in the clearinghouses, banks, and other organizations wholesale Assuring services they nationwide whole- sale services is the job of the Federal Reserve System and uniform wherever in the case of wire transfer, automated ments. clearinghouse pay- institution will soon be able to send items to a Federal Reserve Bank when Any deposit check, (ACH) private market not attractive Cost tional comparisons would per volume.3 estimates be less than of about office-far This finding and of cost functions check costs at an 200 million items per of current of a potential of the Federal cost ad- is consistent with Reserve to price ACH service on the basis of long-run cost at mature tradi- suggest that ACH in excess vantage for ACH, however, the proposal EFT and retail levels. At the whole- Reserve offices ACH volume year of services can be made at both sale level, recent at Federal services are or available. payment the wholesale costs wholesale volume and thereby average at a price 3. David Burras Humphrey, "Costs, Scale Economies, Competition, and Product Mix in the U.S. Payments Mechanism" (paper presented at American Finance Association meetings, Denver, Colorado, September 5, 1980; processed) . domestic States, Repricing by definition, Neither of Electronic Funds Transfer Historically, payment Although nificantly eroded meated the payments industry States, the dominant ments has not changed means of effecting turn of the century. funds and, systems in fact, dominate where delayed appreciably Sophisticated transfer actions ments needs could be since the prices. Market forces would have been developed efficient forms of payment. trans- of lost earnings on teller units portation. system predicted creased branch- under a mountain long before the relative Electronic (EFT) regarded that could efficient replace payments payments rising energy prices in- transportation. is widely and air trans- of paper was being costs paper of branches funds trol Act of 1980 has made sweeping removing among both depository rational institutions modifi- Competition demonstrated steel and automobiles. adviser, Federal ReserveBank of Cleveland. The opinions stated herein are those of the author and not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal ReserveSystem. payment of payment EFT countries competition as well as to services. The ex- right services as we A recently systems import import published in 11 developed clearly shows a more advanced in the payment systems role of such as Belgium, the Netherlands, France, West Germany, and Sweden.1 However, the 1. Bank for International Settlements, Payment Systems in Eleven Developed Countries (Bank Administration Institute, 1980), to offer interest have pro- At tween ac- must be understood present, non-interest-bearing counts of carry an implicit or underpriced free bearing accounts market quire increased costs checking ability. Competition on these bal- of the without explicit paper to member fees or charges. will dismantle The Monetary major latory shelter, institutions with explicit issuing Nationwide thrift below of pricing NOW accounts market been an important industry. of industry. course, have of EFT development. loopholes structure avenue may dampen has for entry Initially, in the long into the NOW account the incentive by thrifts via the paper-based for by permitting technology. costs balance services, customers perceive the with the the Monetary tional institutions to Free incen- by minimumof free be expected advantage of EFT. Control Only rates, permitted by Act in six years, will be discouraged. and thrifts pricing practices mired in tradi- for transactions, will have difficulty driving inefficient services. payment to Q ceil- of Regulation interest banks margin cannot these pricing practices With earnings and the offer elimination ings on deposit below-market will dampen obscured cost of EFT. As long as trans- requirements if traditional For example, see E.J. Stevens, "Electronic Funds Transfer Systems," Federal Reserve Bank of Cleveland Annual Report, 1977. are mode services at cost. services action payments deposit payment or underpriced likely, how- will be with minimum enables pricing lower services The primary rate. The resulting avoid then on NOWs are held interest on deposits to If EFT ser- is not and (3) enabling accounts. relative other a regulated, in- regulatory 2. rates. of thrift paper-based entry ever, if rates of interest large numbers the for result to to all financial EFT a better use of EFT. tives to shift toward of electronic direct would encourage are institutions, development than powers Exploitation authorization EFT This efficient system provide services, carrying prices been at the forefront payments for profit- less costly than traditional and branch-teller prices re- reflecting maintain of balances transactions to enter to could NOW account likely to prompt roughly limits on NOW and Reserve to offer