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February 13,1976 M oney Machines Money transfers and all the attend ant paperwork present fertile terri tory for the application of computer technology. In recent years, the annual volume of checks has been increasing by nearly a billion a year, and this has led financial institu tions to search for less costly and less unwieldy methods of handling payments. Programming resources thus have been increasingly devot ed to streamlining the payments mechanism. Some programs, such as the direct deposit of salary checks and social-security pay ments, are already widely utilized, while the pre-authorized payment of recurring bills is beginning to catch on. It is the programmer's nature, however, to build systems of maximum flexibility, in order to anticipate broader applications of both hardware and software. In the last several years, the techni cal feasibility of automating finan cial transactions has been proven, and the burden of determining economic feasibility has been trans ferred to management. Although a National Commission on Electronic Fund Transfers has been formed to study all facets of the issue, many firms are not waiting for the Com mission's recommendations but are plunging ahead in an effort to gain a competitive advantage in this new field. Managers not only have to become educated to the computer's capa bilities, but they also have to work their way through an array of costbenefit calculations before they can justify the installation of new equip1 ment. A key factor in these calcula tions is projected volume. Since the automating of payments transfers does not involve a new product line, the volume growth that would justify the considerable front-end costs involved in such a shift frequently is greater than what historical trends would indicate. Financial institutions thus might come under significant pressure to broaden their markets in order to cover such costs. Remote service units Many of the new developments center around remote service units (RSUs). An RSU is an automated device linked to a mainframe computer which can make financial transfers at locations off-premise to the financial institution involved. The machines are largely owned by depository institutions, dataprocessing firms, nonbank creditcard firms, or large retailers. Since more checks are written at grocery stores and other retail outlets than at banks, many of the experiments in this field have been conducted at such establishments. In fact, most cash registers installed today are point-of-sale (POS) termi nals, which are adaptable to imme diate debiting of accounts but have not yet been used for that purpose. Many of these terminals are now limited to credit and check clear ance, along with such business functions as maintaining a running inventory. But planners expect that, in full operation, the clerk's inser tion of the customer's coded plastic card into the RSU would debit the (continued on page 2) Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. customer's account for the amount of each sale—debit either his regular charge account or his account at a bank, savings-and-loan association, or credit union. From the consumer's point of view, there are several potential prob lems. The system would require a central information file on partici pants, which could be regarded as an invasion of privacy. It would also tend to eliminate float—the period of time between payment by check and its recording by the depository institution—which many consum ers regard as useful in emergencies or when circumstances require a stop-payment order. Some con sumers also resist any involvement with computers and statement revisions. However, since customer convenience is the carrot being used to entice mass acceptance, the industry will strive to find some means of overcoming such objections. Another type of remote-service unit is the customer-bank commu nications terminal (CBCT). In some activities, the CBCT overlaps with a POS—that is, where the machine simply functions between a bank and a customer to debit an account at the point of sale. For the most 2 part, however, CBCT's are envi sioned as having broader functions. Through CBCT's, a customer may withdraw or deposit funds, transfer funds between his checking and savings accounts, and transfer funds from his account to accounts main tained by other bank customers. These automated teller machines are being placed initially at heavilytrafficked sites such as transporta tion terminals and shopping cen ters. According to a recent industry estimate, some 1,000 U.S. financial institutions have installed about 4,000 automated banking machines and have roughly the same number on order. About 75 percent of the machines are automated tellers, and most of the rest are cash dispensers. New challenges The traditional structure of financial institutions is straining under the weight of these technological breakthroughs, as challenges have developed to present geographic and legal barriers to fund transfers. The Federal Home Loan Bank Board now allows federally-chartered savings-and-loan associations to establish as many limited-service “ satellite offices" as they wish. However, each satellite must be located within five miles, and within the primary service area, of an existing branch office or home office of the sponsoring association. These RSUs are allowed to take deposits, pay out funds and accept mortgage payments. As a counter-move to the liberal FHLBB stance, the Comptroller of the Currency moved, in December 1974, to authorize national banks to establish CBCTs. Each bank was allowed an unlimited number of terminals within 50 miles of its main office or nearest branch, but out side the 50-mile radius, terminals would have to be shared with at least one other financial institution. The Comptroller's ruling was based on the position that CBCT's do not constitute branches under the meaning of the 1927 McFadden Act. However, that ruling was over turned in U.S. District Court, under challenge by the Independent Bankers Association of America. The court's decision is being ap pealed; meanwhile, the Comptrol ler has advised national banks “ to make their own business and legal judgments" on the matter. A high level of activity is continuing in this field, with the greatest challenge to traditional ways of doing business coming at this time from the S&L's and unregulated enterprises, and not only from large banks. Sharing the burden For many small banks and S&L's, the front-end costs of establishing their own automated teller units are prohibitive. (Estimates range from $30,000 to $50,000 per unit.) Wher ever possible, therefore, these institutions are organizing cooper ative arrangements, usually with some large institution. This devel opment can create difficulties be 3 cause of the necessity of differen tiating the service product and its pricing from delivery costs, in order to avoid any appearance of collu sion. In some states, large banks have set up nonexclusive networks, inviting small banks and thrift institutions to share the benefits (and costs) of the facilities; in other instances, the primary investor has been an S&L which then seeks out linkup partners. For consumers, the distinction between the two types of financial enterprise is becoming increasingly blurred. The conse quence may be the side-by-side activation of many systems, with the marketplace gradually culling the herd. There is likely to be a great deal of money made and lost—as has already occurred among the machines' manufacturers—before the outlines of a lasting institutional framework take shape. Legislation now being debated in Congress could liberalize many of the restrictions on money machines, thus intensifying competition in the new world of electronic fund trans fers. For both the new and old players, the road to success seems to lie in wooing consumers with con venience, economy, simplicity, accuracy, safety and confidentiality safeguards. Joan Walsh U O !§ U m S B /V \ • L iB J fl • U O § 0 J O • epE A 0|S | . O L |B p | IjE M E H . E I U J 0 p |E 3 . E U O Z IJ y • E>|SE|V *l!leD'O D S p U E J J UBS ZS/ ON ilWRBd aivd a D v iso d s n n v w s s v id is a u BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in millions) Selected Assets and Liabilities Large Commercial Banks Amount Outstanding 1/28/76 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 deposits:): Large negotiable C D ’s 87,655 64,772 781 23,392 19,672 10,329 10,341 12,542 87,922 23,691 518 62,547 7,477 23,657 28,406 13,874 Weekly Averages of Daily Figures Week ended 1/28/76 Member Bank Reserve Position Excess Reserves Borrowings Net free(+)/Net borrowed (-) Federal Funds—Seven Large Banks Interbank Federal fund transactions Net purchases (+)/Net sales (-) Transactions of U.S. security dealers Net loans (+)/Net borrowings (-) + Change from 1/21/76 + + - 33 5 28 628 420 97 136 17 4 190 18 993 337 233 117 115 265 267 259 Change from year ago Dollar Percent + + + + + + + + + - 2,633 1,764 304 1,107 401 384 4,702 305 4,766 1,164 107 3,631 282 5,218 1,657 2,426 Week ended 1/21/76 + + + + + + + + + + - 3.10 2.65 28.02 4.52 2.00 3.86 83.38 2.37 5.73 5.17 26.03 6.16 3.92 28.30 5.51 14.88 Comparable year-ago period 82 6 76 + 26 3 23 + 1,291 + 1,601 + 1,840 + + + 234 558 466 ♦Includes items not shown separately. ^Individuals, partnerships and corporations. 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 Francisco 94120. Phone (415) 397-1137.
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