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March 11} 1977 C om p u ter Money fecting the terminals and clearingThe computer will remain a revolutionary force for changein the houseswhich handle electronic American financial system}espepayments.But these could be Iifecially in view of the pressureit or-death decisionsto many of the createsfor a standardizedsystemof institutions involved. One such ismoney payments.That seemsto be sue was the question of computer the gist of the messageof the Naterminals vs. bricks-and-mortar tional Commissionon Electronic branches}on which the CommisFund Transfers}which releasedlast sion made probably its most conweek what is in effect the first draft troversial recommendation-that banksand other EFTfirms of its final report. In this report} the rEFTCommissiontried to define the ." future roles of the financial institu-rOaccom-m'oaate--crecHfand debit tions} regulatorsand consumers transfersin contiguous" national who are participating in the rapidly market" areas.In face 4 of the 26 evolving world of computer-based banking. commissioners(generally members of state regulatory agencies)}rejected that recommendation because The Commissionexplicitly accepted the argument that electronic they felt it ignored the" precipitous money is here to stay.Somemarket changesor seriousconsequences)} participants might still question that resulting from any such attempt to notion} in view of the low volume restructure the financial industry. and high lossesexperienced by some of the pioneers in the field. The issuegoes back to the legal But they tend to forget that this overturning of the decision made happenswith most such two yearsago by the Comptroller of innovations-credit cards}for exthe Currency}where he ruled that ample} which eventually gained customer-bankcommunications universalacceptancedespite the terminals (CBCT's)-the general problems encountered by many classificationof automated-teller early participants. In the present machi n case}cost-savingpossibilitiesseem devices-would not be considered of nationally chartered to dictate growing use of the computer} since unit automaiLuncosts banks.Sincethe SupremeCourt tend to decline year as much refused last October to hear an asunit labor costsincrease-about appeal in those severalcasesin 7 percent annually. which the Comptroller}s ruling had been overruled) CBCT'smust still Hardware: terminals be considered bank branches.But J\1any of the Commissioris recomunder terms of the 1927 McFadden mendationson the surfaceseemed Act} national banksmay branch to be only hardware decisions}afonly to the sameextent that the ,f'. (continued on page 2) 1[5) J ill! U" n 1\ f ®@®Ifc£ll §@ID) f Opinions expressed in this newsletter do not necessarily reflect the vievvs of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Covernors of the Federa! Reserve System. statesin which they are located permit their state-charteredbanks to branch-which meansnot at all in unit banking states. financial institutions that establish members' responsibilitiesand operational procedures.Two of the 28 ACH's now operating-one in Chicago and the other in New Yorkare privately operated. I n all other cases,regional FederalReserve banksprovide the facilities for the clearing operations,at no charge to users. The EFTCommissionrecommended lifting restrictions on national-bank CBCT'swithin individual states,and moreover permitting state-wide branching for all financial institutions. The CommisThe operation of these 28 ACH's sion also would have Congressperhasbeen oriented to specific geomit the interstate deployment of graphic areas,but the FederalReterminals(between contiguous states)for Fe'c:i"erally'regulated''. ' "serveplansan e"xp'erime'ntaliink-up financial institutions after some of seve ..". fixed date. Under this approach, eC:!LQ.. nic individual stateswould then be items.On this point, the EFTComforced to change restrictive branchn ing laws if they wanted stateof whether priyategr public entities chartered institutions to have a fair 'na't;lonaLEFT chanceto compete. Otherwise, the network which may ultimately develOpTfom-reglon"arl ps". In Commissionwould recommend that both state- and federallyaddition, it for the forechartered depository institutions be seeablefuture, the FederalReserve empowered to offer debit services should not into the businessof offering point-of-sale switching and (but not deposit taking) nationally clearing facilities for storesor other through terminal-basedEFT systems. merchant locations,and it should not discriminate againstprivate firms that might want to ofter their Hardware: dearanghouses The Commissionalso considered own networks. severalpolicy issuessurrounding the operation of automated clearThe Commissionrecommended inghouses(ACH's).Thesefacilities that the FederalReservecharge clear paymentsin the sameway that banksfor the ACH servicesit now conventional clearinghouseshanprovidesfree, but with ((due