payment institutions EFT accounts the phase-out and savings accounts, services of this regu- (NOW) Q interest-rate the Federal Act to offer interest- (2) scheduling Regulation time portions transactions households, Control by (1) allowing all commercial banks and thrift bearing banks would paper in this new environment. vices were indeed Replac- NOW accounts of interest efficiency system services in the form services. in order payment has provided Re- test return prices service checking with rates banks have had the payments realize a cost advantage EFT development. has been sig- accounts, tions vices, may encourage ing checking in the if ser- a regulatory forces NOW accounts, prices for payment serve, in turn, Some might have been by market of EFT. hand, with explicit The Federal stitutions long ago if we could and assure a more for by and Regulation An EFT cost advantage countries may of this Economic Commentary. is the subject study that this shelter had coupled other ances have been prohibited. that test is likely to take place domestic industry. to pricing of payment tent to which and transfer barriers as the technology E.J. Stevens is an economic Con- test to proceed institution of this and Monetary allow this market financial collapse The Depository finally extensive The Deregulation less- Most pay- through by surface EFT for other structure distributed Iinked assure the sub- in the regulatory are still made by cash and of lower cations ments, networks at the cost and settlement. checks Institutions be in- if basic pay- satisfied of lower-cost in large-value should economy pay- of rapid clearing paper in a market stitution of funds can justify however, evitable of EFT electronic avoidance receipt of the United Implementation within commercial and explicit has per- banks services shelter.2 exclusive change from for- competition commercial past decade, by ~.J. Stevens technological is protected has domestic On the in the United free rein to test the cost advantage duced Although mechanism eign competition. Payments and Incentives for the Development payments transaction out EFT higher-cost, Moreover, pricing even practices change, the efficiency of EFT may only be re- flected prices if deposit in transaction institu- settling EFT payments. retail and wholesale of alternative payment be- services before investigating technologies posit institutions in clearing and The distinction perceived costs by de- and their customers. actions posit payment that enable institution about the services account balances vices may be rendered face-to-face, automated point-of-sale terminal, presentment lay credits, or inquire Ser- by a branch-teller unit teller machine (ATM), payment debits, between institutions. telephone, services or the that re- and account-balance payer These United are operations and payee are crucial have been controversial of the of a de- accounts. and settlement quiries trans- by a wholesaler. Wholesale clearing debit, mail, in- deposit services that since the First Bank States originally performed the services for state banks almost 200 years ago. These United services States independent Indeed, Act, banks soon issue payment particular will accounts. have quite the institutions. Control depository the ability The chances payer holding an account same institutions are thrift 25,000 existing than institutions ket. and because of many small, as a result of the Monetary more normally are critical has a tradition as any particular to of any with the payee are low, even within a local mar- On a nationwide substantially basis, lower. are just as crucial those chances Wholesale services for EFT payment mech- anisms as they are for paper checks. Wholesale quently market payment controversial operations services because and localities form national purely are fre- private have not always been ade- clearing and set- among required system. of payments telephone assure payer dustries, in other and access provide ac- utilities to whole- network-dependent industry. correspondent wish. payee public in- this has not been the solution payments mail of independent regulated nondiscriminatory sale services Clearing calls or sorting holding Although uni- are as complex of the large number counts. all institu- for a truly payments and settlement institutions are the in their tions the timely of all payments because holders to credit, to provide as switching Retail and Wholesale Payment Services Retail quate tlement Private in the clearinghouses, banks, and other organizations wholesale Assuring services they nationwide whole- sale services is the job of the Federal Reserve System and uniform wherever in the case of wire transfer, automated ments. clearinghouse pay- institution will soon be able to send items to a Federal Reserve Bank when Any deposit check, (ACH) private market not attractive Cost tional comparisons would per volume.3 estimates be less than of about