The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
FEDERAL RESERVE BANK
O F N EW YORK
{■Circular No. 8 2 4 9 1
January 4, 1978 J
L
PLANS FOR IMPROVED PAYMENTS SERVICES
To A ll Banking Institutions, and Others Concerned,
in the Second Federal Reserve District:
Following is the text of a statement issued by the Board of Governors of the Federal
Reserve System, announcing plans to enhance and improve payments services:
The Board of Governors of the Federal Reserve System today invited comment on plans to enhance and
improve payments services to financial institutions and the public.
The Board requested comment by February 28, 1978.
These plans are expected to encourage private sector development of competitive payments services and to
encourage broader use of electronic fund transfers as a more efficient, lower cost means of payment.
The two programs on which the Board invited comment are:
1. To make available Federal Reserve net settlement services to member banks, on their reserve accounts,
for wire transfers conducted on Bankwire.
Bankwire is a communications network operated by Payments and Communications Administrative Com
munications Corporation and owned by an association of banks. It provides interbank funds transfer services
to about 200 banks throughout the country.
2. To provide a nationwide Federal Reserve service for clearing and settlement of electronic payments
through automated clearinghouses (A C H ’s).
An automated clearinghouse association is a local or regional association of banks and other depositories
agreeing to make and receive electronic payments among themselves on behalf of the customer. The Federal
Reserve currently operates 33 automated clearinghouses where magnetic tapes bearing the payments instructions
of members of the local clearinghouse associations are sorted and cleared. At present, payment instructions
are exchanged generally only locally among members of the various regional clearinghouse associations.
Use of these electronic payments systems would be voluntary.
In making these proposals the Board said:
“We expect that the program to carry out net settlement for Bankwire transactions will stimulate
private sector alternatives in the payments mechanism leading to lower cost provision of banking services
throughout the nation. The Board will consider other requests for such settlement services on a case-by-case
basis to ensure that the cost and operational impacts and the public service benefits are consistent with
the Board’s overall responsibilities.
“With respect to providing interregional clearing and settlement facilities for ACH’s, we hope to
encourage the use of electronic fund transfers as a more efficient and less costly alternative to check
payments. The Board recognized the evolutionary nature of the program and the need for continuing
analysis of Federal Reserve operational involvement. However, we would emphasize the compatibility of
this program with the traditional wholesale level services which the Federal Reserve has provided
historically. We have basic responsibilities to provide a minimum service capability to the public and to
ensure the certainty and reliability of payments as well as to encourage improved methods of meeting
the credit and debit transfers of the public. Our payments system is important to the smooth functioning
of the whole economy. Not least, we attach importance to the fact that this project has been recom
mended by the National Commission on Electronic Fund Transfers.”
The terms of the project under which the Federal Reserve would settle wire transfers made over Bank
wire were based on a request to the Federal Reserve by member banks participating in Bankwire. Under
these terms, member banks would appoint Bankwire their agent, and settlement would be effected by credit
ing or debiting member bank reserve accounts. Bankwire would be responsible for supplying information
needed for settlement: net amounts to be credited or debited to participating member banks, in accordance
with payment instructions received during the day on Bankwire from all Bankwire members.
The planned connection of automated clearinghouses to form a national network was based on a request
by the National Automated Clearing House Association comprised of some 9,000 member and nonmember
banks, and 1,000 thrift institutions.
Under the planned linkage a member bank or other financial institution in the Dallas automated clear
inghouse association, for example, could present to the Federal Reserve automated clearinghouse at Dallas
electronically recorded instructions to make a payment to a member of the San Francisco clearinghouse asso
ciation. The Federal Reserve would — as it does with payments instructions recorded on checks — forward
the instructions from Dallas to San Francisco. But ACH transactions would be forwarded over the Federal
Reserve’s communications system, rather than by mail or courier. The Federal Reserve would collect the
amount involved from the Dallas depository and pay the amount to the San Francisco depository. The Dallas
and San Francisco depositories would credit or debit their customers.
The feasibility of connecting these facilities has been shown in two recent programs. One is the Treas
ury’s program of direct deposit of social security and other recurring Federal payments. In place of send
ing out checks, the Treasury — at the request of beneficiaries — will send their payments directly to depository
institutions through automated clearing facilities operated by the Reserve Banks.
More recently, the feasibility of interregional commercial payments through the automated facility was
tested during a nine-month pilot test conducted by the National Automated Clearing House Association and
the Federal Reserve.
