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December 7,1973 The nation is moving, slowly but surely, towards the adoption of a new system of handling financial transactions— away from a system of check payments and towards one of electronic payments. Late last month, the Federal Reserve pro posed several changes in its Regulation J which should help along the process. Reg J currently governs the use of Federal Reserve facilities to collect checks, but the proposed changes relate to the Fed's inter-regional network for transferring funds electronically. Interested parties have been given four months' time to comment, not simply on the regulatory changes themselves, which are primarily technical in nature, but also on the broader issues arising from elec tronic funds transfers. Such issues would include the ownership and operation, conditions of access, and payment of the costs of the new system. Last year, individuals and institu tions wrote more than 25 billion checks, against 94 million accounts with balances aggregating $192 bil lion. More importantly, with volume increasing by 7 percent annually, the total could double within a decade — and in dollar terms, the total is projected to rise one and one-half times in just a half-decade. Volume should increase because of both the growth of the national economy and the growth in the number of check users. At the same time, the complexity of this system should increase because of the labor-intensive nature of check handling, involving a substantial amount of expensive processing and physical transfers of paper. The paper glut will result in higher user and purveyor costs, reductions in productivity in making financial transactions, and numerous other problems associated with an over loaded system of paper-conveyed payments. Substituting electronics This proposal and other recent steps are an outgrowth of a 1971 policy statement, in which the Board of Governors assigned high priority to the modernization of the payments mechanism, including the develop ment of an electronic substitute for making payments by check. The check is an extremely useful instru ment, to bankers, businessmen and individual consumers. However, its very success now threatens to engulf the payments system.1 1 Digitized for F R A S E R Im proving checks Some major steps have been taken to improve the efficiency of the check-handling process. The most recent has been the development of a nationwide network of facilities for the overnight processing and settlement of checks— the regional check-processing centers (RCPC's). The Federal Reserve System may soon have close to 50 such centers in operation, mostly at existing Fed facilities (12 head offices and 24 (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. branches) but also at some newly developed sites. The objective is to ensure that most of the 62 million checks written every day be cleared and paid by the opening of business the day following the deposit of those checks. Nonetheless, an improved checkpayments system should be re garded only as a transitional step in the move towards the adoption of an electronic payments system. Fed eral Reserve guidelines thus specify that each RCPC should be provided with an automated clearing and telecommunications ability, to provide a basis for a system of electronic transfers. Yet the RCPC system does bring about an earlier receipt of funds due to individuals and businesses, as well as an earlier payment of funds that they are transferring to others. To promote this development, the Federal Reserve revised Regulation J in November 1972, requiring all banks to pay in immediately avail able funds on the day when checks are presented. Previously, banks located outside cities containing Federal Reserve offices (and other designated areas) had paid the Fed for checks presented in funds col lectable one or more days after presentation. R evising] Now, under the current proposal, the existing regulation would be come the first section of an ex panded Regulation J. Two new 2 sections, dealing with electronic transfers of funds, would govern the procedures under which Reserve Banks could accept and deliver both credit and debit transfers of funds by wire, over the Federal Reserve's national communications network. The first of these new sections would codify current practices for sending funds from one point to another, whereby a member bank authorizes the Fed to deduct a certain amount from its reserve account and to credit that amount to another com mercial bank. The other new section, in contrast, would create a new payments pro cedure. This would permit member banks and their customers to use Federal Reserve facilities to collect funds electronically from another commercial bank, just as they now use other Fed facilities for the col lection of funds moved by check. The proposed electronic process would accomplish, generally within a single business day, what it takes a check several days to accomplish. By