office-far This finding and of cost functions check costs at an 200 million items per of current of a potential of the Federal cost ad- is consistent with Reserve to price ACH service on the basis of long-run cost at mature tradi- suggest that ACH in excess vantage for ACH, however, the proposal EFT and retail levels. At the whole- Reserve offices ACH volume year of services can be made at both sale level, recent at Federal services are or available. payment the wholesale costs wholesale volume and thereby average at a price 3. David Burras Humphrey, "Costs, Scale Economies, Competition, and Product Mix in the U.S. Payments Mechanism" (paper presented at American Finance Association meetings, Denver, Colorado, September 5, 1980; processed) . domestic States, Repricing by definition, Neither of Electronic Funds Transfer Historically, payment Although nificantly eroded meated the payments industry States, the dominant ments has not changed means of effecting turn of the century. funds and, systems in fact, dominate where delayed appreciably Sophisticated transfer actions ments needs could be since the prices. Market forces would have been developed efficient forms of payment. trans- of lost earnings on teller units portation. system predicted creased branch- under a mountain long before the relative Electronic (EFT) regarded that could efficient replace payments payments rising energy prices in- transportation. is widely and air trans- of paper was being costs paper of branches funds trol Act of 1980 has made sweeping removing among both depository rational institutions modifi- Competition demonstrated steel and automobiles. adviser, Federal ReserveBank of Cleveland. The opinions stated herein are those of the author and not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal ReserveSystem. payment of payment EFT countries competition as well as to services. The ex- right services as we A recently systems import import published in 11 developed clearly shows a more advanced in the payment systems role of such as Belgium, the Netherlands, France, West Germany, and Sweden.1 However, the 1. Bank for International Settlements, Payment Systems in Eleven Developed Countries (Bank Administration Institute, 1980), to offer interest have pro- At tween ac- must be understood present, non-interest-bearing counts of carry an implicit or underpriced free bearing accounts market quire increased costs checking ability. Competition on these bal- of the without explicit paper to member fees or charges. will dismantle The Monetary major latory shelter, institutions with explicit issuing Nationwide thrift below of pricing NOW accounts market been an important industry. of industry. course, have of EFT development. loopholes structure avenue may dampen has for entry Initially, in the long into the NOW account the incentive by thrifts via the paper-based for by permitting technology. costs balance services, customers perceive the with the the Monetary tional institutions to Free incen- by minimumof free be expected advantage of EFT. Control Only rates, permitted by Act in six years, will be discouraged. and thrifts pricing practices mired in tradi- for transactions, will have difficulty driving inefficient services. payment to Q ceil- of Regulation interest banks margin cannot these pricing practices With earnings and the offer elimination ings on deposit below-market will dampen obscured cost of EFT. As long as trans- requirements if traditional For example, see E.J. Stevens, "Electronic Funds Transfer Systems," Federal Reserve Bank of Cleveland Annual Report, 1977. are mode services at cost. services action payments deposit payment or underpriced likely, how- will be with minimum enables pricing lower services The primary rate. The resulting avoid then on NOWs are held interest on deposits to If EFT ser- is not and (3) enabling accounts. relative other a regulated, in- regulatory 2. rates. of thrift paper-based entry ever, if rates of interest large numbers the for result to to all financial EFT a better use of EFT. tives to shift toward of electronic direct would encourage are institutions, development than powers Exploitation authorization EFT This efficient system provide services, carrying prices been at the forefront payments for profit- less costly than traditional and branch-teller prices re- reflecting maintain of balances transactions to enter to could NOW account likely to prompt roughly limits on NOW and Reserve to offer payment institutions EFT accounts the phase-out and savings accounts, services of this regu- (NOW) Q interest-rate the Federal Act to offer interest- (2) scheduling Regulation time portions transactions households, Control by (1) allowing all commercial banks and thrift bearing banks would paper in this new environment. vices were indeed Replac- NOW accounts of interest efficiency system services in the form services. in order payment has provided