condle checks,but they do so much sideration" to the reservebalances more efficiently by substituting held by participating member magnetic tapesfor checksand othbanks.In addition, it argued that er paper items. ACH's have been the Fedshould force bank-run organized regionally by groups of ACH's which operate with a Fed computer to permit accessto any 2 kind of depository institution that wants.to join. Bask issue: consumers Throughout the report, the Commissionemphasizedits primary concern with the welfare of the American consumer in any new electronic system.It said that consumerscan benefit in a number of significant waysfrom EFTS,primarily from a more conv_C;l1jent, and __ method of To securethese benefits, however, legislation might be required to set forth consumers'specific rights and responsibilities. The report recommended that financial institutions generally be liable for all billing and crediting errors in an EFTsystem,unlessthey couTCI prove fraud or negligenceon the part of customers.However, consumerswould have to report statementerrors within a reasonable time}} to obtain redress.Financial institutions would not have to utilize a specific type of form or descriptive bill, although competitive pressureswould probably force them to provide adequate reports to consumers. It The Commissiondid not side with all consumer demands.It saw no problem with the lossof Itfloat/' or payment delaysfrom checks in the processof collection. It found scant evidence that consumerswould be damagedby the lossof ability to stop payments,especiallysince "only 0.29percent}}of all checks 3 are actually stopped in the present system.Both problems of this type must still be dealt with, involving as they do some intrusion into what consumersmight consider their inalienable rights. At the sametime, the Commissionexpressedfears that EFTwould create the potential for increasedabuseof pefl2.Qal privacy. It said that government accessto computerized financial records should be obtained only with the depositor's permissionor with a court order, and it called on Congressto passlegislation tb safeguard consumer rights in this respect. The Commission'sfinal report, due this fall, may not add much to the just-releasedinterim report. The fireworks may come later, when Congresstries to evaluatethe merits of the Commission'srecommendations amid all the conflicting pressuresgenerated by consumers, regulators, banks,thrift institutions, and myriad other interests.(For example,small banksin unit banking stateshave already objected strenuouslyto the proposal to permit interstate operation ,of electronic terminals.) Nonetheless,the EFTCommission report, like other recent studies of the nation's financial system,underlines the fact that technological and other pressures are pushing the nation in the direction of a simplified type of payments systemoperating through a standardizedtype of depository institution. ",VilliamBurke 'N,Ol.SUllOr .g UOl8U!4SBM. 4Bln • uo8aJO • BpBJ\aN .04B PI !!BMBH a B!UJoJ!IB::) • BUOZP'v' G B)ISEIV df j}@ 'm'!?::>'O;)SPU'!?.I:1 ues 'ON ll WM3d anVd 'S'(1 lB VW 55Vl::> .IL511D:!! B AN KI N G D A T TWEl LfTH !FEDERAlLRESERVEDI S TRI CT Amount Outstanding 2/23/77 SelectedAssetsand liabilities large Commercial Banks Loans (gross, adjusted) and investments* Loans (gross, adjusted)-total Security loans Commercial and industrial Real estate Consumer instalment U.S. Treasury securities Other securities Deposits (less cash items)-total* Demand deposits (adjusted) U.S. Government deposits Time deposits-total* States and political subdivisions Savings deposits Other time depositst Large negotiable CD's 92,094 70,356 1,546 23,035 21,933 12,370 8,747 12,991 91,320 25,324 313 63,968 5,773 31,063 25,192 8,692 Weekly Averages of Daily figures Week ended 2123/77 Change from 2/16/77 Change from year ago Dollar Percent - + 5,341 + 5,903 + ,836 0 + 2,347 + 1,611 - 850 + 288 + 5,016 + 1,995 5 + 2,607 - 1,015 + 6,364 - 2,174 -.3,405 + + + - + - 205 12 97 175 32 30 111 82 418 630 81 54 55 124 95 163 Week ended 2/16/77 + 6.16 + 9.16 + 117.75 0.0 + 11.98 + 14.97 - 8.86 + 2.27 + 5.81 + 8.55 - 1.57 + 4.25 - 14.95 + 25.77 - 7.94 - 28.15 Comparable year-ago period Member Bank ReservePosition ExcessReserves (+)/Deficiency Borrowings Net free(+)/Net borrowed H H + 23 2 25 + 28 7 21 + 61 2 59 + 716 + 539 + 1,588 + 67 + 196 + + federal funds-Seven large Banks Interbank Federal fund transactions Net purchases (+)/Net sales H Transactions with U.S. security dealers Net loans (+)/Net borrowings H 101 *Includes items not shown separately. tlndividuals, partnerships and corporations. Editorial comments may be addressedto the editor (William Burke) or to the author. . . . Information on this and other publications can be obtained by calling or writing the Public Information Section, federal Reserve Bank of San Francisco, P.O. Box 7702,San Francisco94120. Phone (415) 544-2184. df
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