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Economic
Review
FEDERAL RESERVE BANK OF ATLANTA
C1BRXR
Inside This Issue:
•
•
•
•
•
The ACH: An Elusive Dream
Electronic Payment Basics
ACH Return Items
Electronic Payments at the Crossroads
Desiderata for a Viable ACH
MARCH 1986
President
Robert P. Forrestal
Sr. Vice President and
Director of Research
Sheila L. Tschinkel
Vice President and
Associate Director of Research
B. Frank King
Financial Institutions a n d Payments
David D. Whitehead, Research Officer
Larry D. Wall
Robert E Goudreau
Macropolicy
Robert E Keleher, Research Officer
Thomas J. Cunningham
Mary S. Rosenbaum
Jeffrey A. Rosensweig
J o s e p h A W h i t t Jr.
Pamela V. W h i g h a m
Regional E c o n o m i c s
Gene D. Sullivan, Research Officer
Charlie Carter
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Joel R Parker
W. Gene Wilson
Publications and Information D e p a r t m e n t
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Public Information
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Editorial
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Graphics
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ISSN 0732-1813
Special Issue
This issue of the Economic Review, like t h e April
issue that will follow, is d e v o t e d t o t h e a u t o m a t e d
c l e a r i n g h o u s e — a p a y m e n t m e c h a n i s m used by
depository institutions t o e x c h a n g e f u n d s electronically.
W h e n it w a s c o n c e i v e d in the late 1960s, t h e ACH
w a s hailed as t h e harbinger of a p a y m e n t s revolution that w o u l d quickly replace t h e t w o traditional
m e t h o d s of moving f u n d s — c a s h a n d c h e c k s As
w e will see, however, it hasn't w o r k e d out t h a t
way. C u r r e n c y a n d c h e c k s remain as d o m i n a n t as
they w e r e t w o or t h r e e d e c a d e s ago a n d the A C H
is still a n e t w o r k w h o s e potential has yet t o be
realized.
Our t w o special issues help t o explain w h y the
a u t o m a t e d c l e a r i n g h o u s e a n d o t h e r electronic
p a y m e n t s initiatives have g a i n e d a c c e p t a n c e so
slowly despite t h e c o n v e n i e n c e t h e y offer to
users a n d the improved efficiency they promise
the nation's p a y m e n t s system. O u r c o n t r i b u t o r s
also c o n s i d e r w h a t might h a p p e n in the future as
the nation's p a y m e n t s v o l u m e b u r g e o n s
O u r ACH research was c o o r d i n a t e d by Research
Officer David D. Whitehead, leader of t h e Atlanta
Fecfs financial institutions and payments research
team. H e w o r k e d w i t h t w o authorities on t h e ACH:
Bernell K S t o n e of t h e G e o r g i a Institute of
Technology, a n d G e o r g e C. White, f o u n d e r a n d
publisher of the W h i t e Papers, Inc.
W e w o u l d also like t o express our t h a n k s t o B r u c e
J. Summers, senior vice president a n d electronic
p a y m e n t s p r o d u c t manager at t h e Federal Reserve B a n k of Richmond; t o William R. Moroney,
chief executive officer of the National A u t o m a t e d
Clearing H o u s e Association; t o Gerry Keenan,
assistant vice president in c h a r g e of the Atlanta
Fed's Electronic Payment Services Department;
a n d t o Pamela S. Frisbee, an analyst on our
research staff.
W e h o p e y o u find t h e s e t w o issues informative
a n d thought-provoking.
SWnl
O
o
L
SHEILA L TSCHINKEL
Senior V i c e President a n d
D i r e c t o r of Research
V O L U M E LXXI, N O . 3, M A R C H 1986, E C O N O M I C REVIEW
Table of Contents
The ACH: An Elusive Dream
Historical perspective on the rationale for an electronic
alternative t o checks and paper-based payments.
Electronic Payment Basics
A comparison of payment methods and their respective
economics, explaining the processes and attributes of
electronic systems.
ACH Return Items
The cost and time efficiency of automated returns, as
outlined here, could be a bonus t o users of A C H
processing.
Electronic Payments at the Crossroads
A discussion of the marketing and organizational difficulties that potentially limit automated clearinghouse
expansion.
Desiderata for a Viable ACH
The ideal capabilities for creating an irresistible electronic payments alternative are set forth.
Statistical Summary
Finance, Construction, General, Employment
FEDERAL RESERVE B A N K O F ATLANTA
3
Despite nearly two decades of growth and
promise, the ACH has yet to become a
serious alternative for check payments
Pamela S. Frisbee
Predictions of a cashless society were commonplace in the 1950s and 1960s when plastic
cards seemed to be taking over the world and
major advances in electronic technologies promised to make all things possible. But today,
neither checks nor currency plays a less significant role in our economic life than t w o or three
decades ago. Public subsidies t o the check
processing system, the relatively high cost of
electronics, and the structure of this country's
financial services sector all have served t o
retard the development of electronic payments,
despite their potential for increasing the efficiency of the entire system and the convenience
they offer t o consumers and other individual
users. Electronic funds transfer (EFT) in the
form of direct debits at the point-of-sale, home
banking, and automated clearinghouse (ACH)
payments has been slow t o take hold. The ACH
is the main driving force for most forms of
electronic payments; yet its growth has been
halting and problematic A look at the history of
the ACH will lay the groundwork for the rest of
this special Economic Review, which considers
both the ACH's promise and the obstacles t o
its d e v e l o p m e n t
This issue is the first of t w o that examines
the automated clearinghouse t o determine
The author is a research analyst on the financial
institutions
and payments team at the Federal Reserve Bank of Atlanta.
4
why electronic payments have yet t o be as
widely accepted as forecasters had predicted.
Our contributors also look at what is likely t o
happen t o the ACH in the future.
An automated clearinghouse is a payment
mechanism through which participating depository institutions exchange funds electronically,
thus creating an alternative t o the c o m m o n
method of transacting payments w i t h checks.
The ACH replaces the check w i t h a series of
electronic impulses transmitted over data links
or, more commonly, by magnetic tapes or
floppy disks. Participants in the clearinghouse
use a c o m m o n format for coding information
and abide by operating rules of the National
Automated Clearing House Association (NACHA)
and regional associations. Automated clearinghouse associations are nonprofit corporations
o w n e d by member depository institutions.
The ACH grew out of concern that traditional
check clearing facilities (which process paper
items mechanically) w o u l d be unable to accommodate the rapid economic expansion
and corresponding increase in check volume
that characterized the late 1960s. The costs of
labor and transportation involved in moving
paper items were rising rapidly. During the
middle t o late 1960s, the amount of paper
traveling through the check system was increasing at an unprecedented rate, and payments
specialists recognized the need for a faster,
more efficient method. 1
M A R C H 1986, E C O N O M I C REVIEW
The First Stages of Growth
The ACH is a relatively new payment mechanism compared w i t h other methods in use
today; paper money was introduced in the
M i d d l e Ages and checks were first used in the
United States in the late 1600s.
The A C H began in April 1968 when the San
Francisco and Los Angeles Clearing House
Associations authorized the creation of a joint
committee t o make recommendations for exchanging paperless entries among banks. In
August 1970, a group of 10 California banks
formed the Special Committee on Paperless
Entries (SCOPE) and obtained approval t o
initiate a pilot project, resulting in the computer
software t o operate the ACH for interbank
paperless entry exchange In August 1972 the
San Francisco and Los Angeles Clearing House
Associations approved the rules and legal agreements. The Federal Reserve Bank of San Francisco and the Los Angeles Branch provided the
first automated clearinghouse services beginning in October 1972.
Monetary and Payments System Committee.
Following this regional initiative, a national
program was set in motion in 1970. In that year,
the American Bankers Association formed the
Monetary and Payments System (MAPS) Committee t o study ways t o improve the payments
system by meeting the myriad changes occurring in the financial community. The MAPS
committee was charged with addressing the
need for changes in the existing payments
system, determining what the changes should
be, and assessing their impact on commercial
banking During this time the banking industry
was affected by three major economic forces:
the changing needs of retail and corporate
customers, profitability pressures, and mounting competition in the marketplace 2 The ACH
concept was intended as a natural extension of
the check payment system that would convert
the growing volume of paper processing at
commercial banks and other depository institutions t o electronics, thus responding t o some
of the compelling problems of the day.
The MAPS committee determined that it
would be " a costly mistake" for the industry " t o
remain static with the present payments system
and rely too heavily on the check processing
method of funds transfer. Rising labor expenses
will continually expand the relative costs of
bank operation," t h e c o m m i t t e e reported.
FEDERAL RESERVE B A N K O F ATLANTA
"These additional costs will either reduce profitability, which is already a concern, or increase
the expense t o our customer. Neither outlook
is attractive" 3
MAPS recommended t w o critical areas for
change: first establishing a clearing and distribution system for electronic payments by the
banking system, and, second, developing the
full potential of the bank card. The committee
concluded in its 1971 report that automated
clearing and distribution facilities should be
established locally and linked together nationally t o accommodate paperless debit and credit
transfers. The report emphasized the need for
industry standards for paperless entries. It also
recommended a comprehensive nationwide
clearing and settlement system for electronic
payments that w o u l d not depend solely on or
be controlled by the Federal Reserve System.
This clearing system, according t o the report,
eventually should be able t o handle bank,
corporate, government, and consumer payments.
Committee on Paperless Entry. During this
same time the Federal Reserve Bank of Atlanta,
working w i t h Georgia Institute of Technology,
also studied the possibilities of paperless entries. After this joint research project was completed in September 1971, several major Atlanta banks formed the Committee on Paperless Entry (COPE). The COPE banks agreed t o
implement a Fed-managed ACH, and purchased
software from SCOPE t o run i t The Georgia
Automated Clearing House became the second
ACH, beginning operations in May 1973, just
seven months after the California clearinghouse. 4
Federal Reserve Involvement
The Federal Reserve Board also played an
active part in developing the ACH. The Board
stated in 1971 that it supported rapid development of a viable EFT system. It sought t o
decrease the number of paper items being
handled, speed settlement by minimizing the
handling of checks, and reduce commercial
bank and Fed float resulting from delays. Unlike
the role the MAPS Committee envisioned for
Fed involvement in the ACH, the Fed anticipated playing an active part It viewed its
involvement in the clearing process as necessary t o ensure the safety and soundness of the
payments mechanism. In the spring of 1972,
5
"The ability to exchange data electronically between
regions made it more practical for businesses to use the ACH for the
concentration and disbursement of funds."
the Fed agreed to operate clearinghouses for
the San Francisco and Los Angeles and the
Atlanta clearing associations using the software
developed by SCOPE. It would also develop
and operate a nationwide automated clearing
facility. The Fed agreed to supply space, equipm e n t and management for the local ACHs,
because it felt electronic systems at the local
level would create "nodes" that the Federal
Reserve could then link together through its
communications network into a national electronic payments system.
By 1973 there were 23 SCOPE-type committees set up across the country. Strong national
coordination was necessary to achieve the
level of compatibility required for interregional
and eventually national data interchange. An
ACH task force to develop standards for interregional exchange of ACH entries and to study
educational and marketing possibilities was
commissioned by the American Bankers Association. 5 Using the groundwork provided by
the MAPS committee, this task force became
the forerunner of what is known today as the
National Automated Clearing House Association.
NACHA Arrives on the Scene
NACHA was formed in mid-1974 by local
associations to devise national rules and standards, develop educational programs, and provide technical assistance in setting up automated clearinghouses. Eighteen charter members from regional associations representing all
twelve Federal Reserve districts were among
the original members.
Thirteen ACHs began in 1975, even though
data could be transferred between regions
only through the physical exchange of tapes.
The federal government began processing Social
Security payments via the ACH in 1975. The
government's participation in direct deposit of
Social Security payments and, more recently,
its use of electronic payments to vendors have
promoted the ACH. As with any payments
system, volume is a key factor in lowering costs.
Federal government involvement in the ACH
has substantially increased volume and hence
lowered costs, encouraging more development
of the system. In September 1978, the Fed
i m p l e m e n t e d electronic interregional interchange, resulting in a truly nationwide clearinghouse system. The ability to exchange data
6
electronically between regions made it more
practical for businesses to use the ACH for the
concentration and disbursement of funds, again
increasing volume and furthering development
and use of the system.
The Monetary Control Act of 1980
The Depository Institutions Deregulation and
Monetary Control Act of 1980 (hereafter the
Monetary Control Act of 1980) requires the
Federal Reserve t o price its services, including
the ACH, at actual operating cost plus a private
sector adjustment factor and the cost of the
float This charge was included to account for
costs encountered by a firm in the private
sector but not by the Federal Reserve (for
example, income taxes). The Act also allows all
depository institutions access t o Federal Reserve priced services. Previously, Reserve Banks
provided these services t o members at no
charge. The pricing provision was designed t o
improve efficiency of the payments system
through increased competition. To encourage
the use of electronics, the Fed priced ACH
services not on current volumes and costs, but
instead on "mature volumes." This kept the
cost of ACH transactions lower than checks.
The subsidy was phased out in progressive
steps and full-cost pricing began January 1,
1986. 6
Expansion of ACH Services
The Fed began processing debits during the
night processing cycle in 1979, allowing companies to concentrate funds. In October 1983
the Fed began processing credits as well as
debits on the night cycle and providing next
day settlement Despite a surcharge for using
the night cycle, many institutions prefer to take
advantage of the later deadlines.
In 1983, NACHA and the Fed introduced a
pilot program to facilitate corporate trade payments (CTPs) through the automated clearinghouse. The CTP permits companies to transmit
trade payment information such as terms of
sale and quantity (information similar to that
found on an invoice) along with the payment
These electronic transactions promised to eliminate a large amount of the paper involved in
payments. The CTP program was declared a
success by N A C H A expanded and opened up
M A R C H 1986, E C O N O M I C REVIEW
"Commercial volume. . .has been growing at about 30 to 50
percent each year. Unlike government payments, commercial volume
could continue this growth as more corporations sign o n . "
to any user in January 1984. However, volume
has been disappointing, running only several
hundred transactions per month.
From just t w o ACHs in the early 1970s, the
number has grown to 31 today, serving over
16,000 financial institutions and 34,000 corporations. 7 Currently, the network is a nationwide interconnection of ACHs, most of which
use Federal Reserve facilities for processing,
settlement, and delivery. M u c h of the recent
growth in the number of participants can be
attributed to new technology, primarily introduction of the personal computer as an affordable means of electronic communication. Thanks
to the multiple uses and low cost of a personal
computer compared with a mainframe computer, smaller institutions that could not justify
the purchase of a computer for ACH entries in
the past can do so today.
The ACH now processes approximately 48.1
million electronic payments per month—23.2
million commercial "items," or transfers, and
24.9 million government items. According to
Federal Reserve figures, in 1985 the ACH
system handled an estimated 298.9 million
government and 278.9 million commercial
transactions for a total of 577.8 million transactions. 8 Government ACH transactions have
been growing by only 10 to 13 percent annually
during the last two years. Growth in government
volume has slowed mainly because most people
who will voluntarily sign up for direct deposit of
their Social Security payments have already
done so. Commercial volume, on the other
hand, has been growing at about 30 to 50
percent each year. Unlike government payments, commercial volume could continue this
growth as more corporations sign on.
As financial institutions begin to market ACH
services more aggressively to their customers,
the number of participating corporations and
consumers will increase. Today there are 34,000
corporations using the ACH, in contrast with
the 3,000 that used the system in 1976. Businesses use the A C H to pay employees, as well
as their vendors and suppliers. Consumers use
the system to receive their payroll and Social
Security checks via direct deposit avoiding
long lines at the bank and the possibility of
losing a check in the mail. Consumers also
make payments using the ACH; home mortgage
payments, automobile loans, and insurance
premiums normally paid by check can be paid
automatically.
FEDERAL RESERVE BANK O F ATLANTA
Prospects for Greater Volume
Although the number of institutions participating in the network is growing, the volume
today still falls short of the optimistic outlook
of a few years ago, for several reasons.
Float Float plays an important role in a
company's decision whether or not to use the
ACH. (Float is the term for the lag between the
time a payor writes a check and when it is
actually debited from the payor's account)
The paying company loses the advantage of
float normally gained from sending payments
through the mail. Often, the loss of float "income" created by checks more than offsets the
savings that can be expected from using automated payments. The opposite is true for the
company receiving payments via the ACH; it
benefits as its account is credited the day
payment is received rather than several days
later when the payment is processed. Currently
there is no way for the receiving institution to
compensate the sending institution for loss of
float This tends t o discourage institutions from
being senders.
Check Improvements. Another reason for the
slow growth of the ACH is the low cost of
processing checks through the check collection
system. Check volume has created economies
of scale in processing. This, along w i t h the fact
that the current collection system becomes
more efficient each year as equipment that
reads and sorts checks improves, reduces the
incentive for financial institutions to invest
time and money t o automate payments. Until
ACH volume grows substantially, there is also
little incentive from a cost standpoint
Promotion and Development Promotion efforts by N A C H A members of the banking
45 ustry, and the Federal Reserve System play
dn important role in developing the ACH.
Without good marketing, the likelihood of
significant growth in transactions is slim even
though direct deposit of funds offers recipients
many conveniences not afforded by traditional
paper checks. Besides removing the danger
that a check will be lost or stolen, direct
deposit offers the recipient the security of
knowing that even if he or she is sick or on
vacation, the payment still will be deposited.
To enjoy these advantages, however, the potential user must be aware of them.
The ACH is still in its infancy compared with
the nation's other payment systems. And, not
7
and cooperation by all the players involved. Yet
despite such obstacles, advocates are convinced
that as far as payments are concerned, the
ACH is the future.
all the players agree who should operate it and
how it should be operated. Expanding the ACH
depends upon further cost reductions that
only economies of scale can offer. Increased
use of the ACH will require general acceptance
NOTES
' A t l a n t a P a y m e n t s P r o j e c t Automated
Clearing
Houses:
An
In-Depth
Analysis,
C o m m i t t e e o n P a p e r l e s s Entries: A t l a n t a Georgia, 1 9 7 4 , p.
13.
2
Ibid, p. 10.
i
lbid,
p. 10.
'American Bankers
House
Task Force,
1 9 7 4 , p. 4.
'Ibid, p. 4 .
Association, R e p o r t of the Automated
Clearing
A m e r i c a n B a n k e r s Association: W a s h i n g t o n D . C ,
« B a n k for International S e t t l e m e n t , Payment
Systems
in Eleven
oped
Countries,
B a n k Administration Institute: P a r k Ridge,
Deveh
Illinois,
' N A C H A Surepay Update, O c t o b e r / N o v e m b e r / D e c e m b e r 1 9 8 5 , p. 5.
« F e d e r a l R e s e r v e Board of Governors, 1 9 8 5 . T h e s e n u m b e r s differ
significantly from t h o s e r e p o r t e d by N A C H A in Surepay
Update.
as
N A C H A ' s n u m b e r s include s o m e d o u b l e c o u n t i n g of interregional A C H
transactions
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M A R C H 1986, E C O N O M I C R E V I E W
Electronic
This comparison of three payment mechanisms—ACH, wire, and checks—is a first
step toward understanding the potential of
ACH as an efficient low-cost alternative to
paper-based transactions
Payment
Basics
Berneil K. Stone
The long-predicted electronic payments revolution has been thwarted for a variety of reasons,
including relative cost product requirements
that have not been met, and organizational and
structural barriers. Understanding the operational attributes and the comparative economics
of payment alternatives is crucial to assessing
whether electronic payment systems, particularly the automated clearinghouse (ACH),. are
likely t o displace checks and drafts as the
nation's primary noncurrency payment mechanisms.
Types of Payments
Payments commonly comprise t w o broad
classes—paper and electronic Paper-based
payments include checks and drafts as well as
credit card payments (credit drafts). Electronic
payment is a generic term for any fund transfer
or payment mechanism that relies primarily on
computerized communication systems rather
than paper instruments.
The t w o major categories of electronic payments—wires and ACH—differ markedly. In
fact, the ACH has more in common w i t h checks
than w i t h wires. The structural similarities between checks and ACH payments is no accid e n t for the latter was designed as a computerbased alternative t o checks. 1 The ACH system
The author
at Georgia
is Mills B. Lane professor
Institute
of
Technology.
FEDERAL RESERVE B A N K O F ATLANTA
of banking
and
finance
was intended t o make full use of the processing
and communication efficiency ushered in by
the computer revolution, and thus t o provide a
cheaper, more reliable payment mechanism
than checks.