Re- test return prices service checking with rates banks have had the payments realize a cost advantage EFT development. has been sig- accounts, tions vices, may encourage ing checking in the if ser- a regulatory forces NOW accounts, prices for payment serve, in turn, Some might have been by market of EFT. hand, with explicit The Federal stitutions long ago if we could and assure a more for by and Regulation An EFT cost advantage countries may of this Economic Commentary. is the subject study that this shelter had coupled other ances have been prohibited. that test is likely to take place domestic industry. to pricing of payment tent to which and transfer barriers as the technology E.J. Stevens is an economic Con- test to proceed institution of this and Monetary allow this market financial collapse The Depository finally extensive The Deregulation less- Most pay- through by surface EFT for other structure distributed Iinked assure the sub- in the regulatory are still made by cash and of lower cations ments, networks at the cost and settlement. checks Institutions be in- if basic pay- satisfied of lower-cost in large-value should economy pay- of rapid clearing paper in a market stitution of funds can justify however, evitable of EFT electronic avoidance receipt of the United Implementation within commercial and explicit has per- banks services shelter.2 exclusive change from for- competition commercial past decade, by ~.J. Stevens technological is protected has domestic On the in the United free rein to test the cost advantage duced Although mechanism eign competition. Payments and Incentives for the Development payments transaction out EFT higher-cost, Moreover, pricing even practices change, the efficiency of EFT may only be re- flected prices if deposit in transaction institu- settling EFT payments. retail and wholesale of alternative payment be- services before investigating technologies posit institutions in clearing and The distinction perceived costs by de- and their customers. actions posit payment that enable institution about the services account balances vices may be rendered face-to-face, automated point-of-sale terminal, presentment lay credits, or inquire Ser- by a branch-teller unit teller machine (ATM), payment debits, between institutions. telephone, services or the that re- and account-balance payer These United are operations and payee are crucial have been controversial of the of a de- accounts. and settlement quiries trans- by a wholesaler. Wholesale clearing debit, mail, in- deposit services that since the First Bank States originally performed the services for state banks almost 200 years ago. These United services States independent Indeed, Act, banks soon issue payment particular will accounts. have quite the institutions. Control depository the ability The chances payer holding an account same institutions are thrift 25,000 existing than institutions ket. and because of many small, as a result of the Monetary more normally are critical has a tradition as any particular to of any with the payee are low, even within a local mar- On a nationwide substantially basis, lower. are just as crucial those chances Wholesale services for EFT payment mech- anisms as they are for paper checks. Wholesale quently market payment controversial operations services because and localities form national purely are fre- private have not always been ade- clearing and set- among required system. of payments telephone assure payer dustries, in other and access provide ac- utilities to whole- network-dependent industry. correspondent wish. payee public in- this has not been the solution payments mail of independent regulated nondiscriminatory sale services Clearing calls or sorting holding Although uni- are as complex of the large number counts. all institu- for a truly payments and settlement institutions are the in their tions the timely of all payments because holders to credit, to provide as switching Retail and Wholesale Payment Services Retail quate tlement Private in the clearinghouses, banks, and other organizations wholesale Assuring services they nationwide whole- sale services is the job of the Federal Reserve System and uniform wherever in the case of wire transfer, automated ments. clearinghouse pay- institution will soon be able to send items to a Federal Reserve Bank when Any deposit check, (ACH) private market not attractive Cost tional comparisons would per volume.3 estimates be less than of about office-far This finding and of cost functions check costs at an 200 million items per of current of a potential of the Federal cost ad- is consistent with Reserve to price ACH service on the basis of long-run cost at mature tradi- suggest that ACH in excess vantage for ACH, however, the proposal EFT and retail levels. At the whole- Reserve offices ACH volume year of services can be made at both sale level, recent at Federal services are or