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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 William J. Kahley Joel R Parker W. Gene Wilson Publications and Information D e p a r t m e n t Bobbie H. McCrackin Public Information Duane Kline, Director Linda Donaldson Editorial Harriette Grissom, Publications Coordinator Melinda Dingier Mitchell Ann L. Pegg Graphics Eddie W. Lee, Jr. Typesetting, W o r d Processing Cheryl B Birthrong Beverly N e w t o n Belinda Womble Distribution George Briggs Vivian Wilkins Ellen Gerber T h e E c o n o m i c R e v i e w s e e k s to inform t h e public a b o u t F e d e r a l R e s e r v e policies a n d the e c o n o m i c environment and, in particular, to narrow t h e g a p b e t w e e n specialists and c o n c e r n e d laymen. V i e w s e x p r e s s e d in the E c o n o m i c R e v i e w are not necessarily t h o s e of this B a n k or the Federal R e s e r v e System. M a t e r i a l m a y be reprinted or a b s t r a c t e d if t h e R e v i e w a n d author a r e credited. P l e a s e provide t h e B a n k s R e s e a r c h D e p a r t m e n t with a c o p y of a n y publication containing reprinted material. F r e e subscriptions a n d additional c o p i e s a r e available from t h e Information Center, F e d e r a l R e s e r v e Bank of A t l a n t a 1 0 4 Marietta S t r e e t N. W„ A t l a n t a G a 3 0 3 0 3 2 7 1 3 ( 4 0 4 / 5 2 1 - 8 7 8 8 ) Also contact t h e Information C e n t e r to receive S o u t h e a s t e r n E c o n o m i c I n s i g h t a f r e e n e w s l e t t e r o n e c o n o m i c trends published by t h e Atlanta Fed twice a month. T h e R e v i e w is i n d e x e d online in t h e following data-bases: ABI/lnform, M a g a zine Index. M a n a g e m e n t Contents, PAIS, a n d t h e Predicasts group. 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 SUBSCRIPTION If you are not yet o n our mailing list and w o u l d like to receive the E c o n o m i c Review, please fill out this subscription form. Name Firm or Occupation Address City state Zip Comments. Send to: Information Center® Federal Reserve Bank of A t l a n t a * 104 Marietta S t r e e t N.W. • Atlanta, G a 3 0 3 0 3 8 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 REFERENCES A d c o c k William O., Jr. " F u t u r e of Cash," in The Future of 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 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. 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S t o n e Bernell K " C a s h C y c l e M a n a g e m e n t and t h e A N S I X 1 2 Committ e e " Journal of Cash Management v o l 3, n a 4 ( A u g u s t / S e p t e m b e r 1 9 8 3 ) , pp. 3 7 - 3 8 , S t o n e Bernell 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 " pp. 4 0 - 5 8 , in Payments in the Financial Services of the 1980s, e d i t e d by 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 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 Books 1984. S t o n e Bernell K " C o r p o r a t e T r a d e P a y m e n t s A T e c h n i c a l S u c c e s s a n d a M a r k e t i n g Failure," Economic Review (forthcoming). S t o n e B e r n e l l K a n d T o m W. Miller. " D a i l y C a s h F o r e c a s t n g : A Structuring Framework," Journal of Cash Management voL 1, n a 1 ( O c t o b e r 1 9 8 1 ) pp. 3 5 - 5 0 . S t o n e , B e r n e l l K a n d T o m W. Miller. " F o r e c a s t i n g D i s b u r s e m e n t F u n d i n g R e q u i r e m e n t s T h e C l e a r i n g P a t t e r n Approach," Journal of Cash Management v o l 3, n a 5 ( O c t o b e r / N o v e m b e r 1 9 8 3 ) , p a 6 7 - 8 0 . 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 a 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 ) . W h i t e G e o r g e C , Jr. " E l e c t r o n i c B a n k i n g and Its Impact on t h e F u t u r e " Magazine of Bank Administration, vol 55 (December 1979), p a 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 ot Cash Management v o l 2, n a 2 ( J u n e 1 9 8 2 ) , p a 4 2 - 4 8 . 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