Despite the widespread view that wire payments and A C H payments are simply t w o
electronic alternatives, their differences are
more important than their similarities. Only the
ACH pertains when electronic displacement of
checks and drafts is discussed, since wires
generally are not a substitute for checks. (See
Exhibit 1 for the characteristics of wire, ACH,
and check payments.)
Features of Wire Payments
While the major wire systems (Fedwire, CHIPS,
SWIFT, and, until recently, Bankwire and CHESS)
vary in structural and operational details, they
share many key features. 2 The most important
distinguishing attribute of wire-type payment
services is their communication system. The
virtually instantaneous transfer of payment
data by a two-way, telephone-like communication network shapes the prominent economic
and operational characteristics of wire payment
systems (Exhibit 1).
Wire transfers are expensive compared with
checks. For instance, the Federal Reserve charges
the originating and receiving institutions 55
cents each for executing a wire transfer versus
3.5 t o 5.3 cents for an interdistrict c h e c k Banks
9
Exhibit 1
Key Characteristics of Wire, ACH, and Check Payments
Characteristic
Wire
ACH
Check
Cost
Very high
Low; could be very low
Low
Notification
Yes
No
No
Confirmation
Yes
No
No
Transfer Execution
Time
Within day
Next day
Generally next day
or later
Transaction Type
Single or small group
Batch
Batch
Message
Limited
Limited (CCD)
Extensive (CTP)
Extensive (CTX)
Limited on check
but extensive via
attachment of
remittance advice.
Economics
Very high fixed cost
and peak-load limited
High fixed cost but no
peak-load problem;
very low variable cost
Moderate fixed cost but
relatively high variable
cost
Security
Crucial
Important
Important
typically charge a company $10 to $15 t o send
and another $10 to $15 to receive and process
a domestic wire transfer. 3 Hence, total sending
and receiving charges for domestic wires typically range from $20 to $30 per wire. The
charge for sending and receiving wires is analogous to the charge for check payment and
deposit Recent surveys of bank charges to
their corporate customers for check services
indicate a total charge ranging between 25
cents and 50 cents—much less than the $20 t o
$30 range typical for most wire charges for
sending and receiving.
The reasons for the much greater cost for
wires are their speed, single transaction focus,
and the greater security problems involved.
Wires are clearly not a substitute for most
check payments. Corporations use wires only
when they must have the payment services
that wires uniquely provide, namely fast payment and possibly rapid confirmation or notification of the payment The term "fast" denotes
either virtually immediate (intraday) transfer or
at least same day transfer.
In many cases, all that matters is that good
funds be credited t o an account the same day
10
so that for example, a firm can avoid an overdraft at the end of the processing day. In other
transactions, however, companies—and financial institutions—are concerned w i t h achieving instantaneous, or intraday, funds movement
Security transactions are an important instance,
as are commercial transactions requiring good
funds payment before wares are released to a
buyer or buyers agent For instance, a petroleum
company may be notified that a tanker of oil
has arrived and is ready for unloading. To gain
rapid access t o the petroleum, the company
asks that funds be wired to the owner. A check
or ACH payment would cost the firm far less
than a wire, but would entail next day or later
payment and therefore next day or later access
to the oil. Clearly, the petroleum company s
cost of delay in getting the oil greatly exceeds
the cost of the wire transfer. Thus, it pays a
premium for speed.
Aside from their speed advantage, wires
permit confirmation and notification. In some
high value transactions, the sending company
requires confirmation of the wire transfer, as
when there is a contractual obligation like a
lease payment Notification t o the receiver can
M A R C H 1986, E C O N O M I C REVIEW
be important both to the receiver and t o the
sender. The good funds were received in a
particular account before releasing purchases
such as oil, gems or securities to the buyer.
Hence, the sender benefits from the intraday
fund transfer only when the receiver knows
that payment has occurred. Additionally, the
receiver's cash manager typically wants t o learn
of large dollar good funds payments as soon as
possible so that these funds can be put t o use
rather than left idle in the receiving account
Security is crucial in wire systems, since
transferred funds are generally beyond the
sender's control once the wire is executed.
Companies must exercise meticulous control
over those w h o have access to wire initiation.
Likewise, banks and other financial institutions
must be cautious to restrict access t o their wire
room and avoid errors, fraud, and t h e f t The need
for such security contributes to the high cost of
wire transfers.
The Automated Clearinghouse
The automated clearinghouse arose as a
computer-based counterpart to the existing
check system for facilitating the collection and
settlement of check-like payments. Rather than
sorting checks by financial institution and exchanging bundles of checks (cash letters), as is
the method in a paper-based clearinghouse,
the ACH sorts check-like electronic images
and exchanges the electronic records.
As Pam Frisbee notes in "The ACH: An
Elusive Dream," which leads off this issue, the
original efforts to replace checks by electronic
images were voluntarily initiated at the regional
level. Banks in California first agreed to exchange electronic payment data and organized
a California automated clearinghouse association. The second such association emerged in
Georgia Ultimately the National Automated
Clearing House Association (NACHA), which
was formed to coordinate the regional associations, led to a national settlement network
built on these regional systems. O w i n g t o this
history, today's national settlement system handles t w o broad types of transactions—intraregional and interregional. In this article, the term
"ACH transaction" is used as a catch-all term
for any data transmission from one depository
institution to another via the ACH system. It
may be an electronic credit or d e b i t a return
FEDERAL RESERVE B A N K O F ATLANTA
item or even a message not involving payment
such as a prenotification message. (See the
box, " A C H Terminology," for definitions of key
terms.)
Processing Logic The institution that initiates
a transaction is called the originating depository
institution (ODI, or originating banft; the institution to which the transaction is transmitted is
called the receiving depository institution (RDI,
or receiving bank). The basic logic for ACH
transaction processing is set forth in Exhibits 2
and 3.
Intraregional
transactions
are transactions
exchanged between institutions in the same
geographic area and with the same regional
ACH association. Interregional transactions are
transactions involving financial institutions in
t w o different regional ACH territories. 4
The per item Fed charge for ACH processing
is different for intraregional and interregional
items. For the regular processing cycle, per
item charges are currently 2 cents and 3.6
cents for intraregional and interregional items,
respectively.
The greater per item charge for interregional
transactions reflects greater processing cost for
these items, because data must be transmitted
between regional processing locations and processed at t w o different locations.
Intraregional Transactions. The O D I prepares the transaction and delivers it t o the RDI,
which validates the data for completeness,
conducts error checks, removes on-us transactions (those occurring within the same financial
institutions), and delivers the data t o its regional clearinghouse. 5 The clearinghouse sorts
the data by depository institution and merges
the transactions into a summary file for each
institution. W h e n all processing is complete,
the clearinghouse sends each institution in its
region the appropriate transaction data for
posting to accounts (Exhibit 2).
Interregional Transactions. The processing
of transactions for depository institutions outside the ODI's region is slightly more complex
(Exhibit 3). The originating bank delivers its
transactions to the regional clearinghouse processing p o i n t There, transactions are sorted by
depository institution within the region, as well
as grouped by the other designated regions.
These extraregional data are merged into a
summary file for each of the other regional
associations, and these files are transmitted to
11
Exhibit 2
Intraregional Transactions
(The Basic Steps in ACH Processing)
Originating
Party
Local ACH
Processing Point
0 * 0 .
111111
•••
Local
\
Transaction
File
y
Sort/Merge
Processing
ODI
(Originating
Depository
Institution)
I
t
Receiving
Party
•••
RDI
(Within Region Receiving
Depository Institution)
Company Processing. Company prepares tape or other media acceptable to its originating depository
institution.
Company Delivery to ODI. Company delivers or transports data to ODI.
The ODI. The ODI: (1) validates the data, (2) removes any on-us items for posting to its accounts and (3) merges
the company's data with validated transactions provided by other companies into a composite file of all
originated transactions
ODI Delivery to Regional ACH. The ODI delivers or transmits composite data (merged, validated data) to its
ACH processor, generally the processing location for its region.
The Regional Processing Point The regional processing point: (1) sorts transactions contained on these
tapes by ACH region, (2) merges this region-sorted data with region-sorted data provided by other depository
institutions within the region, (3) retains the items for depository institutions within its region, (4) transmits the
items for each of the other30 regional ACHs to the appropriate regional processor, (5) receives transmissions
from each of the other30 regional ACH centers (6) merges these 30 sets of transm issions into institution-sorted
files, and (7) delivers or transmits to each institution within its region the summary file containing all the
transactions for that institution.
RDI Processing. Each RDI: (1) sorts the data by account (2) posts the transactions to the accounts and (3)
provides appropriate notice to the account owner of the transaction, possibly including daily reports for active
ACH receivers
12
M A R C H 1986, E C O N O M I C REVIEW
Exhibit 3
Interregional ACH
(Data Flow in a Store, Forward, and Process System)
Originating
Party
Local ACH
Processing Point
1
I
•
1111 I I ]
OD I Data
•DO
ODI
(Originating
Depository
Institution)
^
Sort/Merge
Processing
Local
Transaction
File
Transmission of Composite File
for Remote ACH
Remote ACH
Processing Point
1 1 II 1 1 1
Sort/Merge
Processing
Summary \
Transaction \
File
for Each RDI1/
RDI Data
OOD
RDI
(Receiving Depository
Institution)
Receiving
Party
S o m e Variations in Processing
• About 20% of ACH participants send and receive transaction data via direct, computer to computer transmissions rather than
physically delivering a tape or diskette
• Some institutions exchange ACH transactions directly (similar to direct check exchanges) and bypass their regional processor
completely.
• In some areas such as New York and California, there are competing processors so that an ODI may choose among the competing
alternatives.
• RDI processing can vary. In many cases, the RDI merely posts the transaction to the receiver account and reports it in the monthly
statement In other cases, such as CTP or CTX transactions, the RDI typically provides daily reports of not only the payment transaction
but also the addenda data, which may be teleprocessed to the receiving company.
FEDERAL RESERVE BANK OF ATLANTA
13
"Volume determines the average cost of an ACH transaction, and
thus whether the electronic system is cost-competitive w i t h checks."
each of the other regions for further processing.
In this way, each regional processing center
receives those items originating from institutions outside its region and destined for those
within its boundaries. After being sorted by
depository institution, these between-region
transactions are merged into each institution's
summary file along with the intraregional items.
Processing Organizations. The AC H system
has 31 regional ACH associations. The ACH
processing system is organized according to
the geographic regions that comprise the regional associations. Each region has a processing location that serves as the primary processing node in the ACH for (1) handling intraregional transactions, (2) receiving, sorting and
transmitting interregional transactions originated by institutions within its region, and (3)
receiving interregional transactions that originate from institutions outside its region.
Several organizations are involved in processing the ACH transactions. The Federal Reserve
is the primary ACH processor. Although it
currently has processing operations at 28 offices,
the Federal Reserve considers itself one national
service provider centrally coordinating the processing taking place at its various offices. There
are four private ACH processors—the New
York Automated Clearing House, the Arizona
Automated Clearing House, the Calwestern
Automated Clearing House, and the Hawaii
Clearinghouse The Calwestern ACH has contracted with General Electric Information Services (GEISCO) as a processing contractor.
Each of the private ACH operators currently
uses the Federal Reserve t o process its interregional transactions.
Chase Manhattan Bank recently organized
its own "Chase ACH." Chase reached an agreement in December 1985 with the Federal
Reserve that will allow it direct access to the
Federal Reserve's system as an alternative to
access through its participation in the New
York Clearing House Association.
Processing Points. The ACH system can be
viewed as both a network consisting of at least
32 processing nodes (processing points) that
serve as electronic clearinghouses; and, as a
communication system linking these 32 processing nodes 6 Financial institutions send transactions to and receive them from this network.
Communication between the regional processing clearinghouse nodes takes place through
14
batched payment transactions. The Federal
Reserve uses the same communication system
for ACH transactions that it uses for Fedwire.
However, the ACH does not require a telephonetype communication system like the one used
for wires. Instead, it can use a one-way, store
and forward electronic message system similar
t o the kind used for electronic mail.
The efficiency of sort and merge processing
and data communication is clearly the key to
ACH costs. The fixed costs for facilities, equipm e n t and staff far outweigh the variable cost
component—basically tape or disk receipt,
labeling m o u n t i n g and storage, plus any costs
involved in physical delivery of data to receiving
institutions. This cost structure imbalance
means that volume determines the average
cost of an ACH transaction, and thus whether
the electronic system is cost-competitive with
checks.
Features of ACH Payments
While wire transfers require telephone-like
quick data transmission, the ACH data movement from an originating to a receiving institution more closely resembles electronic mail. At
various stages of ACH processing the payment
transaction information is stored before being
forwarded in large batches t o another processing location or t o the receiving institution.
Because of this feature, the ACH system is
called a"store and forward" or a "store-processforward" system.
Because a store and forward system of data
transmission is characteristic of most electronic
mail systems, the ACH can be viewed as a
special-purpose electronic mail system in which
the data transmitted is payment transactions
and related information. Of course, the fact
that payment information is being transmitted
makes the ACH more complex, because of
security requirements and the inability t o tolerate errors.
Exhibit 1 summarizes ACH features compared
with both wires and checks, showing that the
ACH has many of the features of checks.
The Cost of ACH Processing
Electronic mail is generally a less costly way
to transmit information electronically than a
telephone-like system. One reason is that the
M A R C H 1986, E C O N O M I C REVIEW
"Significant improvements in delivery cost are
technically possible. Achieving these improvements, however, will
require a substantial investment."
virtually instantaneous two-way transmission
of a phone-type data transmission is more
expensive than the time-delayed electronic
mail. Another reason is that with electronic
mail, transactions can be batched together and
processed as a group rather than as a single
transaction. Another cost saving feature is "load
smoothing," the ability to balance the use of
processing equipment and data transmission
lines over time since the message can be
stored or queued. 7
The markedly higher price that the Federal
Reserve charges depository institutions for
wires compared with interregional ACH transactions reflects the economic differences in
delivery cost for wires and ACH; and, the
current comparison does not reflect the savings
the ACH could eventually offer. First the ACH
is a comparatively new payment alternative
with low volume given the capacity of the
current ACH system. Wires are a relatively
mature product with high volume in relation to
current wire system capacity. Since almost all
the operating costs to the Federal Reserve for
the ACH are fixed (i.e., facilities, equipment,
and staff), an increase in volume would dramatically reduce prices. For instance, if we
make the conservative assumption that 80
percent of current ACH costs are fixed and will
not increase with transaction volume, then
increasing the transaction volume by a factor of
ten would reduce the average per item cost t o
about one-eighth the current cost 8
Volume growth and ACH price over the last
five years support this view. The 1981 prices
reflected an 80 percent subsidy in that they
were based on a 1986 volume projection
approximately five times the 1981 volume.
The 1986 prices involve no subsidy, and the
interregional cost is approximately the same as
the 1981 prices. The growth in volume between
1981 and 1986 has reduced the average value
of the actual per item cost over this period t o
about one-fifth the 1981 level.
Besides volume relative to capacity, another
factor in the economics of ACH vis-a-vis wires
and checks is the efficiency of the current ACH
processing system. It benefits from using Fed
facilities and the already existing Federal Reserve communication system developed for
wires and other Fed messages. However, the
use of 32 processing locations can be questioned since fixed costs could be significantly
FEDERAL RESERVE B A N K O F ATLANTA
reduced with fewer locations, as could direct
processing costs and data receipt and delivery
expenses.9 The crucial point here is that significant improvements in delivery cost are technically possible. Achieving these improvements, however, will require a substantial investment in new systems and software, major
changes in the ACH organization, and initial
costs to many financial institutions in changing
the way they exchange ACH transactions w i t h
their processor(s).
Comparative Economics: A Synthesis. Wires
are expensive relative t o ACH and check payments. ACH and check collection and settlement costs currently charged by the Fed are
comparable. Volume growth will improve ACH
per item costs relative to check collection and
settlement costs. Improvements in the ACH
processing system may further improve the
economics of the ACH vis-a-vis checks.
Electronic Alternatives to Checks
Given their costly communication system,
single-transaction processing focus, stringent
security control requirements, and limited
message capability, wires clearly are not a
reasonable alternative to checks for most payments now made by check. Wires will be used
in lieu of checks only when a payor requires
same day or intraday good funds settlement
confirmation or notification. The ACH is the
pertinent electronic alternative when check
displacement is considered.
A viable electronic check replacement must
have four features: (1) low cost relative to
checks; (2) batch processing orientation rather
than a single-transaction focus; (3) security
control problems no more onerous than those
associated w i t h check-based payments; and
(4) an interface w i t h the computer-based payment processing frameworks of both the payor
and the payee.
Requirements (2) and (3) are met by the
current ACH. Requirement (1), low cost relative
to checks, is attainable through volume growth
and possibly through improvements in the
ACH system. The interface t o payor and payee
is the last and most difficult requirement that
the ACH must meet to displace checks. Various
check uses call for more than just the transmission of an electronic check image. Many payment transactions involve information exchange
15
between payor and payee and provide controls
such as stop payment M u c h of the infrastructure for information exchange and control over
payment amount and timing has not been
incorporated in either ACH system capabilities
or products. A flexible message feature, confirmation, notification, value dating, and various
types of advance messages and conditional
transactions to give a payor control over payee
initiated debits are system capabilities that
could be developed t o meet these requirements. (See"Desiderata for a Viable ACH," this
issue.)
It is difficult to decide w h a t if any, additional
capabilities should be added to the ACH. The
attempt to provide a message capability illustrates this difficulty. Developing an appropriate message capability is an active area of
concern for NACHA. The message feature has
been a problem for the ACH because the
standard ACH payment transaction has at best
a limited message capability and no system for
ensuring timely electronic delivery to the transaction recipient NACHA introduced special
purpose transactions called corporate trade
payments (CTP) to provide a message capability
that would be the electronic equivalent of the
remittance advice normally accompanying a
trade payment to a vendor. The CTP service has
not generated significant volume and has been
criticized for a variety of reasons. NACHA has
now announced another message-focused service—corporate trade exchange (CTX). It will
have a variable length message and support an
ANSI X12 data content standard. (See the box
" A C H Terminology" for more details on CTP.)
Summary
telephone-like communication systems, involve
stringent security requirements, and are used
primarily when fast transfer, confirmation or
notification pertain. Wires will not displace
checks t o any great extent
The ACH is an electronic payment alternative
to checks and check-like payments. It is batchoriented, uses store and forward communication systems, and looks much like an electronic
check image.
Current ACH costs are comparable to check
costs. However, with significant volume growth,
and possibly an alternative network processing
organization, ACH costs can be dramatically
reduced relative t o check costs. The issue of
significant check displacement is, however,
much more than a question of comparative
economics. The basic ACH fund transfer capability must be translated into products and
services that replace check-based activities.
Achieving a cost-effective ACH with productservice attributes requires considerable research, market analysis, and product develo p m e n t An infrastructure for selling, distributing, and s u p p o r t i n g ACH-based products
comparable t o the elaborate check product
infrastructure must be created. Only a small
part of the necessary infrastructure is currently
in place. However, the organizational infrastructure is beginning t o change. Additional
capabilities are being debated. Many banks
and vendors are looking at business opportunities inherent in ACH-based payment servicing
While volume growth will probably be slower
than many popular forecasts, the ACH should
be an exciting area of payment service innovation and competition as efforts are made to
realize the potential benefits of batch-oriented,
store and forward electronic payments.
Payments can be placed in three broad
classes—wires, check and check-like instruments, and the ACH. Wires use expensive
16
M A R C H 1986, E C O N O M I C REVIEW
ACH Terminology
Types of Services
Standard payment transaction. Most ACH volume
is accounted for by this kind of funds movement The
transaction involves a single 94-character record in
which the key transaction data are encoded: type of
transaction (standard or corporate trade payment),
payor institution and account number, and transaction
amount Because these data are similar to those
contained in a check, the ACH payment transaction
data can be thought of as an electronic image of a
check or draft
The standard transaction has a data field that can
be used for messages to provide additional information
(for example payor name or payee name). However,
because no ACH-wide data code standards or message translation procedures have been developed,
the standard ACH payment transaction has limited
message capacity and lacks a formal message support system
Corporate Trade Payments (CTP). In 1983, NACHA
announced the pilot test of a new ACH transaction
designed for use in corporate trade payments. Besides
providing for the standard 94-character payment record, the transaction offered from one to 4,999 addenda
records of 94 characters each. These addenda are
appended to the standard transaction record Pricing
of the CTP is fixed to include a service charge for 15
addenda records even if fewer than 15 records are
used The addenda records can convey information
about the payment transaction such as invoices paid,
discounts taken, trade and freight allowances, and a
variety of other possible adjustments that occur in
making trade payments This message capability permits the transmission of remittance advice information that routinely accompanies check payments
for items purchased via trade credit In essence, the
new service provides fixed-field electronic mail, in
that the message addenda records are a series of
fixed length message records that are routed from the
originating institution to the receiving institution along
with the payment but without any other processing.