available. payment the wholesale costs wholesale volume and thereby average at a price 3. David Burras Humphrey, "Costs, Scale Economies, Competition, and Product Mix in the U.S. Payments Mechanism" (paper presented at American Finance Association meetings, Denver, Colorado, September 5, 1980; processed) . ) I that is slightly Reserve lower check a wholesale prices. EFT Federal advantage would terminals by electronic account and credit allow debit message captured directly on a merchant's POS terminal. choice is available between every on-line to a wholesale switch, and retail off-line and forward" mitting of These with operating mode receipts routing POS terminal technology, to a wholesale to two technologies each for accounts. may have quite risk costs, technology but high has low credit- hardware-software- line-charge costs so that wholesale currently available mental in only local systems. are difficult ber of institutions sale system merchant On-line to organize same system experi- because a large num- the probability customer is high enough to produce to whether MasterCard However, or any large already wholesale facility tial for relatively Automated quire actions an ACH or VISA or in existence with can net- provide immediate a poten- high volume. teller no wholesale facility (ATMs) re- if ATM trans- are all "on us" and, therefore, lower than prices retail EFT? Does the rela- dangling from the has and consumers various services? been, floor see models "no." zero. What we need to see on these deposit via like the following: ACH cheaper than o o o pure by check than a branch-teller cheaper via ATM unit. withdrawal A check via ATM cheaper than via a wholesale one cashed house at a branch- teller unit. paid via ACH cheaper than bill sale paid house by check cheaper via a branch-teller The advent than of Federal seen as providing ways. Explicit actions might can be much wholesale prices per of retail costs-on to 10 percent set their inducing ATMs the for check branch-teller for ACH. Banks will Somehow, repricing There Control tute is more, cost-based The Monetary Fed both to insti- because of the guarantee banks of a maximum is passed sulting credit credit two-day for checks. prior to actual Reserve float either of credit value plan presentment checks, up present- cost of check alternative only means widespread systems payments not reflected aspect features is that depository-institution accurately reflects duction might industry rapidly electronic Reserve move toward wholesale reliance by competing on "free" in availcosts of of the pricing wholesale problem prices units ser- pricing that costs the an services of even test of Federal ~ ) I l In this issue: Reprici ng Payments and Incent ives for the Development of Electronic Funds Transfer 1 Federal Reserve Bank of Cleveland Research Department P.O. Box 6387 Cleveland, OH 44101 Address correction BULK RATE U.S. Postage Paid Cleveland, OH Permit No. 385 requested one Continued deposit institutions EFT I ECONOMIC COMMENTARY including are only however. full-service retail cost institution users advantage. suppliers may then be the vehicle for free market competition ciency existing of the of pro- payments a market may prevent by non-deposit of payment payments payment services and convenient 'recognizing Inroads Act, Prices services, and Control Rational all relative then technology. delay in cost-based of the Monetary vices will be repriced. in the relative receipts and disbursements. A second hope will be the result of NOW accounts other will repre- of check a substantial What no one can quite believe, but many from management of for from EFT. direction, of many corporate methods to realize in that may produce down. Conclud ing Comments or ACH re-evaluation for optimal institutions step availability Or, branch- services must happen for large- wire and making be closed and elimination, to and superfluous. simply to offthereby of ACH tags pricing relative of payment use price float in the effective a short trans- one or both of these branch-teller with immediate with float increase This change availability Especially loss of free a substantial the re- is to eliminate by speeding to the payee. sent When called float. The cur- creation, Federal most in units might cost advantage services. Most of Fed float arises in receiving credit the prices and to price float to depositing delay however. Act directs of branch-teller intensive payment deposit in two to customers, lower units pay- happen be raised high enough more Fed prices to justify their prices to consumers. prices with teller quite costly could October 6, 1980 charBranch- in an EFT-based This convenience 10 percent a bill paid a cost justifica- Fed- more than ability. Reserve pricing is service. is undoubtedly industry. need much transfer unit. "convenience" payment residual ments and perhaps via a whole- 4. Some shared ATM networks exist, and others are planned, for