inviting comments on broader issues as well as these procedural details, the Federal Reserve recog nizes that there will be many actors besides itself operating under the developing electronics system. The key questions center around who will own and operate— and for that matter, who will have access to— the new system. The answers con cern commercial banks, automated clearing houses, credit-card com panies, savings-and-loan associa tions, and other private as well as public institutions. M ajor participants The major credit-card organizations almost certainly will be interested. Already individuals account for at least half of all checks written, and this proportion could increase as more households make more pur chases out of higher incomes. The obvious solution to this burgeoning check usage is to provide for ac counting and payments for pur chases through the use of electronic point-of-sale terminals. The credit card, or a similar means of activating electronic transfers, should play a major role in this development, and thereby provide a means for par ticipation by credit-card firms in an electronic system. Automated clearing houses are also likely participants. In California, the banks and clearing-house associa tions in San Francisco and Los Angeles, with Federal Reserve sup port, have developed a system of electronic transfers called the Cal ifornia Automated Clearing House Association (CACHA). This system permits an individual bank's cus tomers to authorize employers to deposit their paychecks automat ically into checking accounts every payday. In addition, individuals are encouraged to authorize payments by banks of their recurring predict able bills— mortgage and other loan payments, utility bills and insurance premiums. Thrift institutions are anxious to play a role in the developing system; in fact, a number of California S&L's have applied for full membership in CACHA. Already, they can receive paper paychecks and execute pre authorized drafts on commercialbank demand deposits to effect transfers of funds. Presumably, access to CACHA would enable the S&L's to credit and debit the savings accounts of their customers, in much the same way that banks credit and debit their customers' checking accounts. According to Federal Reserve Gov ernor Mitchell, public acceptance of a system of electronic credits and debits depends upon a marketing effort directed at those individuals who have not yet experienced the superior convenience, safety and certainty of this method of money transfer. The greatest sales appeal may turn out to be an account in a bank or thrift institution which pays interest and permits transfers, such as the NOW account advertised by thrift institutions in Massachu setts and New Hampshire. Thrift institutions do not yet have the operating and technological expe rience which commercial banks boast in the field of money transfers, but they have millions of customers who constitute a ready market for such services, and their rising inter est in this area could stimulate the banks to move ahead more aggres sively with electronic-transfer plans. W illiam Burke 3 Digitized for F R A S E R uoiSuiqseyvV • qcifl • uo S s j o • BpeAO|sj . oqcpi IJB M B H • E lU JO Jt jt?3 • B U O Z JJV BAN KING DATA— TW ELFTH FEDERAL RESERVE D ISTR IC T (D ollar amounts in m illions) Selected Assets and Liabilities Large Com m ercial Banks Loans adjusted and investments* Loans adjusted— total* Securities loans Com m ercial and industrial Real estate Consum er instalm ent U.S. Treasury securities O ther securities Deposits (less cash items)— total* Dem and deposits adjusted U.S. Governm ent deposits Tim e deposits— total* Savings O ther time I.P.C. State and political subdivisions (Large negotiable CD 's) W eekly Averages of D aily Figures Am ount O utstanding 11/21/73 75,884 57,741 1,271 19,977 18,012 8,873 6,091 12,052 71,835 21,770 525 48,324 17,521 22,167 5,532 10,658 Change from 11/14/73 + + 10,022 + 9,148 — 70 + 2,723 + 3,189 + 1,333 + 59 + 815 + 6,893 + 1,201 — 357 + 5,993 — 770 + 5,280 + 572 + 4,095 245 152 — 93 + 66 + 95 5 + 435 — 38 — 568 — 511 + 161 - 252 + 36 — 116 — 143 — 98 - W eek ended 11/21/73 Member Bank Reserve Position Excess reserves Borrowings Net free ( + ) / Net borrowed (— ) [Funds— Seven Large Banks ederal funds transactions ^es ( + ) / Net sales (— ) LS. securities dealers Net borrow ings (— Change from year ago D o lla r Percent W eek ended 11/14/73 + 15.22 + 18.83 — 5.22 + 15.78 + 21.51 + 17.68 + 0.98 + 7.25 + 10.61 + 5.84 — 40.48 + 14.16 — 4.21 + 31.27 + 11.53 + 62.40 Com parable year-ago period 89 88 + 1 - 23 140 -1 6 3 - + 686 + 66 -5 8 1 -2 1 9 + 76 + 180 - 6 18 24 > shown separately. t _ tized for FF _ http;//'f fa$er stloujsffld Federal F ^ this and other publications can be obtained by calling or writing the Services Department. Federal Reserve Bank of San Francisco, P.O. Box 7702, California 94120. Phone (415) 397-1137. • P>|SejV
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