Corporate Trade Exchange (CTX). This special
trade payment transaction has a variable length message addendum format and will support the ANSI
X12.4 data content standard.
FEDERAL RESERVE B A N K O F ATLANTA
ANSI X12. This standard established by the American National Standards Institute pertains to businessto-business electronic data interchange for buyer
and seller transactions including order inquiries, ordering, credit terms delivery instructions invoicing
remittance, payment cash application, and related
information exchange. ANSI X12.4 is the part of the
ANSI X12 standard that applies to remittance data
Credits and Debits
Credit transactions. Credit transactions move
funds from the account of the transaction originator
to the transaction receiver's account They are analogous to check payments drawn on the account of the
transaction originator and deposited into the account
of the transaction receiver. An example is direct
deposit of payroll.
Debit transactions. Debit transactions move funds
into the account of the transaction originator; they
are initiated by the payee with the payor's advance
authorization. ACH debit transactions correspond to
preauthorized checks or drafts Insurance payments
initiated by the insurance company and drawn on a
client's account are an example of such ACH transactions Insurance and mortgage payments are the
major uses of ACH debits as they both involve recurring payments of a fixed amount
Processing Cycles
Regular processing cycle. This is the cycle used
for most ACH transactions It has a cutoff time early in
the day for presenting transactions to a regional ACH
processing point for settlement on the next business
day.
Late night processing cycle. This cycle has a
cutoff time late in the day for presenting transactions
to a regional ACH processing point for next day
settlement It was introduced in 1979, primarily for
cash concentration (the movement of company funds
from deposit banks into a central cash pool in the
company's concentration bank). Late night processing
originally was limited to debit transactions but this
restriction no longer applies The night cycle can now
be used for any ACH transaction, but involves a
premium price because of the fast processing
17
NOTES
' S e e P a m Frisbee, "The A C H : An Elusive Dream," this issue, for a review
of t h e history a n d evolution of t h e A C H .
2
3
B a n k w i r e a n d C H E S S discontinued o p e r a t i o n s in M a r c h 1 9 8 6 .
A limited n u m b e r of b a n k s offer w i r e transfer initiation from a T r e a s u r y
w o r k s t a t i o a For standing w i r e s that c o n f o r m to t h e n u m b e r of control
guidelines, c h a r g e s range from $ 3 . 5 0 to $ 8 . This lower cost reflects a
shifting of d a t a entry b u r d e n to the initiator a n d t h e a u t o m a t i o n of t h e
interface to t h e various wire s y s t e m s H o w e v e r , this lower variable cost
also involves a fixed cost for subscribing to t h e " a u t o m a t e d w i r e
system" and t h e user must a s s u m e t h e cost of h a r d w a r e a n d sometimes long distance c o m m u n i c a t i o a
" W h e n t h e A C H w a s first formed, only b a n k s w e r e m e m b e r s of t h e
regional A C H a s s o c i a t i o n s Intraregional transactions w e r e b e t w e e n
b a n k s belonging to t h e s a m e regional ACH; interregional w e r e for
different A C H associations. By t h e late 1 9 7 0 s , regional associations
permitted all t y p e s of depository institutions (banks, savings and loan
associations, m u t u a l savings banks, a n d credit unions) to b e m e m b e r s
of a regional c l e a r i n g h o u s e a s s o c i a t i o a S i n c e August 1 9 8 1 , t h e
Federal R e s e r v e has provided A C H processing to all depository
institutions a n d not just its m e m b e r b a n k s a n d participants in regional
A C H associations
' R e a d e r s interested in m o r e detail, especially t h e transaction validation,
error c h e c k s a n d controls a r e referred t o C a r e y a n d Carr, " A C H
Transaction Processing: An O v e r v i e w of t h e Information Flows and
Controls" Journal of Cash Management,
voL 2, n o 3 ( S e p t e m b e r , 1 9 8 2 ) ,
pp. 3 2 - 4 7 .
T h e r e f e r e n c e s to at least 3 2 "processing locations" m a y p u z z l e t h e
reader. This d o e s not refer e i t h e r t o t h e 3 1 regional associations per s e
or to processing organizations (Fed, N e w Yorfc C l e a r i n g H o u s e , A r i z o n a
Carey, Kristen E , a n d Kevin Carr. " A C H Transaction Processing: An
Overview of Information Flows and Controls" Journal
ol
Cash
Management
voL 2, n o 3 ( S e p t e m b e r 1 9 8 2 ) , pp. 3 2 - 4 7 .
Corrigan, E Gerald. " F e d e r a l R e s e r v e S y s t e m Pricing: An Overview,"
Journal ot Cash Management,
v o l 2, n o 3 ( S e p t e m b e r 1 9 8 2 ) , p p 4 8 56.
F e d e r a l R e s e r v e B a n k of A t l a n t a Economic
Review,
Special
Issue:
Displacing
the Check. voL 6 8 , n o 8 (August 1 9 8 3 ) .
The Future ot the U.S. Payments
System, p r o c e e d i n g s of a c o n f e r e n c e
s p o n s o r e d by t h e F e d e r a l R e s e r v e B a n k of A t l a n t a J u n e 2 3 - 2 5 ,
1 9 8 1 . A t l a n t a F e d e r a l R e s e r v e B a n k of A t l a n t a 1 9 8 1 .
Johnson, T h e o d o r e O , a n d J o h n M. French. "Electronic C o r p o r a t e
P a y m e n t S y s t e m s " Journal
of Cash Management
v o l 1, n o 1
( O c t o b e r 1 9 8 1 ) , pp. 2 6 - 3 4 .
Kutler, Jeffery. "Fed of Atlanta's C h e c k Study. M o n u m e n t a l a n d Maligned,
Transition,
v o l 1, n o 1 (July 1 9 8 1 ) , pp. 1 3 - 1 6 .
L e e J o h n F. " C H I P S : M o r e T h a n Just Another C l e a r i n g System,
Transition,
voL 11, n o 1 ( F e b r u a r y 1 9 8 3 ) , p p 2 0 - 2 5 .
Payments
in the Financial
Services Industry of the 1980s, p r o c e e d i n g s of
a c o n f e r e n c e s p o n s o r e d b y t h e F e d e r a l R e s e r v e Bank of A t l a n t a
S e p t e m b e r 2 2 - 2 3 , 1 9 8 3 . Westport, C o n n e c t i c u t Q u o r u m B o o k s
1984.
Penney, N o r m a n a n d D o n a l d I. Baker. The Law of Electronic
Transfer
Systems
Boston: W a r r e n , Gortiam, 8 L a m o n t Inc,
with periodic s u p p l e m e n t s
R a w l i n g s Brown R. "Will t h e A C H Ever G r o w Up?" Transition,
1 0 ( D e c e m b e r 1 9 8 2 / J a n u a r y 1 9 8 3 ) , pp. 2 2 - 2 6 .
18
Fund
1980,
A C H , C a l w e s t e r n A C H , a n d Hawaii) but rather to physical locations
w h e r e processing t a k e s p l a c e T h e r e a r e 2 8 F e d offices with processing facilities plus at least o n e n o n - F e d processing location e a c h in
N e w Y o r k C a l i f o r n i a Arizona, a n d H a w a i i H e n c e , t h e r e a r e at least 3 2
physical processing l o c a t i o n s
' T o u n d e r s t a n d l o a d - s m o o t h i n g a n d its b e n e f i t i m a g i n e y o u a r e making
a p h o n e call; y o u a r e t h e m e s s a g e originator, t h e person w h o will
a n s w e r is t h e m e s s a g e receiver, a n d y o u r m e s s a g e is t h e d a t a If t h e line
is constantly busy, a s it c o u l d w e l l b e during a f t e r n o o n business h o u r s
your m e s s a g e - d a t a - d o e s not g e t through. T h e e x p e n s i v e solution is
t o a d d more t e l e p h o n e wires— m o r e c a p a c i t y for handling calls (data). In
t h e c a s e of t h e electronic mail, y o u c a n call, a n d if t h e line is busy, your
m e s s a g e - d a t a — i s queued. W h e n t h e receiver's line is free, t h e
q u e u e d d a t a is distributed—load s m o o t h i n g This type of communication
is most useful for overnight p u r p o s e s w h e n t e l e p h o n e activity d r o p s
b e c a u s e d a t a still m o v e s after the m e s s a g e originator has g o n e h o m e
to s l e e p and d o e s not require that t h e m e s s a g e receiver b e physically
p r e s e n t t o a n s w e r t h e phone. It is just s t o r e d on his/her system a n d
m a d e available a t a c o n v e n i e n t t i m e for t h e m e s s a g e receiver.
»This analysis a s s u m e s that current facilities a n d c o m m u n i c a t i o n syst e m s c a n h a n d l e up to 1 0 t i m e s current v o l u m e without significant
additions of e q u i p m e n t or c o m m u n i c a t i o n capacity. This assumption is
probably conservative. T h e r e is clearly no p r o b l e m with c o m m u n i c a t i o n
capacity. Likewise, existing c o m p u t e r e q u i p m e n t for sort-merge processing has capacity to h a n d l e m a n y t i m e s t h e current v o l u m e If t h e r e
a r e limits it is in input-output processing a n d t a p e h a n d l i n g — a minor
part of t h e total fixed c o s t for A C H p r o c e s s i n g
" S e e n o t e 6, a b o v e
R o m b e r g B e r n h a r d W. " B a n k W i r e ' s Goal: To Be M o r e T h a n J u s t a n
Alternative to F e d w i r e " Transition,
voL 11, n o 1 ( F e b r u a r y 1 9 8 3 ) , pp.
14-20.
Smith, S a m u e l D. " T h e C u r r e n t Status of C o r p o r a t e EFT," Journal
of
Cash Management
v o l 2, no. 2 ( J u n e 1 9 8 2 ) , p p 2 8 - 4 0 .
Smith, S a m u e l D. An Assessment
of Electronic
Funds Transfer
Systems
to Meet
the Needs
of the Corporate
Treasurer.
Thesis Stonier
G r a d u a t e S c h o o l of B a n k i n g R u t g e r s University, N e w Brunswick,
N.J, 1 9 8 0 .
Stone, B e r n e » K. " C o r p o r a t e P e r s p e c t i v e s on C a s h M a n a g e m e n t
in
Payments
in the Financial
Services
of the 1980s. W e s t p o r t C o n n e c ticut Quorum Books 1984, p p 4 0 - 5 8 .
Trotter, J a m e s W. "Is C o r p o r a t e E F T C o m i n g of Age?" Journal
of Cash
Management
voL 2, n o 3 ( S e p t e m b e r 1 9 8 2 ) , p p 2 2 - 2 9 . This u p d a t e s
an earlier version of this article from Computer
Law Journal, v o l 2,
no.1 ( W i n t e r 1 9 8 0 ) .
U S D e p a r t m e n t of C o m m e r c e National C o m m i s s i o n o n Electronic
F u n d T r a n s f e r s EFT in the United States: Policy
Recommendations
and the Public
Interest
( W a s h i n g t o n D . C : G o v e r n m e n t Printing
Office October 28, 1977).
W h i t e G e o r g e C , Jr. "Electronic B a n k i n g a n d Its Impact on t h e F u t u r e
Magazine
of Bank Administration,
vol 55 (December 1979), p p 3942.
.
„
W h i t e G e o r g e C " E F T O p p o r t u n i t i e s for t h e Innovative Corporation,
Journal
of Cash Management
voL 2, n o 2 ( J u n e 1 9 8 2 ) , p p 4 2 - 4 8 .
voL 1 0 , n o
M A R C H 1986, E C O N O M I C R E V I E W
ACH Return Items
Gerald L Keenan
One of the many similarities between the ACH system
and the check collection system is the process used
for returning unposted items to the originator. Financial institutions return ACH items for the same reasons
they return checks primarily insufficient funds Items
may also be returned because an account has been
closed, payment has been stopped, no account exists
or an item was drawn against uncollected funds
Just as ACH items may be presented to receiving
financial institutions in paper or automated form, dishonored ACH items may be returned as paper items
or via automated media such as magnetic tape or data
communications Historically, the vast majority of
returns have been processed in paper form Receiving
financial institutions complete preprinted return item
forms manually or use computer printed forms Information contained in the original ACH item must be
included on the form along with the reason for return.
Receiving institutions have long had the option of
handling returns automatically. Although commercial
software packages that create return items from an
original ACH input file have been available for some
time, few financial institutions chose to use this
option or write their own software prior to 1985. One
reason is that because of the relatively small number
of ACH returns most institutions could not financially
justify the software purchase or development cost
necessary to begin automation.
In February 1985, the Federal Reserve System
began converting to automated returns all paper
returns received at the Federal Reserve Bank of first
deposit Planners determined it would be more costeffective to automate returns at the Fed of first
deposit and allow them to flow through the originating
Fed in automated form to the originating financial
institution. An important aspect of the Federal Reserve's move to automate returns was the decision to
charge a conversion fee to financial institutions returning paper items The fee was set at a relatively
high $2.50 per item. This fee covers the Fecfs operating costs to convert the items and provides financial
institutions a significant incentive to automate, since
automated returns are handled at no f e e Many institutions have since followed this course to save the
$2.50 fee.
Recently several private sector companies have
begun marketing automated return item packages
The author
is an assistant
Reserve Bank of Atlanta
vice president
with responsibility
payment services, including
ACH.
FEDERAL RESERVE BANK O F ATLANTA
at the
for all
Federal
electronic
that allow financial institutions to create an automated return item file using personal computers
Generally, an installation fee and a per item fee
(usually lower than the Fed's $2.50 fee) are charged
for these return item packages In addition, many
Federal Reserve Banks are now offering personal
computer-based programs that allow financial institutions to create automated return item files for transmission to the Fed Most of these automated return
item packages offer economically attractive alternatives to the paper-based return item process
Not only will automating returns be more efficient
from an economic standpoint but it will also decrease
the time needed for a return item to get back to an
originating financial institutioa In the late 1970s
Chase Manhattan Bank in New York began collecting
statistics on ACH return items including the number
of returns reasons for return, and time between
origination and receipt of a return item. When Chase
first distributed the results of its analysis the average
length of time for an item to be returned ranged from
10 to 15 days from the date of origination. This was
significantly longer than the seven days for a paper
item to be returned Continuing education of receiving
financial institutions helped cut the transit period to
approximately nine days The Fed's conversion to
automated returns reduced the outstanding time still
further, to five or six days comparing favorably with
the time required for a check retura
Occasionally a receiving financial institution must
send corrected information about an ACH item back
to the originating institution, usually because of an
incorrect account number. The corrected information
is sent back to the originating institution on a notification form similar to a return item form. Historically
those notices flowed back to the originating financial
institution in paper form, much like a return item. As
with return items though, financial institutions have
the option of sending notifications of change back in
automated form When the Federal Reserve implemented its return item conversion process in February
1985, it included notification-of-change forms A fee
of $2.50 is also charged to convert these notifications
from paper to automated form.
The paper ACH return item process is a relatively
expensive and slow method of returning unposted
items The Federal Reserve's decision to convert
paper to automated media and charge for this service
should encourage receiving financial institutions to
move toward automation, thus hastening further improvements in ACH efficiency.
19
Electronic
Payments
Making a technological innovation like ACH
viable in the marketplace calls for capital
investment and effective organizational infrastructure to support product development
life cycle pricing, and market research.
at the
Crossroads
Bernell K. Stone
The ACH system has been available as a technically viable alternative to checks for more
than a decade. Yet ACH transaction volume in
1985, approximately 600 million transactions,
was only 1.5 percent of total noncurrency
payments. 1 Moreover, the approximately 600
million ACH transactions processed in 1985
represent only half of the estimated growth in
check volume for 1985, approximately 1.0 t o
1.2 billion more checks than in 1984. It is hard
t o argue that the United States is on the verge
of an electronic payment revolution when
annual growth in check volume exceeds total
electronic payments.
Forecasts in the late 1960s and early 1970s
predicted that electronic technology w o u l d
bring rapid, even revolutionary, displacement
of check-based payments. Several forecasters
speculated during this period that a majority of
all noncurrency payments w o u l d be based on
electronics rather than paper by 1980. Clearly,
these forecasts were unduly optimistic
Proponents of electronic payments continue
to argue that rapid conversion from checks to
electronic payment is i m m i n e n t Yet the ACH
is the only viable electronic alternative t o
checks and other paper-based noncurrency
payments available today. Wire payments are
"electronic," but their cost single-transaction
The author
at Georgia
is Mills 8. Lane professor
Institute
of
Technology.
20
of banking
and
finance
focus, and stringent security requirements mean
wire payments will not displace check volume
conspicuously. Critical analysis of current A C H
volume, use, capabilities, and economics compared w i t h checks indicates that the electronic
payment revolution is not taking place, is not
i m m i n e n t and will not occur if the current ACH
system is the only alternative t o check payments.
ACH is now used primarily for Social Security
payments, direct deposit of payroll, cash concentration, and insurance payments. As long as
significant use of the ACH system is restricted
t o these kinds of payments, growth possibilities
are limited since these payment areas provide
the potential for at most three billion t o four
billion transactions a year, even if the ACH
achieves 50 percent penetration of these markets.
ACH payments can attain prominent volume
as a percentage of total noncurrency payments
only if the ACH: (1) can expand into new
applications that constitute a noteworthy proportion of noncurrency payments (such as
corporate trade or consumer bill payments),
(2) can displace currency payments or (3) can
displace credit card payments. In effect an
ACH-type service must supersede existing payment instruments in applications with considerable volume if the ACH or ACH-type payments are to constitute a significant proportion
of all noncurrency payments. 2 Since check displacement is the major area for immediate
M A R C H 1986, E C O N O M I C REVIEW
volume growth, this article will focus primarily
on the ACH as an alternative t o checks and
drafts and will not treat its potential t o displace
credit card payments or t o be used in transactions now involving currency payments.
Given the apparent cost and quality advantages of payment systems based on computer
communication over those based on paper
transportation, w e need t o examine w h y the
ACH has failed to generate more volume and
why it is not being used in many payment areas
as a substitute for checks, drafts, and other
paper-based payments.
If the ACH is to expand significantly in
payment applications other than current usage
areas, additional capabilities and specific payment services must be added. Greater processing and communication efficiency is essential
for the ACH if the cost and quality benefits
inherent in today's computer-communication
technology are to be realized. (See "Desiderata
for a Viable ACH," this issue.)
Why have w e failed t o develop the capabilities,
specific products for different payment areas,
and enhancements t o communication necessary
for processing efficiency? W h y has a seemingly
obvious business opportunity not produced the
products and services the marketplace requires
to use ACH-type payment alternatives?
Creating new technology-based products and
services is never easy. It takes time, capital
investment and great technical and business
skill. It also requires the creation of an industry
infrastructure t o produce, distribute, and support the p r o d u c t Examination of the organizational and industrial infrastructure of the payments business from the viewpoint of technology assimilation and displacement seems
to indicate major problems: an inability t o
perform meaningful market research, to undertake significant research and d e v e l o p m e n t
and to employ life cycle pricing typically used
for new products and services seeking t o displace existing ones. The organizational and
industrial infrastructure necessary for a new
technology t o supersede an existing one does
not seem to be in place now nor does it appear
to be developing. The absence of the necessary
infrastructure will impede progress in providing
electronic payments and thus delay realization
of the economic benefits possible with an efficient electronic payment system.
FEDERAL RESERVE B A N K O F ATLANTA
Technology Assimilation and
Displacement
Technology assimilation refers t o the conversion of a technical capability into an accepted, widely used p r o d u c t Exhibit 1 depicts
the three stages inherent in most technology
assimilation situations: gestation, rapid growth,
and saturation and mature growth.
Gestation is the period during which the
product is defined, refined, and tested on the
market This is a period of market research,
user education, and product testing, developm e n t and refinement During the gestation
phase, market awareness grows. Capabilities
for producing, selling, distributing, and supporting the product are developed. Organizations are created t o provide this support
Rapid growth is the second stage, during
which volume grows significantly and customer
awareness of the product becomes widespread.
Growth is often constrained by limits on production capacity and support in the early portion of rapid growth. In contrast the later
portion of the rapid growth stage has adequate
or even surplus production capacity. Thus,
prices often decline over the course of the
rapid growth stage, providing further incentives
for accelerated volume growth.
Saturation and mature growth occur when
virtually all potential users have adopted the
new p r o d u c t Sales represent replacement
upgrading to new models, and growth in the
population.