which wholesale services are required. estimates of 3 percent transfer a bill paid by check. A because and efficient it retail payment ment to the payer or by delaying cashed bill with various rent than by check. A pricing, prices released to the paying bank, the Fed finances A deposit A cash stimu- in relative item of check and ACH are trivial compared in check collection are uni- might to rational prices formly A service cost-based its payment and frequently price tags are something increase adjustment is hard to see how the recently and explicitly consistently their Payment priced, o price retail prices of check and ACH. However, of The answer up until of course, are not in the non-price of retail and would be scaled down to some necessary wholesale order Reserve check services. sometimes machines EFT prices businesses funds to ac- nationwide wholesale price tags that o is no way to know other at least when Reserve of EFT show through the has high credit- the payer has sufficient cept a debit. work there zero, Federal but slightly cheaper technology risk costs, because namely by the tive efficiency now Cur- the wide service, of Federal volume and low cost. The off-line available. involves acteristic teller technology of an inducement provided o of both belonging POS-are services- by check. POS systems must use the same whole- before and services are a few EFT service pricing. Reserve ACH prices be lower than check prices, but also the industry- eral Reserve services ferent costs. The on-line off-line for such retail payment Not only will Federal they carry a price equal to wholesale retail payment dif- having tion late an industry-wide wholesale What about tape of reflects institutions wholesaler. will be positive switch customer apparently depository house. Next year, these wholesale (or trans- of) a magnetic debits check in a "store and sending the contents the day's retail POS of the number this retail service without In summary, rently, A on-line nation of many ACH and telecommunications POS merchant in the ability to use a common to a payee's with the payment with the to account technology, of ATMs be to provide (POS) payment items." Rapid growth retail institutions. Point-of-sale a payer's average In this case, at least, cost visible to deposit paperless than ISSN 0428-1276 to test the effi- technology of the industry. NOTE: No Economic Commentary was published on September 22, 1980. Address Change o Correct o Remove as shown from mailing list Please send mailing label to the Research Department, Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland, OH 44101. ) I that is slightly Reserve lower check a wholesale prices. EFT Federal advantage would terminals by electronic account and credit allow debit message captured directly on a merchant's POS terminal. choice is available between every on-line to a wholesale switch, and retail off-line and forward" mitting of These with operating mode receipts routing POS terminal technology, to a wholesale to two technologies each for accounts. may have quite risk costs, technology but high has low credit- hardware-software- line-charge costs so that wholesale currently available mental in only local systems. are difficult ber of institutions sale system merchant On-line to organize same system experi- because a large num- the probability customer is high enough to produce to whether MasterCard However, or any large already wholesale facility tial for relatively Automated quire actions an ACH or VISA or in existence with can net- provide immediate a poten- high volume. teller no wholesale facility (ATMs) re- if ATM trans- are all "on us" and, therefore, lower than prices retail EFT? Does the rela- dangling from the has and consumers various services? been, floor see models "no." zero. What we need to see on these deposit via like the following: ACH cheaper than o o o pure by check than a branch-teller cheaper via ATM unit. withdrawal A check via ATM cheaper than via a wholesale one cashed house at a branch- teller unit. paid via ACH cheaper than bill sale paid house by check cheaper via a branch-teller The advent than of Federal seen as providing ways. Explicit actions might can be much wholesale prices per of retail costs-on to 10 percent set their inducing ATMs the for check branch-teller for ACH. Banks will Somehow, repricing There Control tute is more, cost-based The Monetary Fed both to insti- because of the guarantee banks of a maximum is passed sulting credit credit two-day for checks. prior to actual Reserve float either of credit value plan presentment checks, up present- cost of check alternative only means widespread systems payments not reflected aspect features is that depository-institution accurately reflects duction might industry rapidly electronic Reserve move toward wholesale reliance by competing on "free" in availcosts of of the pricing wholesale problem prices units ser- pricing