Exhibit 1
Typical Growth Stages for a New,
Technology-Based Product
Volume
21
Framework Generality. Most product innovations such as the automobile, radio, TV, color
TV, and personal computer fit into this framework, which provides a useful industrial organization concept for analyzing and explaining
both the adoption of new technologies and the
displacement of existing products or services
by new ones. It also helps to explain w h y some
technologies fail to gain sufficient acceptance
to displace an existing technology. W e shall
use this framework t o evaluate the ACH system
as an alternative t o check-based payments. 3
Technology Displacement Requirements. The
ACH is clearly a case of technology displacement rather than assimilation of a new capability. The volume of payments is determined by
the level of economic activity and payment
practices. The ACH is primarily an alternative
to check-based payments, although in a limited
number of cases, it may displace wire-based
payments, credit drafts or currency payments.
Since checks constitute the vast majority of
noncurrency payments, check displacement
affords the primary opportunity for ACH growth
over the next decade. The critical issue for ACH
volume growth, then, is whether it can displace
checks in high volume check-usage categories
such as consumer bill payment, retail payments
or vendor trade payments.
In broad terms, the ACH will displace checks
only if three requirements are met:
1. Product Dominance
The ACH must be
superior t o checks in terms of price and quality
in at least some payment applications. If it is
not price-dominant then the ACH must offer
quality attributes sufficiently valuable t o offset
any price advantage for checks.
2. Product Development
Infrastructure
This
capacity must be developed to conduct market
research, to convert the research into product
capabilities, and t o educate the marketplace.
3. Production and Distribution
Infrastructure
The capacity t o produce, sell, distribute, and
support the product must also be developed.
Anyone familiar with product development
or industrial organization would view these as
obvious requirements. Why, then, are we presenting the obvious? First most efforts to predict growth of the ACH as a check alternative
have neglected at least some, and generally all,
of these requirements. 4 For instance, the many
optimistic forecasts of ACH growth have assumed the ultimate technical and economic
22
superiority of ACH-type payments over checks.
These forecasts naively assumed that the ACH
would displace checks rapidly, without analyzing seriously the infrastructure requirements
and barriers t o change that might inhibit or
prohibit the necessary infrastructure developm e n t Second, significant barriers within the
existing ACH infrastructure currently inhibit or
prohibit the necessary development of each of
these three generic infrastructure requirements.
Structure of the ACH Industry
Exhibit 2 depicts the structure of the ACH
industry in three parts: (1) a product manufacturer (the ACH processing and settlement system), (2) distributors (usually depository institutions), and (3) customers.
This manufacturer-distributor-customer structure arises in many industries, especially those
that involve a substantial fixed cost for production and have a large, geographically dispersed,
retail customer base. The automobile industry
is a prime example of this structure, with three
major U.S. manufacturers and several foreign
manufacturers. All use dealers t o distribute
(i.e., sell and service) cars rather than selling t o
consumers directly.
A pyramid is a useful way t o depict the
industry structure, which consists of many
more customers than distributors and many
more distributors than manufacturers. In the
case of ACH-type payments, there is in fact
only a single product and a single manufacturer
of processing and settlement services—the
ACH system. The statement that there is a
"single manufacturer"' does not mean that only
one organization provides ACH processing for
financial institutions. Rather it means that a
bank or other depository institution in a given
location generally has only a single system
available t o it for ACH transaction processing.
Thus, it looks t o a service distributor much as if
there were a single product and therefore a
single manufacturer. However, the ACH system
has a complex structure involving a number of
organizations working cooperatively.
Thirty-one regional clearinghouse associations exist each covering a geographical segment of the United States market The National
Automated Clearing House Association (NACHA)
is the primary organization that coordinates
the activities of the regional associations. The
M A R C H 1986, E C O N O M I C REVIEW
Exhibit 2
The Industrial Structure of ACH Payment Services
Federal Reserve System is the primary ACH
processor, operating 28 offices under coordinated management It provides settlement
interregional processing, and most of the regional processing. The N e w York Clearing
House operates the New York ACH Association.
The Arizona, Calwestern, and Hawaii regions
also use non-Fed processors for at least some
of their intraregional transactions. The Calwestern ACH has selected General Electric Information Services (GEISCO) as an alternative
processor that may be used by financial institutions in its region. 5
Marketing Effort Problem or Symptom
In assessing w h y ACH volume growth is slow,
it should be noted that only a few institutions
are active ACH originators and most are passive
In many of the 31 regional associations, five or
fewer institutions originate the majority of the
ACH transactions in their region.
Since active selling and marketing are necessary for any new product t o displace an existing
one, it is easy to " b l a m e " the many passive
institutions for slow ACH growth. However,
FEDERAL RESERVE BANK O F ATLANTA
this is really blaming the symptom and not the
cause of the problem. Criticizing banks for
selling check services rather than ACH services
is analogous t o blaming car dealers that sell
both domestic cars and imports for the fact that
imports have been displacing domestic cars in
recent years. A distributor or dealer of competing services will emphasize the service that
provides the best return to the dealer-distributor and is demanded by the customer because
of its price and quality. Of course, the level of
demand is a critical factor in determining the
best return. Thus, if the ACH system wants t o
convert more of its passive distributors into
active distributors that aggressively sell and
service ACH payments as a serious alternative
t o checks and other payment instruments,
then the ACH system must convince the passive
distributors that the price and quality attributes
of ACH-based services will stimulate customer
demand and provide a favorable return on the
startup investment
Banking is competitive and becoming more
so as geographic and other regulatory barriers
are relaxed. Most banks are aggressively looking
for new services. W h e n the price and quality
23
"Selling a payment alternative to checks has one dimension that
makes it more complex than selling most products and services. . . . It
is necessary to sell both the payor and payee."
attributes of the ACH are competitive with
checks and when many consumers and businesses demand ACH-based services, the passive distributors will become active ones or
else they will lose business t o the active distributors.
Thus, the problem in ACH growth is not the
many passive distributors of ACH services. The
lack of bank marketing effort is a symptom of
the true problem—the price and quality of the
current ACH service and possibly the cost of
entry into ACH servicing. The crucial question
is: " W h a t is necessary to induce more banks t o
become active distributors?" Answering this
question requires that w e return to the current
product and its manufacturer—the ACH system. First, however, w e will consider the customers at the base of the pyramid in Exhibit 2
and discuss market segments and other key
attributes of the ACH market
Customers and Market Segments
The base of the pyramid in Exhibit 2 depicts
ACH customers as individual consumers and
businesses—all those entities that initiate and
receive payment Every individual with a checking account or other transaction account and
all businesses are potential users of the ACH.
Inducing significant check displacement means
that it is necessary t o convince consumers and
businesses to switch a large proportion of their
noncurrency payment transactions now conducted by check to the ACH.
The ACH system does not sell to either
consumers or nonfinancial businesses directly.
Rather banks and other depository institutions
are the service distributors. Depository institutions are responsible for selling ACH services,
providing all service support and performing
any special services required to meet the needs
of particular customers.
Using depository institutions as ACH distributors means that a distribution system is already
established. It is not necessary to create a
dealer-distributor system as it was for selling
cars in the early days of the automobile industry.
However, a predetermined group of distributors means that the ACH system cannot succeed
unless these distributors decide to actively
market the ACH as an alternative t o checks and
other payment instruments.
24
Selling a payment alternative to checks has
one dimension that makes it more complex
than selling most products and services. In
most sales, a purchase decision can be made
by an individual consumer or business solely
on their preferences. However, for payments it
is often necessary t o sell both the payor and
payee. For instance, even though the Social
Security Administration has decided t o use the
ACH, an actual check displacement occurs
only when the payee also perceives price and
quality attributes that justify a change in payment instrument In effect the Social Security
Administration can use the ACH only when the
payee also decides t o use the ACH for receipt
of his or her Social Security payment
Another aspect of the ACH-versus-check
decision is that it varies across different payment uses. A company may decide to use the
ACH for payroll and cash concentration but not
for its trade payments or dividends. A consumer
may decide t o have his or her insurance payment handled via the ACH but not the mortgage
or any variable-amount recurring bills. Displacement does not depend on selling a payor
and payee on the merits of the ACH over
checks in general, but rather on the use of ACH
for specific usage categories. One of the present problems is that most ACH commercial
usage is limited to payroll, cash concentration,
and pre-authorized insurance payments. In
most other payment usage areas, payors and
payees seem unwilling or unable to use the
ACH in its current form.
The Current ACH Production-Manufacturing Infrastructure
NACHA, the primary ACH organization, is an
association of 31 regional clearinghouse associations. NACHA members are commercial
banks and other depository institutions. Thus,
the regional clearinghouse associations consist
of competitors from within a geographical region, w h o pay annual dues to support their
association.
While depository institutions are the nominal
distributors of ACH services, most ACH members are (as already noted) passive participants
that d o not actively sell and support ACH
payments. The passive institutions receive and
process ACH transactions for their depository
accounts, but they do not actively originate
M A R C H 1986, E C O N O M I C REVIEW
" W h i l e depository institutions are the nominal distributors of
ACH services, most ACH members are passive participants that do not
actively sell and support ACH payments."
ACH transactions nor are they proactive marketers of ACH-based services. However, most
do actively sell check-based payment services.
The Conflict Between Active and Passive
Members. The fact that most financial institutions are passive distributors produces conflicts
of interest with the active originators. In governing the regional associations, passive members
generally are reluctant to authorize spending
for improvements or new capabilities that will
not produce significant business for them but
that could enhance the profitability and competitive position of an already established,
relatively high-volume ACH originator. The conflict of interest is exacerbated when the improvements or innovations tend to displace
check volume from the passive institutions t o
one or more of the active institutions.
The organization of NACHA and the regional
ACH associations is such that the general membership governs policy and direction. Hence,
any change or innovation initiated by NACHA
must be acceptable t o the low-volume, relatively passive institutions as well as to the
active transaction originators.
The Federal Reserve. Until 1981, the Federal
Reserve contracted with most of the regional
associations to provide ACH processing In
conjunction with pricing its ACH services as
required by the Monetary Control Act of 1980,
the Fed began providing ACH services t o all
depository institutions in the same way that it
provides check collection and settlement security safekeeping, and other priced services.
ACH processing takes place at 28 Federal
Reserve offices which are maintained as part of
the operating services delivered by the District
Banks. The 28 offices are linked by the Federal
Reserve's communication system. Thus, the
ACH uses the same communication lines as
wire transfers.
The Federal Reserve treats electronic payments—wire transfers and ACH processing—
as a service area Electronic payments have a
management structure within the Fed similar
to checks and security services. There is a
product director charged with overall management of electronic payments including development and market research.
The Fed has historically relied on NACHA for
input on market needs, but this is slowly
changing as the Fed moves from being a contractor for services to a more proactive service
provider.
FEDERAL RESERVE BANK O F ATLANTA
Other Processors. The New York Clearing
House has always been the processor for the
New York ACH. Other non-Fed ACH associations are the Arizona ACH and the Calwestern
ACH. Hawaii is now part of the Calwestern
ACH but uses a bank processor for its in-state
processing and for its interface to the Calwestern ACH and the Fed. The Calwestern ACH
has recently selected CEISCO as a private
sector alternative t o Fed processing. Chase
Manhattan Bank, the largest bank originator of
ACH transactions, has organized its own "Chase
ACH."
NACHA is currently studying the issue of
private sector processors and their role in the
ACH system. However, the Fed is now the
dominant ACH processor.
The existence of non-Fed ACH associations
and the emergence of private sector processors
such as CEISCO and Chase Manhattan Bank
are indicative of infrastructure development—
a subject discussed further at the end of this
article.
Infrastructure Issues
In developing new products, the early gestation period focuses on market research, product research and design, and product develo p m e n t These activities require a front-end
capital investment Thus, they can take place
only in organizations capable of making such
capital investments.
Similarly, the early stages of product introduction often involve an operating loss. Thus,
organizations introducing new products must
be able to absorb startup losses.
Critique of NACHA. NACHA is made up of
regional associations whose primary activities
are staging an annual conference, preparing
press releases, handling promotion and education, and coordinating various committee activities. NACHA depends on member dues for
support has no equity capital and only limited
financial reserves. Therefore, it lacks the capacity to sustain an operating loss or t o make
significant investments in market or product
research, product d e v e l o p m e n t and similar
activities necessary to move a new technology
from the laboratory through the gestation period
and on t o the rapid growth phase. As a result
NACHA itself performs little market research,
product research or product d e v e l o p m e n t
25
"While the Monetary Control Act provides some leeway in meeting
competition, it effectively prohibits the Fed from below-cost pricing arrangements that could spark rapid volume growth."
NACHA's corporate trade payment (CTP)
service is an example of a largely unsuccessful
effort t o innovate by introducing a capability to
accommodate vendor trade payments. The
root cause of the CTP failure is an organization
that is not structured to deal w i t h market
research or product development and that
lacks adequate control of both product price
and distribution channels. 6
Critique of Regional ACH Associations. The
individual regional ACH associations are in an
even weaker position than the larger NACHA
to conduct research and development provide
for life cycle pricing or otherwise develop
necessary infrastructure such as standards.
Regional clearinghouse associations are organizations of competitors from the same geographic area Most members are not major
ACH originators and, thus, have little incentive
to invest in product development that will
primarily benefit higher volume members. In
fact the less active ACH institutions have a
clear conflict of interest with more active ones;
greater ACH volume means less check volume
for their institutions and thus less check income
Like NACHA, the regional associations have
no equity capital and no significant reserves.
Thus, the regional associations do not have the
means for making investments in market research or product development
Critique of the Federal Reserve's Role in the
ACH. The Monetary Control Act of 1980 requires the Federal Reserve t o price its services
at cost plus a private sector adjustment factor.
While the Monetary Control Act provides some
leeway in meeting competition, it effectively
prohibits the Fed from life cycle pricing and
other below-cost pricing arrangements that could
spark rapid volume growth and thereby lower
the average cost
When ACH pricing was first introduced in
1981, the Federal Reserve was able to use a
variant of life cycle pricing called "mature
volume pricing" Prices in 1981 were set on the
basis of the projected volume of commercial
transactions for 1986, about five times the
1981 volume. Hence, an implicit subsidy of
approximately 80 percent was incorporated in
the 1981 prices.
Objections were raised to the subsidy, primarily that it violated the Monetary Control
A c t The mature volume price reflected only 20
percent of the actual cost to the Federal Reserve
System of providing ACH processing It was
26
further argued that the subsidy inhibited private
sector entry into the ACH processing business
and was contrary to the spirit of the 1980 A c t
Thus, the Federal Reserve agreed t o phase out
mature volume pricing over five years, with the
amount of the subsidy declining 20 percent
each year. This means that beginning in 1986
there will be no subsidy. From this time on, the
Federal Reserve seems t o be precluded from
life cycle pricing or any related form of incentive
pricing that would build volume and lower the
average cost of the ACH services provided by
the Fed.
The Fed's Ability to Engage in Market Research
and Product Development As noted previously,
electronic payment services are now viewed as
a service area within the Fed with a special
product director responsible for market research and product development in the area of
electronic payments. Given the evolving nature
of the Federal Reserve's electronic payment
services, it is too early to assess unambiguously
whether the Federal Reserve will be able to
successfully perform market research and product development with the speed, efficiency,
and effectiveness of private sector manufacturers of new technical products. Nevertheless,
the Federal Reserve clearly operates under
serious organizational handicaps when it comes
t o market research and product d e v e l o p m e n t
1.Fed Organization. First as a banks' bank,
the Fed has customers that are the potential
distributors of payment services rather than
the ultimate users—the nonbank payors and
payees now using checks. Second, the Federal
Reserve is organized into District Banks w i t h
decision making vested in committees coordinated by staff at the Board of Governors. This
committee-driven organizational structure can
handicap significant innovation, especially rapid
assessment of market needs and quick translation into products.
2. Fed Conflicts. The Fed's role as a bank
regulator may be a handicap. The Fed is often
criticized for competing, or at least appearing
t o compete with, the banks it regulates, especially in check services. The use of government
resources to innovate in the ACH area could
elicit similar charges. The criticism provoked
by mature volume pricing supports this view.
Furthermore, the Fed is in the check and wire
businesses. ACH innovation that shifted payments from checks or wires could lower return
on these other established products.
M A R C H 1986, E C O N O M I C REVIEW
"To expand ACH use to high volume payment segments
.a number of major changes and improvements are required in the
current ACH system."
3. Cost Markup Pricing. To the extent that
the Federal Reserve incurs significant costs for
either ACH research or product development,
these costs must be reflected in each year's
cost assessment and marked up by the private
sector adjustment factor. Hence, significant
Fed investment in ACH improvement w i t h low
ACH volume will increase the price that the
Fed must charge. Thus, any investment in
research and development that cannot pay for
itself in one year will effectively increase the
immediate price of ACH services from the Fed.
The difference in full-cost pricing for ACH
services and Fed check services is that the ACH
is a relatively new service with limited volume
while check processing is a mature product
with significant volume over which research
and development costs can be spread. So,
even with cost markup pricing of its check
services, the Fed can invest in check research
and development without dramatically affecting check prices.
4. Competition with Private Sector Processors. The recent selection of GEISCO as a
private sector processing alternative by the
Calwestern ACH makes clear that the Federal
Reserve must remain cost competitive. Therefore, the Fed cannot invest in ACH research
and development in ways that increase its
costs compared with either current or likely
private sector alternatives. However, private
sector network contractors and transaction
processors have little incentive t o make longrun investments in research or product development beyond what is necessary to deliver
contractual services that generate revenue.
The Current Fed Role: A Synthesis. The Federal Reserve System is more constrained than
most private sector organizations in conducting
significant ACH research and d e v e l o p m e n t
The most significant constraint is the cost
markup pricing required by the Monetary Control A c t Three additional factors are that (1)
the Fed's role in the ACH evolved from a
contractors relationship as a processor for
NACHA and the regional ACH associations; (2)
the Fed is just beginning to conduct market
analysis and market research; and (3) as a bank
regulator the Fed is often criticized for competing with its regulatees.
A Critique of Contractors. A contractor with
no long-run ownership interest in the ACH has
little economic incentive to conduct the research and development generally necessary
FEDERAL RESERVE BANK O F ATLANTA
to move a new, technology-based product
through the product gestation stage. Likewise,
a contractor's relationship, especially one that
is short-term or that involves multiple, competing contractors, generally precludes life cycle
pricing and other volume building, incentive
pricing arrangements.
Requirements for Significant Check
Displacement
To expand ACH use to high volume payment
segments such as consumer bill payments and
vendor trade payments, a number of major
changes and improvements are required in the
current ACH system. These are summarized in
Exhibit 3.
Greater Processing and Communication Efficiency. Current charges to banks for interregional ACH transfers are comparable t o the
charges t o banks for interdistrict check collection and settlement There is not a strong
economic or business incentive for most banks
t o invest resources in ACH-based services or to
encourage their customers t o convert their
payments from checks to ACH. In fact current
check prices constrain the amount that banks
can charge for their ACH-based services. A
careful analysis of return on investment for
most banks considering ACH-based services
usually indicates low or negative yields for
ACH compared with continuing t o sell and
support check-based services.
The poor return on investment for ACHbased payment services seems paradoxical,
since processing by computer communication
is supposed to have an economic advantage
over the paper-based system used for checks.
However, current ACH prices (costs) and the
low yield perceived on ACH investment seem
to contradict this theory.
There are several explanations for this paradox. One is low ACH volume and the large
fixed cost of the ACH system. Part of the
explanation for low volume is that ACH usage
today is seemingly limited t o a small fraction of
the payment market
Another explanation rests with the structure
and efficiency of the current ACH network,
which evolved into a national system from a
number of regional systems and functions today
with 32 processing points. The term "processing
point" here does not refer t o processing organizations (the Fed, the New York Clearing
27
Exhibit 3
System and Marketing Requirements
for Significant Check Displacement
Improvement
Problem Summary
Recommended Change
System Structure
(32 Processing
Points)
High fixed costs for facilities equipment, and staff.
' Redundant sort and merge processing.
• Fewer processing points probably
just one central location for processing
between regions
> Standards and software for direct exchange and/or a local electronic clearinghouse function.
Communication
Interface
Tape and disk;
» Require physical delivery and time delays with many of the limitations of
check processing
> Involve costs for handling mounting and
demounting and storage.
»Impose control and error problems
• Make direct computer to computer
communication of presorted files the
primary interface.
• Make tape and disk secondary, with
all direct and indirect costs reflected
fully in additional prices
Expanded
Capabilities
'Ability to service high volume payment
segments requires capabilities beyond
payment data exchange.
• Add new capabilities such as a costeffective, flexible message capability.
Pricing
Flexibility
• Fed pricing via cost markup is inflexible
and precludes life cycle pricing
> Use of a private sector contractor for
system operation limits ability to engage
in life cycle pricing and other volume
building incentive pricing systems commonly used for new products
• Create a processing organization financed by equity capital
Marketing
Effort
> Most banks are not actively selling ACH
services and do not even use the ACH
for their own payments
> Many banks find low return on investment in creating and selling ACH-based
payment services
> Many financial institutions view entry
into serious ACH-based services as
risky because of the uncertainty in volume, price for ACH services and even
the organization.
• Improve ACH in terms of efficiency
and capabilities so that return'on investment improves vis-a-vis selling
check-based services
» Lower cost of entry via standardized
software, simpler bank interface, and
lower cost training and startup
• Reduce risk by long-range planning
and developing credibility through viability of system and services
Planning
Market Research,
and Product
Development
* An absence of market research, product
research and development and the organizational learning necessary to convert a technical capability into a viable
product
> Uncertainty about the ACH's future.
• Either NACHA or the Fed could adapt
their organizations to handle planning
market research, and product research
and development better.
• One or more ACH-like systems could
be created to compete with the current ACH system.
• Private sector organizations could develop products and services within
the existing infrastructure.
28
M A R C H 1986, E C O N O M I C REVIEW
House Association, the Arizona ACH or the
Calwestern ACH). Likewise, it does not necessarily refer to a regional ACH association, although currently at least one processing point
exists for each ACH association.
A processing point is any location in the ACH
system where there are facilities for housing
computer and communication equipment that
(1) receives ACH transactions from originating
organizations and delivers ACH transactions to
receiving organizations; (2) sorts and merges
transactions; (3) stores records of past transactions; and (4) has a communication interface t o
at least some of the other processing points
within the ACH system. The 32 processing
points referred to here are the 28 Fed offices
where ACH processing takes place and the
processing points of the New York Clearing
House, the Arizona ACH, the Calwestern ACH,
and the clearinghouse in Hawaii.
The number of processing points is central to
the cost of the ACH. Most of the fixed costs are
related to facilities, computer communications
e q u i p m e n t and the staff necessary to operate
the facilities at low volume. Likewise, the efficiency of sort and merge processing and communications are dictated to a great extent by
the number of interregional sort and merge
locations within the ACH system. Finally, the
location of processing points in relation to the
institutions that are ACH originators and receivers also determines their communication
costs and the logical communication interface
mechanisms.
The major input mechanism is tape or disk
rather than a computer to computer communication link Likewise, output is also delivered
primarily on tape or disk (and sometimes even
a paper printout) rather than through a telecommunication link A single, central processing
point for sorting and merging interregional
transactions, rather than 32 sort and merge
points, could cut costs. Direct computer t o
computer telecommunication for both input
and output is in most cases superior to either
tape or disk as the primary communication
mechanism between the ACH system and
financial institutions for interregional transactions. The current 32-point network is hampered by three major problems: First primary
reliance on the physical delivery of tapes and
disks encumbers the system with transportation
costs and delays, requires a geographically
FEDERAL RESERVE BANK O F ATLANTA
dispersed set of data receipt and distribution
points, and involves significant costs for tape or
disk handling, mounting, storage, reading, and
writing. Reliance on tapes and disks also creates
a variety of control and error problems. Thus,
while tape and disk and other media are sometimes the appropriate interface mechanisms,
they should generally be viewed as subordinate
telecommunication links. Second, the use of
32 processing points results in excessive fixed
costs for physical facilities, redundant computer and other processing e q u i p m e n t and
greater staff costs as compared with a single,
central sort and merge processing p o i n t The
fixed cost for 32 processing points is probably
more than 20 times greater than the fixed cost
of a single, central location. Third, the use of 32
processing points means inefficient sort and
merge processing, message transfer processing
and data communications so that the variable
cost for ACH payments is also much higher
than necessary.
Thus, much of the explanation for the fact
that current ACH processing has no significant
cost advantage over checks rests with the fact
that the current ACH network has evolved over
time into a system that is far more costly than
alternatives which utilize contemporary computer communication capabilities more efficiently. Costs at current volume are many
times greater than possible with more efficient
alternative network processing systems.
Expanded Capabilities. The current ACH network lacks the capacity to duplicate electronically the payor-payee information exchange
and other related activities associated w i t h
many payments. System capabilities that seem
necessary or desirable for some of the high
volume payment segments include: (1) a flexible message feature; (2) a general system for
supporting data content standards (rather than
just supporting one or t w o particular standards
such as ANSI XI2.4); (3) value dating; (4)
conditional transactions; (5) advance notification transactions (which require that a payment
message be disconnected from the payment
transaction per se); and (6) confirmations. (See
"Desiderata for a Viable ACH," this issue.)
The message area illustrates the problems
with the current network The choice is either a
limited message with virtually no support in a
standard ACH transaction or else an extensive
29
"Low price in itself will not sell ACH services;
it can at best accelerate growth when other necessary conditions
for growth are met."
but expensive capability in the CTP and CTX
services.
Products for High Volume Payment Segments.
There is clearly a need for ACH-based payment
products that can successfully displace checks
in the high volume payment segments. It is
important to distinguish between generic system capabilities (like those listed in the previous paragraph) and products and services
addressed to specific payment segments such
as vendor trade payments, dealer payments or
variable amount consumer bills. A generic capability such as a message feature could be
used in a variety of payment-segment specific
products. For instance, particular but generally
different message requirements arise in vendor
payments, dealer payments, payroll payments,
and variable amount bill payments.
The CTP and CTX transactions are examples
of efforts to provide an ACH-based service for
business to business trade payments involving
complex remittance advices. The CTP service,
however, has received poor market acceptance
and the recently announced CTX is designed to
address some of the criticisms. The CTX service
differs from the CTP service in that it provides a
variable-length message format (rather than
the semi-fixed format involving multiples of
the standard 94-character ACH record) and
supports a particular data content standard for
remittance advice information, namely ANSI
X12.4.
Both the CTP and CTX services reflect a cartbefore-the-horse problem in expanding ACH
capabilities in that these services address a
specific payment segment (business to business trade payments with long, complex remittance advices) rather than providing generic
network switch capabilities that NACHA or
individual banks or vendors can use t o create
products for particular payment market segments.
CTX will support a particular data content
standard, ANSI XI 2.4. The alternative is a
generic data standard capability. Interestingly,
the general capability could be implemented
with no greater initial cost than a particular data
content standard. CTX is especially risky since
it depends on a relatively new standard that
must itself generate volume and that will probably be used initially in specific industry payment services.
30
One can argue that implementing specific
capabilities for particular payment segments
such as the CTP and CTX services provides a
way for NACHA, the Federal Reserve, the
regional associations, and the active ACH banks
t o learn in the context of specific services about
general capabilities. However, t o an external
observer, the focus on CTP and CTX as services
for a special payment segment without a longrun plan for developing general capabilities
seems risky. It is clearly not the way t o generate
rapid ACH volume or a marketing infrastructure
of active ACH service and sales organizations
or ACH application developers.
The Need for Both New Products and Greater
Efficiency. Existing ACH use areas have limited
volume potential, probably no more than 6 to 8
percent of all noncurrency payments with 50
percent penetration in the current usage segments. They are, moreover, among the less
price-sensitive payment areas. Hence, a marked
reduction in ACH prices compared with check
prices would probably not generate significant
additional volume as long as ACH use is concentrated in the current payment segments.
Moreover, there probably is too little volume
growth potential in these payment segments t o
justify major investments in the development
of a more efficient network, sort and merge
processing operation, and data interface.
Expansion of ACH capabilities into new applications that represent a large proportion of
noncurrency payments such as vendor trade,
retail point-of-sale, and consumer bill payments
will be economically viable only if overall ACH
processing and communication efficiency improve drastically. Thus, new products, capabilities, and efficiency enhancements must take
place in parallel to ensure an economically
viable ACH. Economic viability will, in turn,
generate volume and create enough volume
potential to justify the necessary investment in
new products, capabilities, and processing and
communication efficiency.
Once the underlying efficiency and true
volume potential are in place, then some kind
of life cycle pricing of network processing becomes logical as a means of generating rapid
volume growth. Life cycle pricing makes sense,
however, only as a way to generate volume
faster once the necessary capabilities are in
place. Low price in itself will not sell ACH
services; it can at best accelerate growth when
other necessary conditions for growth are m e t
M A R C H 1986, E C O N O M I C REVIEW
"The organizational infrastructure must i n c l u d e . . . a capacity for making capital
investments, incurring startup costs, and probably engaging in life cycle pricing."
Infrastructure Requirements
Developing new products, reducing processing and communication costs, and employing
life cycle pricing all require a drastically different organizational structure for ACH-type
services than the one now in place. In particular,
the organizational infrastructure must include
organizations with a capacity for making capital
investments, incurring startup costs, and probably engaging in life cycle pricing for at least
some ACH services. Finally, it requires greater
ability t o conduct market research and product
design, development, and testing than that
now evidenced within NACHA, the Fed or the
regional ACH associations. Exhibit 4 summarizes these infrastructure issues.
There are a variety of ways t o encourage
product innovation, greater processing and
communication efficiency, life cycle pricing,
and the creation of a strong distribution and
support infrastructure. All imply a significant
change in the organization and structure of the
current ACH system.
1. Private Sector Alternatives. Capital investment and startup losses are required to develop
products and initiate other changes. If neither
NACHA nor the Fed undertake these investments, then it is logical to believe that the
private sector at some point will recognize the
opportunity and enter the business. A large
bank originator might offer its services to other
large originators, which w o u l d continue t o use
the existing infrastructure as well. Chase Manhattan Bank's recent action to become its o w n
ACH processor with direct access t o the Fed
system is indicative of this type of evolution. A
set of major banks may organize a consortium
Exhibit 4
A Summary of Organizational Infrastructure Issues
Problem
Brief Problem Summary
System Structure
The current system structure has a processing point wherever there
is a regional ACH association and divides transactions into intraregional and interregional, primarily because of the way the ACH
evolved into a national system.
Communication Interface
Tape and
to ACH's
computer
a system
regarding
Expanded Capabilities
Identifying capabilities, designing systems to provide them, validating
market vis-a-vis cost, doing product development, and marketing the
program is a complex task Current NACHA organization as an
association of associations dependent on the Fed and other contractors severely limits the ability to coordinate new capabilities,
market segments and development Likewise, Fed product research
and development efforts are currently limited and hindered by Fed
organization.
Pricing Flexibility
NACHA the Fed, and even private sector processors lack the
flexibility to price in a way that maximizes return on investment such
as life cycle pricing.
Marketing Effort
This is not a fundamental problem but rather a symptom of other
problems that discourage entry into ACH sales and servicing. A
viable ACH system will attract banks and other depository institutions
as serious proactive marketers This in turn will engender a variety of
hardware and software vendors to support these bank efforts
FEDERAL RESERVE BANK O F ATLANTA
other physical storage media have developed in response
historical progression. Converting to direct computer to
communication as primary interface is costly, especially in
with 32 processing points There are complex issues
standards speed, and format options
31
with each member providing equity capital to
create the processing and support infrastructure
These banks then use this processing themselves and offer it to other banks as a correspondent service.
The Society for Worldwide International Financial Transactions (SWIFT) is an example of
such a consortium in the area of communication-based international services. The MasterCard system is another example of a consortium
in the area of credit card servicing.
2. Restructured N A C H A Another possibility
is that NACHA could change its organization,
for example, by creating classes of membership
and having a set of " e q u i t y members" that
operate a communication network and processing switch. Again this would involve a structure
similar t o SWIFT, namely the actual operation
of a processing capability and network with a
large, competent support staff.
3. Fed Utility. The Federal Reserve could
cease to operate in a contractor-like role, decide
to restructure its ACH processing organizations,
and offer an ACH-type collection and settlement utility. W i t h an expanded range of capabilities and much lower collection and s e t t l e
ment prices, it would encourage financial institutions t o be active ACH distributors, selling
ACH aggressively as an alternative to checks.
The key requirements for realizing these
possibilities for significant change in the ACH
infrastructure are greater processing and communication efficiency, mechanisms for product
innovation, clear price and quality advantage
for ACH-type payments over check-based alternatives, and economic incentives t o financial
institutions and software system organizations
to become ACH service distributors and product support vendors. 7
Conclusion
The difficulties of developing new technology-based products are particularly complex in
the payment services business, which has its
own unique problems. These include: (1) the
necessity of payor-payee concurrence in many
situations to change from check to ACH payment; (2) reliance for ACH sales on financial
institution distributors that also sell check payments and have an organizational and capital
investment in checks; and (3) the general
absence of for-profit businesses w i t h equity
capital within the many organizations that work
cooperatively in the ACH system, coupled with
32
distributors that are all for-profit institutions
with a strong concern for return on investment
and profitability.
Viewed from the perspective of technology
displacement at the level of particular payment
usage segments, the development of the ACH
is clearly in the early stages of gestation for
most commercial payment areas. Many of the
capabilities needed for these segments are not
in place. It is unreasonable t o expect most of
the distributors t o do the necessary market
research and provide the necessary capabilities.
Distributors do not generally become manufacturers.
Success for ACH-type payments will require
market research, product research, development, and testing and most likely significant
capital investment with front-end losses. The
existing ACH organizational infrastructure must
change significantly before many of these activities are likely to occur efficiently.
M u c h greater delivery efficiency for ACH
collection and settlement is also necessary,
especially in areas in which price is the key
decision variable for otherwise comparable
payment alternatives.
Changes in NACHA and the Fed,'along with
the possibility of more private sector processing
suggest that the necessary infrastructure changes
may be underway. However, it is reasonable t o
believe that these changes will take several
years. Hence, optimistic forecasts for rapid
check displacement should be viewed w i t h
skepticism unless they deal explicitly and convincingly with ways that the product delivery
infrastructure can and will change.
Many policymakers are interested in facilitating rapid assimilation of electronic technology
in the United States. This article has t w o major
policy implications. First, the logical focus for
progress is infrastructure change so that organizational impediments to progress can be
reduced. Second, the response to policy actions
will be slow since the current problem is simply
to establish organizations capable of moving
electronic payments through the gestation stage
in more usage segments.
Bank planners and product managers are
concerned about the impact of electronic payments on their businesses. Understanding organizational barriers and how they will affect
the rate of change is important for the overall
planning process as well as for particular products and payment areas.
M A R C H 1986, E C O N O M I C REVIEW
NOTES
' T h i s figure e x c l u d e s on-us A C H items and corrects for t h e d o u b l e
c o u n t i n g of interregional A C H i t e m s that occurs in s o m e reports o n
A C H volume.
2
T h e A C H is a batch-oriented, store a n d f o r w a r d p a y m e n t transaction
processing a n d s e t t l e m e n t system. In this article, the t e r m s
ACH-like
and ACH-type
a r e used to refer to batch-oriented, store a n d forward
p a y m e n t s y s t e m s o t h e r than t h e current A C H system. Also, this t e r m is
u s e d to refer to t h e g e n e r i c class of batch-oriented, store a n d f o r w a r d
p a y m e n t s y s t e m s rather t h a n t h e c u r r e n t A C H in particular.
3
T h i s f r a m e w o r k has already b e e n used in a prior issue of t h e
Economic
Review to look at A C H d i s p l a c e m e n t of checks, namely, voL 6 7 , no. 8
(August 1 9 8 3 ) . R e a d e r s i n t e r e s t e d in b a c k g r o u n d o n t h e t h r e e - s t a g e
t e c h n o l o g y d i s p l a c e m e n t f r a m e w o r k a r e referred t o w o r k s such a s
Bright ( 1 9 6 4 ) , Kelly ( 1 9 7 8 ) , S t o n e ( 1 9 8 4 ) , a n d Tarpley ( 1 9 8 4 ) a s well a s
t h e previous s p e c i a l issue of Economic
Review.
* T h e major e x c e p t i o n is t h e s p e c i a l issue of Economic
Review (August
1 9 8 3 ) d e v o t e d to displacing t h e c h e c k
5
G E I S C O b e g a n processing in late 1 9 8 5 . Its work to d a t e has b e e n limited
to a few institutions Thus, it is difficult to a s s e s s w h e t h e r G E I S C O will
b e c o m e a serious alternative a s a provider of A C H s e r v i c e s
« S e e " C o r p o r a t e T r a d e Payments," by Bernell Stone, forthcoming in t h e
April 1 9 8 6 issue of Economic
Review
for a critique of t h e C T P
innovation.
' I n " S c e n a r i o s for t h e Future of t h e ACH," f o r t h c o m i n g in t h e April 1 9 8 6
issue of Economic
Review, S t o n e and W h i t e explain w a y s t h a t N A C H A
t h e Fed, and private sector c o m p e t i t o r s m a y provide t h e o r g a n i z a t i o n a l
Infrastructure required for a viable A C H s y s t e m
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Payments
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Reserve Bank of Atlanta, J u n e 2 3 - 2 5 , 1 9 8 1 . A t l a n t a Federal Reserve
B a n k of Atlanta, 1 9 8 1 , pp. 1 4 - 2 1 .
Bright J a m e s R. Research
Development
and Technological
Forecasting.
H o m e w o o d , Illinois: Richard D. Irwin, 1 9 6 4 .
Corrigan, E Gerald. " T h e P a y m e n t s M e c h a n i s m System: E m e r g i n g
C h a n g e s a n d Challenges," in The Future
of the US
Payments
System,
p r o c e e d i n g s of a c o n f e r e n c e s p o n s o r e d by t h e F e d e r a l
Reserve Bank of Atlanta, J u n e 2 3 - 2 5 , 1 9 8 1 . A t l a n t a Federal Reserve
Bank of A t l a n t a 1 9 8 1 , pp. 7 - 1 3 .
Kelly, Patrick and o t h e r s Technological
Innovation:
A Critical Review of
Current Knowledge
S a n Francisco: S a n Francisco P r e s s 1 9 7 8 .
L i p i s Allen H. " F u t u r e of t h e ACH," The Future of the U.S
Payments
System,"
p r o c e e d i n g s of a c o n f e r e n c e s p o n s o r e d b y t h e F e d e r a l
Reserve Bank of Atlanta J u n e 2 3 - 2 5 , 1 9 8 1 . Atlanta Federal Reserve
Bank of A t l a n t a 1 9 8 1 , pp. 1 0 6 - 1 1 5 .
R a w l i n g s Brown R " F u t u r e of t h e C h e c k System," in The Future of the
U.S Payment
System,
p r o c e e d i n g s of a c o n f e r e n c e s p o n s o r e d by
FEDERAL RESERVE B A N K O F ATLANTA
t h e F e d e r a l R e s e r v e B a n k of A t l a n t a J u n e 2 3 - 2 5 , 1 9 8 1 . A t l a n t a
F e d e r a l R e s e r v e Bank of A t l a n t a 1 9 8 1 , pp. 4 0 - 6 8 .
Stone, Bernell K " C o r p o r a t e P e r s p e c t i v e s o n C a s h M a n a g e m e n t " in
Payments in the Financial Services Industry of the 1980s, proceedings
of a c o n f e r e n c e s p o n s o r e d by t h e F e d e r a l R e s e r v e B a n k of A t l a n t a
September 22-23, 1983. Westport Connecticut Quorum Books
1 9 8 4 , pp. 4 0 - 5 8 .
Tarpley, F r e d A , Jr. " T e c h n o l o g i c a l Diffusion," in Payments
in
the
Financial Services Industry of the 1980s proceedings of a conference
s p o n s o r e d by t h e F e d e r a l R e s e r v e B a n k of A t l a n t a S e p t e m b e r 2 2 2 3 , 1 9 8 3 . W e s t p o r t C o n n e c t i c u t Q u o r u m B o o k s 1 9 8 4 , pp. 1 4 9 152.
V i t t a s D i m i t r l "International P a y m e n t s S y s t e m s " in Payments
in the
Financial Services Industry of the 1980s proceedings of a conference
s p o n s o r e d by t h e F e d e r a l R e s e r v e B a n k of A t l a n t a S e p t e m b e r 2 2 2 3 , 1 9 8 3 . W e s t p o r t C o n n e c t i c u t Q u o r u m B o o k s 1 9 8 4 , pp. 1 4 1 148.
33
¥7Z
Desiderata
for a Viable
ACH
'¡mm
Developing generic information exchange
and payor control capabilities is crucial if the
ACH is to win high-volume markets like corporate trade payments and variable amount
consumer bills
Bernell K. Stone
Despite enthusiastic predictions in the late
1960s and early 1970s, electronic payments
have not taken hold as a serious alternative for
paper-based transactions except in a few payment segments. It is now doubtful that even 10
percent of all noncurrency payments in the
United States will be electronic by 1990. After
nearly 15 years of a constantly receding "payments revolution," many are now questioning
whether electronic payments will make any
significant incursion into check payments.