that costs the an services of even test of Federal ~ ) I l In this issue: Reprici ng Payments and Incent ives for the Development of Electronic Funds Transfer 1 Federal Reserve Bank of Cleveland Research Department P.O. Box 6387 Cleveland, OH 44101 Address correction BULK RATE U.S. Postage Paid Cleveland, OH Permit No. 385 requested one Continued deposit institutions EFT I ECONOMIC COMMENTARY including are only however. full-service retail cost institution users advantage. suppliers may then be the vehicle for free market competition ciency existing of the of pro- payments a market may prevent by non-deposit of payment payments payment services and convenient 'recognizing Inroads Act, Prices services, and Control Rational all relative then technology. delay in cost-based of the Monetary vices will be repriced. in the relative receipts and disbursements. A second hope will be the result of NOW accounts other will repre- of check a substantial What no one can quite believe, but many from management of for from EFT. direction, of many corporate methods to realize in that may produce down. Conclud ing Comments or ACH re-evaluation for optimal institutions step availability Or, branch- services must happen for large- wire and making be closed and elimination, to and superfluous. simply to offthereby of ACH tags pricing relative of payment use price float in the effective a short trans- one or both of these branch-teller with immediate with float increase This change availability Especially loss of free a substantial the re- is to eliminate by speeding to the payee. sent When called float. The cur- creation, Federal most in units might cost advantage services. Most of Fed float arises in receiving credit the prices and to price float to depositing delay however. Act directs of branch-teller intensive payment deposit in two to customers, lower units pay- happen be raised high enough more Fed prices to justify their prices to consumers. prices with teller quite costly could October 6, 1980 charBranch- in an EFT-based This convenience 10 percent a bill paid a cost justifica- Fed- more than ability. Reserve pricing is service. is undoubtedly industry. need much transfer unit. "convenience" payment residual ments and perhaps via a whole- 4. Some shared ATM networks exist, and others are planned, for which wholesale services are required. estimates of 3 percent transfer a bill paid by check. A because and efficient it retail payment ment to the payer or by delaying cashed bill with various rent than by check. A pricing, prices released to the paying bank, the Fed finances A deposit A cash stimu- in relative item of check and ACH are trivial compared in check collection are uni- might to rational prices formly A service cost-based its payment and frequently price tags are something increase adjustment is hard to see how the recently and explicitly consistently their Payment priced, o price retail prices of check and ACH. However, of The answer up until of course, are not in the non-price of retail and would be scaled down to some necessary wholesale order Reserve check services. sometimes machines EFT prices businesses funds to ac- nationwide wholesale price tags that o is no way to know other at least when Reserve of EFT show through the has high credit- the payer has sufficient cept a debit. work there zero, Federal but slightly cheaper technology risk costs, because namely by the tive efficiency now Cur- the wide service, of Federal volume and low cost. The off-line available. involves acteristic teller technology of an inducement provided o of both belonging POS-are services- by check. POS systems must use the same whole- before and services are a few EFT service pricing. Reserve ACH prices be lower than check prices, but also the industry- eral Reserve services ferent costs. The on-line off-line for such retail payment Not only will Federal they carry a price equal to wholesale retail payment dif- having tion late an industry-wide wholesale What about tape of reflects institutions wholesaler. will be positive switch customer apparently depository house. Next year, these wholesale (or trans- of) a magnetic debits check in a "store and sending the contents the day's retail POS of the number this retail service without In summary, rently, A on-line nation of many ACH and telecommunications POS merchant in the ability to use a common to a payee's with the payment with the to account technology, of ATMs be to provide (POS) payment items." Rapid growth retail institutions. Point-of-sale a payer's average In this case, at least, cost visible to deposit paperless than ISSN 0428-1276 to test the effi- technology of the industry. NOTE: No Economic Commentary was published on September 22, 1980. Address Change o Correct o Remove as shown from mailing list Please send mailing label to the Research Department, Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland, OH 44101.