Why, given its apparent benefits, has the electronic payments system failed t o displace paper-based payment practices?
The payments revolution has been thwarted
for several reasons:
• Check Processing Improvements. Since the
late 1960s, computer technology and other
processing refinements have enhanced the
efficiency of check processing. This has significantly improved the cost of check processing
and its overall quality, as reflected by measures
such as collection times, error rates, and return
item problems.
• User Resistance or Indifference.
For the
most part, neither businesses nor consumers
actively demand electronic payment as an
alternative to checks. In many cases, potential
users actively resist using the ACH. A variety of
The author
at Georgia
is Mills B. Lane professor
Institute
of
Technology.
34
of banking
and
finance
reasons are given, for example: loss of float
loss of control over payment timing; perceived
risk arising from legal uncertainty of electronic
payments and the legal enforceability of the
multiparty contracts involved i n - m a n y ACH
payment arrangements; the cost of converting
t o ACH payments; and the cost of running
either a hybrid system—both ACH and check—
or else dual systems—one for ACH and one for
check. In other cases, potential users are simply
neutral because they perceive no significant
benefit for ACH payment and thus see no
reason t o change.
• Marketing Effort and Passive
Distributors.
Depository institutions are the nominal distributors of ACH services. However, few are active
originators. In the geographical territories of
each regional ACH association, the majority of
ACH transaction volume originated in that
region is handled by a few institutions—usually
t w o or three and rarely more than five. 1 From
this data on origination volume, it seems clear
that only a few of the nominal distributors are
seriously engaged in ACH selling and service
support Of the large set of nominal distributors (all depository institutions), only a small
number are in fact active distributors. If direct
deposit of payroll is excluded, there are probably at most 100 depository institutions that
are assertively selling ACH-based payment services t o their corporate customers. Among
active originators, many limit their support and
M A R C H 1986, E C O N O M I C REVIEW
sales effort t o one or t w o specialized payment
uses such as direct deposit of payroll, pension
payments, and cash concentration. Few sell
ACH for corporate trade payments or consumer
bill payment In fact not many depository institutions use the ACH for their o w n payments,
except possibly for payroll.
These depository institutions not only provide
check payments but actively sell them. Their
reasons for not marketing A C H service are: low
user demand in virtually all commercial payment
applications other than special uses such as
direct deposit of payroll and cash concentration;
and, poor return on investment given startup
costs, low immediate volume potential, and
probable displacement of the institution's o w n
check business.
No new technical product can displace an
existing one without active, effective marketing
For this reason, many advocates of electronic
payments criticize banks and other depository
institutions for being passive sellers. This criticism, however, deals primarily with a symptom
of the problem rather than the cause. Depository institutions will be serious marketers only
when they perceive a favorable margin on
ACH-based payments compared with checkbased services and when adequate user demand exists t o justify the cost of marketing and
provide a good return on the investment required
t o become an assertive distributor.
• Infrastructure.
The organizational infrastructure for delivering ACH payments has
failed t o accommodate new product development activities such as product research,
market research, and product d e v e l o p m e n t
• System Capabilities. As a direct outgrowth
of these failures, significant enhancements to
service capabilities have not occurred, aside
from the later processing cycle. Thus the ACH
system cannot provide electronic analogues t o
the information exchange and control features
incorporated into contemporary check-based
payment transactions. These are critical for
many payment areas.
• System Structure. The ACH evolved from a
regional system w i t h tape as the primary data
interface between the system, transaction originators, and transaction receivers. While telecommunications input and output are used for
about 20 percent of the transactions, the system
is still dependent on physical, transportationlimited delivery. Moreover, significant changes
FEDERAL RESERVE B A N K O F ATLANTA
in the network organization that could improve
processing efficiency have not taken place.
Information and Control Issues
It is common for check writers t o contend
that the A C H is unacceptable. Corporate cash
managers, for instance, might object t o allowing
another company t o debit their bank accounts,
because initiation of payment by the payee has
several negative implications: (1) loss of control
over payment approval afforded by today's
invoice-based billing; (2) loss of control over
adjustments in payment amount for damage,
freight returns, and promotion allowances; (3)
loss of control over whether t o take discounts
(for early payment) or simply pay the nominal
price at a later date; (4) less ability t o forecast
and manage cash than w i t h current procedures
(based on invoices containing credit terms that
imply a nominal payment date some time in
the future); and (5) loss of control over payment release.2 A consumer may also object t o
preauthorized bill payment for variable amount
but recurring bills for similar reasons, namely,
concern over overdrafts due t o unanticipated
debit amounts, loss of approval control, and
loss of payment timing control.
These objections reflect the fact that payorpayee interaction in most payment situations is
much more than an exchange of value. The
exchange also includes advance information
about the amount of the payment the possibility
for the payor t o approve or adjust the nominal
obligation stated in an invoice, discounts, an
implicit and sometimes even an explicit extension of credit and control over the payment
timing by the payor.
At present the ACH is primarily a payment
mechanism and lacks capabilities for facilitating
an information exchange between the payor
and payee. It also lacks payor control features.
The electronic analogues to the payor-payee
information exchange and payor control over
the payment a m o u n t discounts, and payment
date, have not been incorporated in the ACH.
Nor have bank products using the ACH encompassed these controls to date, except for a
few special applications such as dealer payments.
Current commercial use of the A C H is primarily for simple payments in which the ACH
35
Exhibit 1
Payor Payee Information Exchange in the Current ACH
(For Major Commercial Payment Classes)
Payment Use
Information Required
Means to Accomplish
Payroll
Amount of payment and deductions from
gross pay for taxes Social Security, benefits etc
Paying company provides the salary advice, usually delivered to payee at company on or before payment date.
Retirement
Payments
Amount of payment and deductions
Paying company or its agent provides a
payment advice, usually mailed to the
payee and timed to arrive one or two days
before the payment takes place.
Cash Concentration
None because payor and payee are the
same organization.
ACH merely replaces depository transfer
check with all other information gathering
reports and controls being unchanged
Insurance
None except possibly notice that the
debit will take place on a given date.
Mailing from insurance company to payor.
Dealer Payments
Dealer agrees on payment terms so that
order and delivery trigger the payment
with information exchange taking place
outside the ACH.
Manufacturer-run system or third party
data exchange service.
payment replaces the check (Exhibit 1). In
such uses either no requirement for information
exchange or payor control exists (cash concentration), or information is provided to the
payee outside the ACH, generally via a printed
advice for a credit payroll or pension payment
Insurance payments are the only significant
use of ACH debits and they are generally for a
fixed a m o u n t recurring consumer payment
requiring very little information exchange or
payor control prior to the payment
Dealer payments to manufacturers are not
simple in regard to information exchange The
information exchange in this case takes place
outside the ACH through a manufacturer operated system, or else relies on a third party data
exchange service working under the control of
the manufacturer. Dealer payments are not a
major source of ACH volume.
For ACH to expand to major payment classes
requiring information exchange and payor control, especially to debit transactions initiated
by the payee, it must provide for information
exchange, controls, and discretionary activities
such as discounts. Product refinements and
new capabilities could enable an ACH-type
payment mechanism t o become a viable alternative to check-based payments in major uses
36
such as trade payments and variable a m o u n t
consumer bill payments. 3
Price of A C H Collection and Settlement
Services
Given the reputed efficiency advantages of
communicating and processing electronic images, it is puzzling that depository institutions
pay approximately the same collection and
settlement charge for an interregional ACH
transaction as for an interdistrict check. W h y
have the purported advantages of electronics
not been converted into significant price advantage over checks? The t w o determinants of
the ACH price are transaction volume and the
efficiency of the systems used for data communication and sort and merge processing
Price and Volume Relationship. While both
check and ACH processing involve fixed and
variable costs, the fixed costs of ACH processing
are relatively greater than that of checks and its
variable costs are relatively less. This disparity
means that the ACH requires a certain minimum
level of volume before it can become the more
cost-effective technology.
The importance of volume on average ACH
costs can be seen by comparing Fed prices
M A R C H 1986, E C O N O M I C REVIEW
(costs) for ACH transactions over the last five
years. W h e n the Fed first announced ACH
prices in 1981, it adopted a form of life cycle
pricing called "mature volume pricing." The
1981 prices were based on projected 1986
volume Since this was approximately five times
the 1981 transaction volume, there was an
implicit subsidy at 80 percent in these prices.
The subsidy was reduced 20 percent each year
and was eliminated for 1986. But 1986 prices,
with no subsidy, are essentially the same as the
1981 prices with an 80 percent subsidy. The
nearly fivefold increase in transaction volume
has meant that average per item costs for the
ACH are now approximately one-fifth the average costs in 1981.
It is crucial t o understand that total costs for
the ACH have not fallen. These costs are
predominantly fixed and are roughly the same
today as in 1981. The drop in per item cost is
attributable mainly to the increase in v o l u m e
The current ACH system has the capacity t o
handle many times the current volume without
adding significantly to its communication capacity, processing e q u i p m e n t staff or physical
facilities. If costs were t o increase by at most 20
percent while volume increased 5 times, then
the cost per item would fall by at least onefourth the current costs. This reduction would
mean that the average cost per item for an
interregional transaction would decrease from
its current level of 3.8 cents to about one cent
Similarly, if volume were to increase to ten
times the current level, while costs increased at
most 20 percent then the average cost per
item w o u l d fall to about one-eighth the current
value. Applying this o n e e i g h t h factor again to
the current interregional cost per item of 3.8
cents would mean an average price per interregional transaction of roughly fivetenths of a
cent
Assuming that check costs are constant or
increasing volume growth clearly has the ability
to reduce the average cost of ACH transactions
so that the collection and settlement costs for
ACH transactions could be much lower than
for checks. 4
Of course, for the business or consumer
using either checks or ACH payments, the Fed
collection and settlement cost is only a small
part of the total charge assessed by a depository
institution. However, the economics for overall
ACH processing costs compared w i t h overall
FEDERAL RESERVE BANK O F ATLANTA
check processing costs parallel the economics
for collection and settlement processing: the
ACH has a relatively higher fixed cost and
much lower variable cost than checks. Hence,
the impact of volume growth on overall ACH
costs incurred by a given financial institution
should be comparable to the impact on ACH
collection and settlement costs—a dramatic
reduction in the average cost per item.
The Price and Volume Dilemma
Like any new technology attempting t o displace an existing system, the ACH faces a
chicken-and-egg problem: to be pricecompetitive requires a certain m i n i m u m business volume; y e t without the price incentive t o attract
users, the volume will never develop.
The Fed's use of "mature volume pricing"
was a variant of life cycle pricing. It involved a
price that more than covered the variable cost
but not all of the fixed costs. Thus, it allowed
the Fed t o assess an ACH collection and s e t t l e
ment price that was roughly comparable t o
(and therefore competitive with) collection
and settlement prices for checks. Had the full
cost of the Fed's ACH processing been incorporated in the Fed per item charge, ACH
payments would have cost financial institutions
much more than checks. Volume growth would
have been much slower in all usage areas. Cash
concentration, which is a pure substitution of
an ACH payment for a depository transfer
check, would almost certainly have failed t o
develop significant volume without mature
volume pricing from 1981 to 1985.
ACH volume is still very low compared with
check v o l u m e More importantly, ACH volume
is low in proportion to the capacity of the
current Fed delivery system. Likewise, there
are few active ACH distributors. If more depository institutions are to become active ACH
distributors, a considerable volume increase
will be needed to rationalize the necessary
investment in equipment and startup marketing
Volume growth is clearly crucial if the price
of ACH collection and settlement services is t o
continue falling and if more depository institutions are to become ACH distributors. The
current commercial uses (payroll, pension paym e n t cash concentration, and insurance payments) have limited volume potential, however.
37
"Significant volume growth requires that the ACH displace
checks in high volume areas, such as trade payments, variable amount
consumer bill payments, and retail point-of-sale payments."
Their volume could rise to at most 6 to 8
percent of noncurrency payments, even if 50
percent of these classes switched t o the ACH.
Significant volume growth requires that the
ACH displace checks in high volume areas,
such as trade payments, variable amount consumer bill payments, and retail point-of-sale
payments. But especially in these high volume
areas, the ACH will be viable only if some
means exists to accommodate the information
exchanges, timing controls, amount controls,
and credit extensions now involved in these
transactions. Financial institutions are not likely
to provide for these requirements when acting as
individual distributors. Thus, it seems that the
viability of the ACH depends on the ability to
expand ACH capabilities so that it can meet the
information exchange and control requirements
that arise in high volume payment uses.
Expanding capabilities t o increase volume
raises t w o issues for the ACH. First the Fed
seems precluded from life cycle pricing since it
must mark up its ACH costs by an appropriate
private sector adjustment factor. Any major
investment in new capabilities by the Fed may
therefore mean a higher price that would discourage the very volume growth the new capabilities are designed to promote. Second,
neither the Fed nor the National Automated
Clearing House Association (NACHA) seems
equipped t o do the market analysis, product
research, market testing, and product development required t o conceive, design, develop,
test refine, and ultimately market a complex
information and control product built upon
payment servicing. The failure of the corporate
trade payment (CTP) service illustrates the
difficulty of developing information-based enhancements to add to the basic payment transaction.
The desiderata list presented in this article is
based on extensive research on the design and
development of business payment systems, as
well as a system analysis of the issues involved
in business to business electronic data interchange for the buyer-seller information exchange The proposed capabilities have taken
into consideration the objections frequently
raised by both business and consumer payors
regarding information and control. Thus, the
desiderata list should be viewed as an effort to
specify generic system capabilities to deal with
common information and control issues arising
38
in many payment areas. The following capabilities have been hypothesized as necessary requirements t o extend the ACH to a wider range
of payment uses. Validating the viability of
these capabilities calls for market analysis,
detailed capability design, capability costing,
d e v e l o p m e n t testing, and refinement For the
most part these activities have not yet taken
place within the ACH organizational infrastructure. Thus, the capability ideas developed here
are intended to stimulate discussion and debate
on the evolution of ACH payments.
Desirable System Capabilities
To design products that deal with the information exchange and control requirements
inherent in today's check-based payments, the
ACH system itself needs generic capabilities.
These include: a flexible message capability,
the ability to use message content standards,
conditional approval transactions, advance notification transactions, value dated transactions,
fast electronic returns, and return notification.
Before discussing these capabilities, it is
useful to distinguish between generic capabilities and product-specific capabilities. The recently announced corporate exchange service
(CTX), a product-specific capability, will support the ANSI XI 2.4 standard for remittance
advice data A generic capability would support
many standards and would enable the payee
and payor (or their institutions) to recognize
through appropriate codes that data exchanged
is encoded in accord with a particular standard.
The user would then consult the appropriate
data dictionary. The ANSI XI2 standard is only
one of many standards and is specific to a
particular class of payments—business to business trade payments.
The CTP service illustrates the issue of providing generic capabilities versus providing product-specific or usage-specific capabilities for
messages. The CTP message capability is designed primarily for invoice and remittance
data in a restrictive framework- Its design is
much too specific to provide a generic message
capability that could be customized to a variety
of uses such as variable amount consumer bill
payment
An issue in the evolution of the ACH is
whether enhancements should be specific to
M A R C H 1986, E C O N O M I C REVIEW
"From the outset, inability to include
pertinent messages with the payment transaction information has
limited the ACH."
particular payment uses and product assumptions. Generic capabilities seem most favorable
for the network, because they can be specialized to fit particular payment uses and products
by either the ACH or service vendors. This
article will illustrate the value of generic capabilities in particular payment areas by way of
example, but readers should not lose sight of
the fact that the intent is to present generic
network capabilities and not specific product
specializations.
Flexible Message Capability
From the outset inability to include pertinent
messages with the payment transaction information has limited the ACH. Except for the
recent corporate trade payment (CTP) and
corporate trade exchange (CTX) services, message attachments have been restricted t o no
more than a small character field within the
standard 94-character ACH record. Hence, the
only payment transactions that could use the
ACH system fell into one of three classes: (1)
transactions needing no message, (2) transactions requiring only an extremely limited message (no more than 30 to 34 characters) going
to a receiving institution willing and able t o
convey the message to the transaction receiver in a timely way, and (3) transactions for
which the payor and payee had made provision
to send the message outside the ACH (such as
direct delivery from the payor to the payee,
with some system for matching the payments
messages to the payment transaction).
In introducing the CTP service, NACHA attempted t o respond to the need for a message
feature. The CTP service provided for 1 to
4,999 of the 94-character addendum records
that could be attached to any payment transaction. However, the CTP message has several
drawbacks, one of which is its fixed f o r m a t A
CTP message must be packed into one or more
94-character ACH records before entry to the
network. The burden of message packing is
imposed on the originating company or its O D I
(originating depository institution). Likewise,
either the receiving company or its RDI (receiving depository institution) must unpack
the message after it leaves the ACH. The fixed
field format as implemented in the CTP service
presents six problems.
FEDERAL RESERVE B A N K O F ATLANTA
• Cost of record packing. Unlike a variable
length record, a fixed length record involves
processing costs associated with first packing
the message into one or more 94-character
ACH records and later unpacking i t
• Data transmission cost Transmitting data
packed into fixed field records is slightly more
time-consuming and, therefore, more costly
than transmitting variable length records, primarily because of empty fields in at least one
record per transaction.
• Assumed minimum
length message. The
CTP currently charges for at least 15 addenda
records regardless of the actual message size
Thus, a company sending a 50-character message is charged for a message over 20 times
longer than the one actually sent This is the
cause of much corporate criticism.
• Invoice-focused
message Most bank implementations of the CTP addenda message
have assumed that each record should be
associated with a single invoice message Much
of the criticism of the fixed record structure by
potential users such as the automotive industry
pertains to the inefficiency and inflexibility of
the o n e invoice-to-one record data structure.
• Electronic delivery of addendum data. B e
cause the CTP service makes no explicit provision for the RDI to deliver the addendum
message electronically t o the receiving company, the burden rests w i t h the RDI. Obviously,
delivering an electronic addendum in the form
of a printout mailed t o the receiving company
undercuts all the payee's major benefits from
an electronic system—no printing, no mail, no
rekeying by the receiving company, and automated update of its accounts receivable
• Data content codes. The CTP addendum
record is a pure message service comparable t o
electronic mail. It transmits payment-related
data along w i t h the payment but has no data
type codes, such as the ANSI X I 2 standards,
that would facilitate automated processing
Hence, automated update of accounts receivable the single largest source of administrative
savings, is precluded as a payee benefit and as
an incentive to use the CTP service Furthermore,
lack of data codes means that an opportunity
for significant data compression is forfeited.
Such compression could reduce the total volume of data that must be transmitted and t h e r e
fore the transmission time and cost NACHA's
39
"The system has not effectively utilized the
potential of computer technology to provide for the information
exchange necessary for many payment uses."
new corporate trade exchange service CTX will
support ANSI X12.4.5
Message Desiderata
If the ACH is t o have a viable message
capability, it must be price competitive and
must have certain structural features.
Prices structure. The ACH message price
should combine a fixed cost and a variable
cost where the variable cost is a function of
message length. Discounts for long messages
are a possibility, as is tiered pricing that w o u l d
allow for processing and transmitting data at
nonpeak times.
Price leveL A viable message service demands
that the cost be less than direct company t o
company communication via public networks,
including store and forward electronic mail
systems. An ACH message service that is not
price competitive with electronic mail systems
providing similar services will never attain significant volume for its message-based transactions. Thus, the variable component of the
message price will have t o drop substantially
relative to the current variable price for the
CTP service.
Message separability. The message capability
should accommodate transmission of message
data separately from the payment transaction
processing itself, for example, in a conditional
or advance notification transaction.
Variable length messages. If there is only one
message format it should be variable length.
Otherwise, the ACH should be prepared to
support multiple formats, both fixed and variable Adding CTX variable message capability
to the current CTP service is a step in the right
direction.
Data content standards. Standards should be
specified so that codes can identify the data
content for automated processing. At a minimum, existing codes such as ANSI XI2 should
be incorporated. The fact that there are a
variety of transaction types (trade payments,
point-of-sale transactions, consumer bill paym e n t and so on) means that a variety of
message standards may be necessary. For this
reason, the ACH should have a data standard
code and support a variety of standards.
Electronic delivery. The system must provide
for electronic delivery of ACH data, especially
transactions involving messages. In fact this
40
should become the standard interface between
depository institutions and the ACH network.
Special Capabilities. Today, the ACH is a
bare-bones electronic payment network. The
system has automated the transmission of fund
transfer data between participating depository
institutions, but has not effectively utilized the
potential of computer technology to provide
for the information exchange necessary for
many payment uses.
Conditional and Advance Notification
Conditional Transactions. In a large number
of payment transactions, the payee is the logical
initiator (for example, consumer bill payment
dealer and distributor payments, franchise payments, and many trade payments). However,
because amounts vary and may even be a
subject of dispute, payors are reluctant to
relinquish control over both payment approval
and timing of the payment execution.
A conditional transaction is a method for
maintaining payor control over both approval
and payment timing while allowing the payee
t o initiate the transaction. The essence of a
conditional transaction is the advance presentation of the payment amount and any explanatory message to the payee w i t h a tentative
value date for settlement if the transaction is
approved.
Conditional transactions can be structured
in t w o ways. In the first the
rejection-ofexceptions transaction, the receiving party has
a period of time, agreed on in advance, t o
reject the transaction. If not explicitly rejected,
the transaction is executed on the stated value
date. The reason for basing execution on the
absence of explicit rejection is that most transactions presumably will be approved. Hence,
the rejection-of-exceptions structure minimizes both the payee's administrative effort
and the total ACH processing required t o
effect this type of transaction.
In an explicit approval conditional transaction,
the second structure for a conditional transaction, the payee must explicitly authorize the
transaction for it to be executed. This close
variant of the rejection-based conditional transaction gives the payee greater control but
involves greater payee administrative effort, as
well as processing of the approval notification
for every transaction.
M A R C H 1986, E C O N O M I C REVIEW
"The ACH can dominate checks
in the area of fast returns, saving both time and money."
Advance Notification Transactions. According
t o the terms of an advance notification transaction, which is a payor-initiated debit, the payor
furnishes the payee with the amount and proposed settlement date for the transaction a
minimum number of days before settlement
This information enables the payee both t o
plan for funding in advance and t o avoid
overdrafts. These transactions require an advance agreement between the payor and the
payee, as do conditional transactions. Advance
notification transactions also require the RDI
t o be an active participant in the message
delivery. For corporate transactions, the delivery of notice is logically accomplished through
an automated information reporting system. 6
Notification for retail payments could be accomplished via bank statements, thus avoiding
any significant notification costs.
Value Dated Transactions
In a variety of situations, value-dated transactions (transactions that specify a future settlement date) may be desirable An obvious
application is to allow an originating company
to deliver all of its transactions for several days
in a single batch. The O D I can handle such
"entry dating" simply by warehousing the company's transactions and entering them into the
ACH on the appropriate day. Many ACH originators now provide this type of value dating;
entry dating probably does not need t o be a
network feature
Capability for advance notification with the
current ACH is limited. For instance, a bank
originating payroll credits can enter pertinent
data t w o days prior to the transaction. The
receiving institutions can then be notified the
day before the transaction and can post the
deposit that will take place the following business day. The generic capability would provide
for longer times t o give notice, allow for notice
delivery to the transaction receiver, and would
not be restricted to particular payment uses
such as payroll credits.
A large number of possible payment services
based on conditional transactions or advance
notification transactions logically involve message transfers prior to final execution of paym e n t Examples are payee-initiated debits for
both consumer and business bill payment
Since time is required for notification of the
FEDERAL RESERVE BANK O F ATLANTA
payor and for their approval of the transaction,
it is desirable t o enter a transaction into the
system well before the actual settlement date.
Fast Electronic Returns
Returns have been a problem for the ACH.
Much has been done to speed up and otherwise
improve return handling, and prospects for
more improvement are good. (See " A C H Return
Items," by Gerald L Keenan, this issue).
The ACH can dominate checks in the area of
fast returns, saving both time and money. From
the perspective of desirable attributes, ACH
returns should take at most one business day to
effect To the extent all ACH transactions
cannot be returned in one business day, there
could at least be classes of ACH transactions
that guaranteed returns in at most one business
day, or classes that included rapid notification
of the account owner.
One area where fast returns are crucial is
cash concentration. Many companies use notification of an overdraft (insufficient funds) as a
fraud and theft control on their field deposits.
The faster and the more certain the notification
of inadequate funds to cover a depository
transfer, the faster corrective action can be
taken and the lower the firms's theft losses.
Many retailers considering ACH for cash concentration have been surprised t o discover
that ACH processing and return items could
involve greater time delays than depository
transfer checks.
While an electronic system has the theoretical ability to handle returns and provide notification much faster than a paper system depending on transportation of physical records,
a gap often exists between the theoretical
ability and the implemented capabilities. The
situation with returns is a good illustration.
Generic Strategy Alternatives
In seeking t o become more competitive, the
ACH system can choose between a passive
and an active strategy. The passive strategy
would be t o wait for electronic data interchange in payment-related areas. W h e n most
other data are transmitted between payor and
payee in electronic form, electronic payment
will be seen as a logical adjunct and volume will
41
gradually grow. Following such a passive strategy would limit the network primarily to simple
payment transactions. Payment messages and
services involving messages for special purpose
processing or standards-based automated processing would take place outside of the ACH
network, for instance, through private valueadded networks.
The active strategy for the ACH would be t o
seek rapid volume growth. The keys t o such
growth are an efficient network, an attractive
price that provides an economic incentive t o
switch transactions to the system, and products
tailored t o particular classes of payments where
transaction volume already exists. In developing such products, the system must verify that
it can offer the service at a reasonable price
leading t o a long-run return on investment
Furthermore, the ACH must distinguish b e
tween features that should be provided or
standardized by the network and those best
provided by banks or other payment service
vendors. If the ACH pursues an active strategy,
its logical network capabilities for next day and
later payment services should be expanded to
include conditional collection, advance notification, certified transactions, value dating, a
flexible and cost-effective message capability,
and the support of message standards.
The Role of Depository Institutions
Before the ACH can work effectively in the
marketplace, depository institutions must develop their o w n capabilities in providing clearinghouse services and must market them aggressively. First however, institutions need to
be convinced that the network itself is viable.
Current differences of opinion regarding w h o
will handle processing and how the network
will be organized, as well as uncertainty over
future prices and future product capabilities,
does little to inspire such trust Instead, it
prompts a "wait-and-see" attitude that leaves
institutions willing to be second or third in their
geographical marketplace to offer automated
services after another firm has incurred the
cost of validating the market A believable,
coherent long-run plan for ACH services and
42
prices is crucial in building depository institutions' confidence in the viability of the ACH.
While check processing enjoys an elaborate
service support infrastructure—hardware and
software vendors, correspondent and third
party servicers, and Fed support—no comparable infrastructure has developed for ACH
processing There is much evidence, however,
that this infrastructure is beginning to emerge.
The simple fact that the ACH is a new technology and a relatively new service accounts
for its spotty support infrastructure. Nonetheless, the speed of check displacement and
ACH volume growth depend upon how quickly
financial institutions become active distributors
of automated services and how soon a support
infrastructure for hardware, software, and other
processing emerges. Aside from producing a
long-term plan for the ACH, the best way to
induce distributors t o enter the business is t o
provide attractive products and prices that
ensure check displacement Having pertinent
generic capabilities is the first step.
Conclusions
An efficient ACH-type network can offer
significant economic advantages over checks.
Realizing this potential requires that the current
ACH system undergo major design improvements and capability enhancements. The generic capabilities discussed here are illustrative
of the enhancements that appear necessary if
the ACH is to be viable in the major payment
areas now dominated by checks. Much analysis,
research, refinement pricing, and planning are
necessary before new capabilities can be provided. However, if the ACH system is t o follow
a proactive strategy aimed at attaining rapid
volume growth by dealing with buyer-seller
information exchange and control needs, then
at least some of these generic capabilities are
crucial. If the system makes these improvements and also convinces financial institutions
and other service vendors that the automated
services are both viable and attractive, then the
serious product support and marketing efforts
that are prerequisite t o check displacement
will follow.
M A R C H 1986, E C O N O M I C REVIEW
NOTES
' I a m i n d e b t e d to G e o r g e C W h i t e for pointing out t h e fact that A C H
origination v o l u m e is c o n c e n t r a t e d in a f e w institutions in most A C H
regions
2
S o m e a d v o c a t e s of A C H p a y m e n t s h a v e a s s e r t e d that t h e certainty of
p a y m e n t d a t e with t h e A C H m e a n s g r e a t e r ability to forecast cash flow
t h a n with c h e c k s H o w e v e r , in most situations, t h e a d v a n t a g e for
forecasting is with c h e c k s a n d t h e a s s o c i a t e d p a p e r - b a s e d d a t a
e x c h a n g e , especially w h e n c o m p a r e d with a shift to a p a y e e initiated
debit without t h e a d v a n c e n o t i c e implicit in a n i n v o i c e T h e f o r e c a s t
horizon for c o r p o r a t e cash m a n a g e m e n t is typically 2 0 to 3 0 days
ahead. T h e invoice approval involves a n implicit d a t e for c h e c k r e l e a s e
Predicting d i s b u r s e m e n t clearings given c h e c k r e l e a s e is o n e of t h e
easiest c a s h forecasting problems. For more details, s e e S t o n e a n d
Miller ( 1 9 8 3 ) .
3
T h e t e r m " A C H - t y p e p a y m e n t mechanism" is u s e d to m e a n a batchoriented, t i m e - d e l a y e d ("store a n d forward") electronic p a y m e n t capability. This capability contrasts with wire payments, w h i c h a r e transaction-oriented, q u i c k a n d relatively e x p e n s i v e For m o r e details on k e y
f e a t u r e s a n d costs of t h e A C H a n d wires, s e e S t o n e , " E l e c t r o n i c
P a y m e n t Basics," this i s s u e
4
A n interregional A C H transaction is currently 3.6 c e n t s while F e d
c h a r g e s for interregional c h e c k processing r a n g e from 3.5 to 5 . 3 c e n t s
G i v e n that t h e F e d e r a l R e s e r v e b a s e s both its A C H a n d c h e c k prices o n
its m e a s u r e d costs plus a private sector a d j u s t m e n t factor, w e c a n b e
confident in this c a s e that t h e c o m p a r i s o n of prices reflects a s well t h e
underlying a v e r a g e cost for providing e a c h s e r v i c e
S e e " C o r p o r a t e T r a d e Payments," by Bernell S t o n e a n d " N A C H A ' s
F u t u r e R o l e " by William R M o r o n e y , f o r t h c o m i n g in t h e April 1 9 8 6
Economic
Review for more information o n C T P a n d CTX.
• T h e t e r m " a u t o m a t e d information reporting system" refers to a computer c o m m u n i c a t i o n - b a s e d system n o w w i d e l y used by m a j o r b a n k s to
provide information to their major c u s t o m e r s T h e t w o most c o m m o n
classes of information reports a r e (1) b a n k b a l a n c e r e p o r t s w h i c h
provide b a n k b a l a n c e s a n d b a l a n c e - r e l a t e d activity such a s w i r e s in,
w i r e s o u t major deposits, large c h e c k s and (2) m o n e y m a r k e t q u o t a t i o n
s e r v i c e s R e c e n t surveys indicate that 8 , 0 0 0 to 1 6 , 0 0 0 c o m p a n i e s n o w
use b a l a n c e r e p o r t s T h e r e is an e l a b o r a t e information delivery infrastructure for b a l a n c e reporting including (1) a system of b a l a n c e
reporting c o n t e n t s t a n d a r d s c r e a t e d u n d e r t h e a e g i s of t h e B a n k
Administration I n s t i t u t e a n d (2) a n u m b e r of third-parly o p e r a t o r s of
b a l a n c e s w i t c h e s using several c o m m u n i c a t i o n n e t w o r k s R a t h e r t h a n
receiving delivery to a teletype-like terminal, m a n y c o m p a n i e s n o w
receive delivery of d a t a to a m i n i c o m p u t o r or m i c r o c o m p u t o r that c a n
r e c e i v e r e f o r m a t p r o c e s s and store t h e data for u s e by t h e company.
T h e s e intelligent terminals are o f t e n c a l l e d "treasury workstations" or
"treasury terminal s y s t e m s " R e a d e r s i n t e r e s t e d in more detail o n b a n k
information reporting a r e referred to C o h e n ( 1 9 8 3 ) .
s
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43
vings & Loans
Total Deposits
NOW
Savings
Time
„ommerci
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings & Time
Mortgages Outstanding
Mortgage Commitments
748,114
28,087
175,178
546,560
DEC
651,344
63,600
+10
• ¡ • • • • • I
Commercial Bank ueposi
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings & Time
Xomme^T^Janniepösi
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings & Time
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings & Time
Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings & Time
CommerHe^BatTnepo^s
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings & Time
T ö m m e r u ä l Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings & Time
98,278
4,555
22,027
72,124
Mortgages Outstanding
Mortgage Commitments
93,019
4,877
6,410
268
1,112
5,061
+ 7
+39
+ 7
+21
6,622
38,741
11,360
39,298
67,269
6,511
595
5,813
18,172
4,164
1,520
3,721
9,286
1,189
140
966
17,650
4,001
1,428
3,741
9,024
1,189
135
961
17,857
4,133
1,226
3,410
9,724
979
109
860
+ 2
+ 1
+24
+ 9
- 5
+21
+28
+21
Savings & Loans**
Total Deposits
NOW
Savings
Time
TTW
15,399
6,730
22,896
24,911
3,414
364
2,892
6M10
14,327
6,211
22,382
24,336
3,393
353
2,880
60^99^+Tl
14,291
5,407
+24
20,456
+12
22,561
+10
2,925
+17
294
+24
2,510
+15
T a v T n g s T Loans**
Total Deposits
NOW
Savings
Time
+16
+23
+14
ALABAMA
Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings & Time
Savings & Loans**
Total Deposits
NOW
Savings
Time
38,628
14,573
48,580
80,432
7,536
709
6,511
41,563
15,741
42,008
81,527
7,559
734
Mortgages Outstanding
Mortgage Commitments
Mortgages Outstanding
Mortgage Commitments
S a H n g ^ T Loans**
Total Deposits
NOW
Savings
Time
8,497
2,065
7,914
12,029
1,546
123
1,442
7 T W
7,835
1,966
7,647
11,891
1,538
115
1,434
T6?534
8,059
1,773
6,557
11,707
1,371
93
1,280
+ 5
+16
+21
+ 3
+13
+32
+13
29,064
5,838
1,975
7,323
14,561
191
17
183
28,237
5,427
1,729
6,938
14,597
192
17
184
27,935
6,230
1,663
5,771
14,867
183
20
177
+ 4
- 7
+19
+27
- 3
+ 4
-15
+13
Savings & Loans**
Total Deposits
NOW
Savings
Time
• r a r
2,694
1,067
2,667
7,225
2,496
1,001
2,646
7,116
12,708
2,580
919
2,409
7,127
+ 4
+ib
+11
+ 1
*
*
*
*
*
*
w
Sé.lié
4,971
2,384
5,401
13,518
1,219
90
1,139
¿5,325
4,542
2,238
5,226
13,421
1,224
89
1,052
25,137
5,013
2,080
4,992
13,287
1,051
79
966
+ 4
- 1
+15
+ 8
+ 2
+16
+14
+16
Mortgages Outstanding
Mortgage Commitments
DEC
+ 1
+20
+ 4
- 2
92,807
5,038
97, 207
3.,784
21.,152
72.,882
utc
/b.,533
4,,50/
6,349
263
1,105
5,031
6,075
251
923
4,989
+ 6
+ /
+2U
+ 1
98,019
4,292
21,979
71,301
NOV
+22
+ 8
DEC
NOV
DEC
5,866
334
5,792
351
4,306
174
+36
+92
63,403
3,011
14,983
45,305
63,309
2,829
15,085
45,108
62,648
2,629
14,435
45,734
+ 1
+15
+ 4
- 1
DEC
NOV
DEC
56,873
3,353
56,660
3,498
44,447
2,916
+28
+15
8,400
561
1,958
6,225
8,372
526
1,818
6,190
8,346
314
1,854
6,337
+ 1
+/9
+ 6
- 2
DEC
NOV
DEC
10,629
405
10,663
401
9,004
420
10,914
346
2,387
8,294
10,870
332
2,371
7,760
11,221
301
2,319
8,752
+18
- 4
mm
- 3
+15
+ 3
- 6
DEC
NOV
DEC
10,269
228
10,339
257
10,168
511
+ 1
-56
Total Deposits
NOW
Savings
Time
,132
89
337
1 ,702
2,121
75
338
1,703
1.,597
54
351
1.,204
+34
+65
- 4
+41
DEC
NOV
DEC
Mortgages Outstanding
Mortgage Commitments
? ,648
232
2,618
207
2.,518
147
+ 5
+58
7,019
280
1,250
5,537
6,998
267
1,262
5,509
7,320
235
1,270
5,866
- 5
+19
- 2
- 6
Mortgages Outstanding
Mortgage Commitments
Sa^ng^^^ans*^^
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage Commitments
DEC
NOV
DEC
6,734
325
6,735
324
6,090
339
+10
- 5
Notes- All deposit data are extracted from the Federal Reserve Report of Transaction Accounts, other Deposits and Vault Cash (FR29CD), and
are reported for the average of the week ending the 1st Monday of the m o n t h . This data, reported by institutions with over $15 million in
deposits and $2.1 million of reserve requirements as of June 1984, represents 95% of deposits in the six state area. The annual rate of
chanqe is based on most recent data over December 3 1 , 1980 b a s e , annualized. The m a j o r differences between this report and the call report
are size, the treatment of interbank deposits, and the treatment of float. The data generated from the Report of Transaction Accounts is for
banks over $15 million in deposits as of December 31, 1979. The total deposit data generated from the Report of Transaction Accounts eliminates
interbank deposits by reporting the net of deposits "due to" and "due from" other depository institutions. The Report of Transaction Accounts
subtracts cash in process of collection from demand deposits, while the call report does n o t . Savings and loan mortgage data are from the
Federal Home Loan Bank Board Selected Balance Sheet Data. The Southeast data represent the total of the six states. Subcategories were chosen
on a selective basis and do not add to total.
* = fewer than four institutions reporting.
** = S&L deposits subject to revisions due to reporting changes.
44
M A R C H 1986, E C O N O M I C REVIEW
CONSTRUCTION
JAN
1986
DEC
1985
JAN
1985
ANN.
% .
CHG.
Nonresidential Building Permits - $ M i l .
T o t a l Nonresidential
68,260
Industrial B l d g s .
8,776
Offices
17,373
Stores
11,228
Hospitals
2,266
Schools
1,137
69,309
8,722
17,319
11,224
2,134
1,133
62,351
9,084
14,840
9,780
1,852
1,042
+ 9
- 3
+17
+15
+22
+ 9
Residential Building Permits
Value - $ M i l .
Residential Permits - T h o u s .
Single-family units
Multifamily units
Total Building Permits
Value - $ M i l .
Nonresidential Building Permits - $ M i l .
T o t a l Nonresidential
11,350
Industrial B l d g s .
1,219
Offices
2,675
Stores
2,261
Hospitals
372
Schools
142
11,457
1,192
2,639
2,280
344
157
9,597
1,005
2,216
1,959
402
125
+18
+21
+21
+15
- 7
+14
R e s i d e n t i a l Building Permits
Value - $ M i l .
R e s i d e n t i a l Permits - T h o u s .
Single-family units
Multifamily units
T o t a l Building Permits
Value - $ M i l .
Nonresidential Building Permits - S M i l .
T o t a l Nonresidential
617
Industrial B l d g s .
55
Offices
157
Stores
160
Hospitals
15
Schools
14
624
55
150
160
13
14
726
197
91
126
53
6
-15
-72
+73
+27
-72
+133
Residential Building Permits
Value - $ M i l .
Residential Permits - T h o u s .
Single-family units
Multifamily units
Total Building Permits
Value - $ M i l .
N o n r e s i d e n t i a l Building Permits - $ M i l .
T o t a l Nonresidential
5.,811
Industrial B l d g s .
539
Offices
1.,197
Stores
1.,234
Hospitals
203
Schools
44
5,868
537
1,170
1,255
189
50
4,796
495
1,037
1,107
163
52
+21
+ 9
+15
+11
+25
-15
Value - $ M i l .
R e s i d e n t i a l Permits - T h o u s .
Single-family units
M u l t i f a m i l y units
Total Building Permits
Value - $ M i l .
N o n r e s i d e n t i a l Building Permits
Total Nonresidential
Industrial B l d g s .
Offices
Stores
Hospitals
Schools
2,054
330
544
331
32
17
2,049
316
545
318
25
20
1,822
189
551
299
47
22
+13
+75
- 1
+11
-32
-23
R e s i d e n t i a l Building Permits
Value - $ M i l .
R e s i d e n t i a l Permits - T h o u s .
Single-family units
Multifamily units
T o t a l Building Permits
Value - $ M i l .
Nonresidential Building
Total Nonresidential
Industrial B l d g s .
Offices
Stores
Hospitals
Schools
1,311
50
451
241
49
46
1,324
50
421
251
45
55
1,191
33
283
243
103
34
+10
+52
+59
- 1
-52
+35
Value - $ M i l .
R e s i d e n t i a l Permits - T h o u s .
Single-family units
M u l t i f a m i l y units
T o t a l Building Permits
Value - $ M i l .
) m 1.
304
26
55
64
18
7
305
25
54
65
17
7
255
12
40
58
9
3
+19
+117
+38
+10
+100
+133
riesidential Building Permits
Value - $ M i l .
R e s i d e n t i a l Permits - T h o u s .
Single-family units
M u l t i f a m i l y units
Total Building Permits
Value - $ M i l .
Nonresidential Building Permits - $ M i l .
Total Nonresidential
1,253
Industrial B l d g s .
219
Offices
271
Stores
231
Hospitals
55
Schools
14
1,287
209
299
231
55
11
807
79
214
126
27
5
+55
+177
+27
+83
+104
+180
R e s i d e n t i a l Building Permits
Value - $ M i l .
R e s i d e n t i a l Permits - T h o u s .
S i n g l e - f a m i l y units
Multifamily units
Total Building Permits
Value - $ M i l .
ANN.
%
CHG.
JAN
1986
DEC
1985
JAN
1985
84,137
83,107
74,368
+13
964.2
776.7
953.4
773.1
917.6
755.2
+ 5
+ 3
152,397
152,416
136,719
+11
15,028
14,903
13,858
+ 8
199.3
164.9
197.9
165.5
190.3
175.0
+ 5
- 6
26,378
26,359
23,454
+12
12-month cumulative rate
Nonresidential Building Permits
T o t a l Nonresidential
Industrial B l d g s .
Offices
Stores
Hospitals
Schools
'
3
566
552
449
+26
10.1
8.1
9.9
8.0
8.2
7.1
+23
+14
1,183
1,176
1,175
+ 1
8,490
8,477
7,959
+ 7
105.3
99.1
105.9
98.5
103.2
100.3
+
14,301
14,345
12,755
3,270
3,188
2,835
+15
47.4
27.8
46.6
27.7
43.7
26.7
+ 8
+ 4
5,323
5,237
4,656
+14
752
785
1,040
-28
11.6
5.7
11.5
7.3
14.5
13.6
-20
-58
2,064
2,108
2,231
- 7
342
335
385
-11
5.8
2.7
5.7
2.7
6.6
4.9
-12
-45
646
640
640
+ 1
1,608
1,566
1,190
+35
19.1
21.5
18.3
21.3
14.1
22.4
+35
- 4
2,861
2,853
1,997
+43
?
- 1
+12
'-
NOTES:
Data supplied b y the U . S . Bureau of the C e n s u s , Housing Units A u t h o r i z e d B.y Building Permits and Public C o n t r a c t s . C - 4 0 .
Nonresidential data excludes the c o s t of construction for p u b l i c l y o w n e d b u i l d i n g s . T h e southeast data represent the total of the six
states.
FEDERAL
RESERVE BANK O F ATLANTA
45
GENERAL
Personal Income
($bil. - SAAR)
Taxable Sales - $ b i l .
Plane P a s s . A r r . (OOO's)
Petroleum P r o d , (thous.)
C o n s u m e r Price Index
1967=100
Kilowatt Hours - m i l s .
Personal Income
($bi1. - SAAR)
Taxable Sales - $ b i l .
Plane P a s s . A r r . (OOO's)
Petroleum P r o d , (thous.)
C o n s u m e r Price Index
1967=100
Kilowatt Hours - m i l s .
Personal Income
($bi1. - SAAR)
Taxable Sales - $ b i l .
Plane P a s s . A r r . (OOO's)
Petroleum P r o d , (thous.)
C o n s u m e r Price Index
1967=100
Kilowatt Hours - m i l s .
Personal Income
($bi 1. - SAAR)
T a x a b l e Sales - $ b i l .
Plane P a s s . A r r . (OOO's)
Petroleum P r o d , (thous.)
Consumer Price Index
1967=100
Kilowatt Hours - m i l s .
Personal Income
(Sbil. - S A A R )
Taxable Sales - S b i l .
Plane P a s s . A r r . (OOO's)
Petroleum P r o d , (thous.)
Consumer Price Index
1967=100
Kilowatt Hours - m i l s .
ANN.
%.
CHG.
LATEST
CURR.
DATA
PERIOD
PREV.
PERIOD
YEAR
AGO
FEB
3,211.6
N.A.
N.A.
8,933.7
3,190.7
N.A.
N.A.
8,950.2
3,057.3
N.A.
N.A.
8,868.0
+ 1
FEB
DEC
327.5
196.4
328.4
179.1
317.4
186.9
+ 3
+ 5
388.2
N.A.
4,369.4
1,526.0
373.1
N.A.
4,546.7
1,483.0
+ 5
DEC
FEB
392.0
N.A.
5,144.4
1,513.0
+13
+ 2
DEC
N.A.
29.3
N.A.
28.5
N.A.
27.9
+ 5
DEC
FEB
42.2
N.A.
132.2
57.0
42.1
N.A.
123.0
58.0
40.4
N.A.
103.2
58.0
+28
- 2
DEC
N.A.
4.0
N.A.
3.8
N.A.
4.0
0
3Q
151.2
149.0
142.6
+ 6
2,627.8
33.0
2,117.9
34.0
2,309.4
34.0
+14
- 3
3Q
3Q
3Q
DEC
FEB
DEC
DEC
DEC
+ 5
+ 4
JAN
NOV
JAN
174.6
8.5
173.9
9.0
168.6
7.5
+ 4
+13
73.0
N.A.
1,879.5
N.A.
71.8
N.A.
1,631.4
N.A.
68.4
N.A.
1,705.6
N.A.
+ 7
FEB
DEC
FEB
336.9
4.9
335.3
4.5
322.4
4.5
+10
+ 4
+ 9
JAN (R)
1986
Agriculture
Prices Rec'd by Farmers
Index (1977=100)
Broiler Placements (thous.)
Calf Prices ($ p e r c w t . )
Broiler Prices (£ per lb.)
Soybean Prices ($ p e r bu.)
Broiler Feed Cost ($ per ton)
121
18,139
61.60
29.0
5.13
189
124
87,918
60.10
30.5
5.16
191
135
86,001
66.20
30.5
5.74
217
-10
+ 2
- 7
- 5
-11
-13
Agriculture
Prices R e c ' d by Farmers
Index (1977=100)
B r o i l e r Placements (thous.)
Calf Prices ($ p e r cwt.)
Broiler Prices (t p e r lb.)
Soybean Prices ($ p e r bu.)
B r o i l e r Feed Cost ($ per ton)
108
33,880
59.50
27.84
5.15
181
112
33,895
55.59
29.16
5.20
184
127
33,640
60.44
29.04
5.91
217
-15
+ 1
- 2
- 4
-13
-17
Agriculture
Farm Cash Receipts - $ m i l .
1,992
( D a t e s : D E C , DEC)
11,470
Broiler Placements (thous.)
58.90
Calf Prices ($ p e r cwt.)
27.00
B r o i l e r Prices (t per lb.)
Soybean Prices ($ p e r bu.)
5.26
Broiler Feed Cost ($ per ton)
179
11,469
55.30
29.00
5.27
183
2,188
11,455
60.10
27.00
6.05
205
- 9
+ 0
- 2
0
-13
-13
griculture
Farm Cash Receipts - $ m i l .
4,403
( D a t e s : D E C , DEC)
2,136
Broiler Placements (thous.)
64.00
Calf Prices ($ p e r c w t . )
27.00
B r o i l e r Prices (t per lb.)
Soybean Prices (S p e r bu.)
5.26
B r o i l e r Feed Cost ($ p e r ton
230
2,195
55.20
29.00'
5.27
235
4,587
2,ose
62.60
30.00
6.05
235
- 4
+ 2
+ 2
-10
-13
- 2
Personal Income
(Sbil. - SAAR)
Taxable Sales - S b i l .
Plane P a s s . A r r . (OOO's)
Petroleum P r o d , (thous.)
C o n s u m e r Price Index
1967=100
Kilowatt Hours - m i l s .
Personal Income
(Sbil. - SAAR)
Taxable Sales - S b i l .
Plane P a s s . A r r . (OOO's)
Petroleum P r o d , (thous.)
C o n s u m e r Price Index
1967=100
Kilowatt Hours - m i l s .
NOTES'
DEC
FEB
49.8
N.A.
286.7
1,340.0
49.6
N.A.
292.8
1,350.0
49.0
N.A.
248.0
1 ,306.0
+16
+ 3
DEC
N.A.
4.4
N.A.
4.4
N.A.
4.5
- 3
DEC
FEB
23.0
N.A.
35.2
83.0
23.7
N.A.
32.6
84.0
23.0
N.A.
31.2
85.0
+13
- 4
DEC
N.A.
2.0
N.A.
1.9
N.A.
2.0
0
52.8
N.A.
183.0
N.A.
52.0
N.A.
171.6
N.A.
49.7
N.A.
149.3
N.A.
N.A.
4.9
N.A.
5.4
3Q
3Q
3Q
DEC
DEC
N.A.
5.5
+ 1
0
+ 6
+ 2
_
igriculture
Farm Cash Receipts - S m i l .
3,091
( D a t e s : D E C , DEC)
13,879
Broiler Placements (thous.)
54.40
Calf Prices ($ p e r cwt.)
27.00
Broiler Prices (i p e r lb.)
Soybean Prices ($ p e r b u . )
5.10
Broiler Feed Cost (S p e r ton)
180
H
-
Personal Income
(Sbil. - SAAR)
Taxable Sales - S b i l .
Plane P a s s . A r r . (OOO's)
Petroleum P r o d , (thous.)
Consumer Price Index
1967=100
Kilowatt Hours - m i l s .
ANN.
FEB
%
1985 C H G .
FEB
1986
H
H
H
-
13,697
52.60
28.50
4.93
181
H
H
3,587
13,553
59.50
29.00
5.74
250
H
-14
+ 2
- 9
- 7
-11
- 8
H
Agriculture
Farm Cash Receipts - S m i l .
( D a t e s : D E C , DEC)
Broiler Placements (thous.)
Calf Prices ($ p e r c w t . )
Broiler Prices (i per lb.)
Soybean Prices (S p e r bu.)
Broiler F e e d Cost (S per ton)
1,658
N.A.
58.00
30.00
4.80
245
56.10
31.00
5.06
250
1,52
N.A.
60.70
31.50
5.77
250
Agriculture
Farm Cash Receipts - S m i l .
(Dates:DEC, DEC)
B r o i l e r Placements (thous.)
C a l f Prices (S p e r cwt.)
Broiler Prices (t per lb.)
Soybean Prices ($ p e r bu.)
Broiler Feed Cost (S p e r ton)
2,266
6,394
59.50
30.80
5.20
157
6,533
51.80
30.50
5.28
159
2,162
6,534
61.40
31.50
5.92
164
+ 5
- 2
- 3
- 2
-12
- 4
Agriculture
Farm Cash Receipts - $ m i l .
( D a t e s : D E C , DEC)
Broiler Placements (thous.)
Calf Prices ($ p e r c w t . )
B r o i l e r Prices (t p e r lb.)
Soybean Prices (S p e r bu.)
Broiler Feed Cost ($ per ton)
2,052
N.A.
60.30
26.00
5.45
176
1,984
N.A.
58.30
29.00
6.05
185
+ 3
Personal Income data supplied by U . S . Department of C o m m e r c e .
-
55.90
27.50
5.37
186
4+9
- 4
- 5
-17
- 2
+ 3
-10
-10
- 5
Taxable Sales are reported as a 12-month cumulative t o t a l .
Plane
Passenqer Arrivals are collected from 26 a i r p o r t s . Petroleum Production data supplied b y U . S . Bureau of M i n e s . C o n s u m e r Price Index data
supplied b y Bureau of Labor S t a t i s t i c s . Agriculture data supplied by U . S . Department of A g r i c u l t u r e . Farm Cash Receipts data are reported
as cumulative for the calendar year through the m o n t h s h o w n . Broiler placements are an average w e e k l y r a t e . The Southeast data represent
the total of the six s t a t e s . N. A . = not a v a i l a b l e . The annual percent c h a n g e calculation is based on m o s t recent data over prior y e a r .
R = revised.
46
M A R C H 1986, E C O N O M I C REVIEW
EMPLOYMENT
ANN.
% .
CHG
JAN
1986
OEC
1985
JAN
1985
Civilian Labor Force - thous.
Total Employed - thous
Total Uemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured Unemployment - t h o u s .
Insured U n e m p l . Rate - %
Mfg. A v g . W k l y . Hours
Mfg. Avg. Wkly. Earn. - $
115,431
106,959
8,472
6.7
N.A.
N.A.
40.6
393
115,780
108,063
7,717
6.9
N.A.
N.A.
41.6
404
113,475
104,344
9,131
7.4
N.A.
N.A.
40.3
380
+ 2
+ 3
- 7
Civilian Labor Force - thous.
Total Employed - thous
Total Uemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
15,266
14,089
1,176
7.1
N.A.
N.A.
41.0
350
15,417
14,285
1,132
7.4
N.A.
N.A.
42.3
363
15,079
13,809
1,271
7.8
N.A.
N.A.
40.7
338
+ I
+
- 1
Civilian Labor Force - thous.
Total Employed - thous
Total Uemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured Unemployment - t h o u s .
Insured Unempl. Rate - %
M f g . A v g . W k l y . Hours
Mfg. Avg. Wkly. Earn. - S
1,797
1,634
163
8.0
N.A.
N.A.
41.3
363
1,798
1,648
149
8.1
N.A.
N.A.
42.0
366
1,795
1,591
204
9.9
N.A.
N.A.
40.2
336
m m a a m m
Civilian Labor Force - thous.
Total Employed - thous
Total Uemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured Unemployment - thous.
Insured U n e m p l . Rate - %
Mfg. A v g . W k l y . Hours
Mfg. Avg. Wkly. Earn. - $
5,344
5,043
301
5.3
N.A.
N.A.
41.0
323
5,391
5,091
300
5.6
N.A.
N.A.
42.5
343
5,295
4,950
346
6.2
N.A.
N.A.
40.5
317
+ 1
+ 2
-13
Civilian Labor Force - thous.
Total Employed - thous
Total Uemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
2,841
2,680
160
5.2
N.A.
N.A.
41.0
336
2,885
2,708
177
6.3
N.A.
N.A.
42.1
349
2,772
2,591
181
6.1
N.A.
N.A.
40.3
318
+ 2
+ 3
-12
Labor Force - thous.
Total Employed - thous
Total Uemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured U n e m p l o y m e n t - thous.
Insured Unempl. Rate - %
Mfg. A v g . Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
1,939
1,702
237
11.7
N.A.
N.A.
41.5
433
1,963
1,740
223
12.0
N.A.
N.A.
42.7
448
1,886
1,680
206
10.6
N.A.
N.A.
41.4
427
+ 3
+ 1
+15
u i v i n a n LaDor rorce - tnous.
Total Employed - thous
•Total U e m p l o y e d - t h o u s .
U n e m p l o y m e n t R a t e - % SA
Insured Unemployment - t h o u s .
Insured U n e m p l . R a t e - %
Mfg. A v g . W k l y . Hours
Mfg. Avg. Wkly. Earn. - $
987
124
10.3
N.A.
N.A.
40.5
298
1,007
105
9.6
N.A.
N.A.
41.6
307
i ,U/6
954
123
10.5
N.A.
N.A.
40.8
292
+ i
+ 3
+ 1
Civilian Labor Force - thous.
Total Employed - thous
Total Uemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured Unemployment - thous.
Insured U n e m p l . Rate - %
Mfg. A v g . Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
2,234
2,043
191
7.5
N.A.
N.A.
41.0
347
2,269
2,091
178
7.6
N.A.
N.A.
42.7
364
2,255
2,043
211
8.4
N.A.
N.A.
40.9
335
- 1
0
- 9
NOTES:
+ 1
+ 3
?
+ 1
+ 4
+ 0
+ 3
-20
+ 3
+ 8
+ 1
+ 2
+ 2
+ 6
+ 0
+ 1
- 1
+ 2
+ 0
+ 4
DEC
1985
JAN
1985
Nonfarm Employment - thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins. & Real. Est.
Trans. Com. & Pub. Util.
98,170
19,268
4,490
23,482
16,467
22,169
6,049
5,303
99,712
19,387
4,704
24,169
16,729
22,348
6,052
5,372
95,034
19,403
4,138
22,490
16,092
21,022
5,739
5,185
- 1
+ 9
+ 4
+ 2
+ 5
+ 5
+ 2
Nonfarm Employment - thous.
Manufacturing
Construction
Trade
Government
Services
F i n . , I n s . & R e a l .. E s t .
T r a n s . C o m . & P u b .. U t i l .
1 ? .,833
2 .,309
/64
3 .,202
2 .,278
2 .,687
742
725
12,955
2,318
785
3,270
2,282
2,695
743
732
12,443
2,308
732
3,065
2,216
2,563
711
717
+
+
+
+
+
+
+
+
Nonfarm Employment - thous.
Manufacturing
Construction
Trade
Government
Services
F i n . , I n s . & R e a l .. E s t .
T r a n s . C o m . & P u b ,. U t i l .
1,425
354
70
305
301
242
67
72
1,440
354
73
314
301
244
67
73
1.,393
354
64
296
294
235
64
72
+ 2
0
+ 9
+ 3
+ 2
+ 3
+ 5
0
Nonfarm Employment - thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins. & Real. Est.
Trans. Com. & Pub. Util.
4,519
523
335
1,221
694
1,167
326
245
4,532
522
339
1,231
695
1,164
325
246
^52
514
326
1.,176
668
1,,105
310
243
+
+
+
+
+
+
+
+
Nonfarm Employment - thous.
Manufacturing
Construction
Trade
Government
Services
F i n . , I n s . & R e a l ., E s t .
T r a n s . C o m . & P u b ,, U t i l .
2,598
557
151
661
453
463
140
164
2,626
559
153
679
453
469
140
165
2,490
550
133
623
444
442
132
159
+ 4
+ 1
+14
+ 6
+ 2
+ 5
+ 6
+ 3
Nonfarm Employment - thous.
Manufacturing
Construction
Trade
Government
Services
F i n . , Ins. & R e a l . Est.
Trans. Com. & Pub. Util.
1,570
170
95
384
325
319
85
112
1,600
174
100
397
328
321
86
115
1,586
181
104
382
322
313
84
116
+
+
+
+
-
1
6
9
1
1
2
1
3
Nontarm Employment - thous.
Manufacturing
Construction
Trade
Government
Services
F i n . , I n s . & R e a l ,. E s t .
T r a n s . C o m . & P u b ., U t i l .
842
223
33
178
193
131
36
39
856
224
37
185
193
132
36
39
818
219
32
171
188
126
35
39
+
+
+
+
+
+
+
3
2
3
4
3
4
3
0
Nonfarm Employment - thous.
Manufacturing
Construction
Trade
Government
Services
F i n . , I n s . & R e a l .. E s t .
T r a n s . C o m . & P u b .. U t i l .
1,879
482
80
453
312
365
88
93
1,901
485
83
464
312
365
89
94
1,804
490
73
417
300
342
86
88
A l l l a b o r f o r c e d a r a are f r o m B u r e a u o f L a b o r S t a t i s t i c s r e p o r t s s u p p l i e d b y s t a t e
O n l y the u n e m p l o y m e n t r a t e d a t a a r e s e a s o n a l l y a d j u s t e d .
T h e S o u t h e a s t d a t a r e p r e s e n t t h e t o t a l o f t h e six s t a t e s .
FEDERAL RESERVE BANK OF ATLANTA
ANN.
%
CHG
JAN
1986
+ 3
3
0
4
4
3
5
4
1
4
2
3
4
4
6
5
1
+ 4
- 2
+10
+ 9
+ 0
+ 7
+ 2
+ 6
agencies.
47
Federal Reserve B a n k o f Atlanta
1 0 4 Marietta S t , N.W.
Atlanta, Georgia 3 0 3 0 3 - 2 7 1 3
Address Correction Requested
Bulk Rate
U . S . Postage
PAID
Atlanta, Ga.
Permit 292
@FedFRASER