Today’s proposal does not alter the Treasury’s procedures in its direct deposit program.
Printed below is the text of the Board’s plans. Comments thereon should be submitted by Feb
ruary 28 and may be sent to this Bank, addressed to Thomas C. Sloane, Senior Vice President and
Senior Adviser.
P aul A. V olcker,
President.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Announcement of Proposed Actions Regarding Net Settlement of
Member Bank Reserve Accounts and Automated Clearing Houses
(Docket No. R-0138)
I.
I nter-D istrict N et S ettlement B y F ederal
R eserve B anks F or M ember Banks .
The Board of Governors has considered a request
from an organization of member banks that Federal
Reserve assistance be provided to member banks par
ticipating in an independent privately-owned organiza
tion providing interbank funds transfer services. The
member banks participating in this organization have
requested assistance from the Federal Reserve System
in an arrangement to use their reserve account balances
at Federal Reserve Banks to settle for payment trans
actions that have been exchanged through a private
clearing organization known as the Bankwire to which
these member banks belong. Bankwire is operated by
the Payment and Administrative Communications Cor
poration, a privately owned corporation. The proposed
arrangement would allow the Federal Reserve member
banks in this organization, during daily operations,
to transfer among themselves payment instructions
throughout the country via Bankwire and then to settle
for those funds transfers on that same day using the
Federal Reserve Communications System to make ap
propriate adjustments to member bank reserve account
balances.
S U M M A R Y S T A T E M E N T : The Board of Gov
ernors has announced its intention to take two actions
regarding its funds transfer and clearing services. The
first action is the approval of a request from a group
of member banks participating in a private clearing and
settlement organization that Federal Reserve Banks
make available to them a net settlement service for
their funds transfer messages. In the second action, the
Board has approved plans to provide, by year end 1978,
interregional clearing and settlement services for funds
transfers originated at automated clearing house asso
ciations. The Board intends to take these actions in
order to improve the efficiency of the nation’s payments
mechanism and to encourage private-sector develop
ment of electronic payments services for the public. The
Board has invited public comment on these actions by
February 28, 1978.
FO R F U R T H E R IN F O R M A T IO N C O N TA C T:
James R. Kudlinski, Director, Division of Federal Re
serve Bank Operations ((202) 452-3985) ; or Allen L.
Raiken, Assistant General Counsel ((202) 452-3625),
Board of Governors of the Federal Reserve System,
Washington, D.C. 20551.
2
The member banks participating in the Bankwire
organization have indicated that significant efficiencies
in their current clearing and settlement services will
be achieved through the receipt of the net settlement
service requested. The proposed net settlement service
would consist of Federal Reserve Banks making debit
and credit entries to the reserve accounts of member
banks that are members of Bankwire. Bankwire would
be appointed the agent of the participating member
banks, and would be responsible for providing a desig
nated Federal Reserve office with a list of debit and
credit settlement instructions necessary to effect the net
settlement. Upon obtaining this information, which
would be received through a link-up of the Federal
Reserve Communications System and the Bankwire
system, the designated Federal Reserve office would
distribute the accounting entries to the Federal Reserve
Banks for posting to the reserve accounts of the par
ticipating member banks. This posting would represent
the net amount “due from” or “due to” the member
bank resulting from payment transactions exchanged
that day through the Bankwire system.
For some time the Federal Reserve has provided set
tlement services for member banks that, within indi
vidual Federal Reserve Districts, participate in pri
vately run local and regional clearing organizations by
charging and crediting net entries to the member banks’
reserve accounts. The proposed settlement service dif
fers from such existing services in that it will be offered
on an inter-District, rather than an intra-District basis.
The Board perceives that adoption of this proposal will
enhance the settlement services that it offers to member
banks. The Board expects that the availability of these
settlement services will facilitate member bank partici
pation in private-sector payments clearing arrangements
and will result in same-day funds availability for mem
ber banks participating in this private-sector clearing
organization. The Board views these services as con
sistent with the Federal Reserve System’s commitment
to provide assistance to private sector initiatives di
rected towards improving the efficiency of the nation’s
payments mechanism. Providing this net settlement ser
vice should permit the Bankwire organization and its
member banks to offer improved funds transfer services
to the public.
Should other requests by member banks for special
ized settlement services be received in the future, the
Board will review these requests on a case-by-case basis
considering among other matters overall System capa
bilities and consistency with the Federal Reserve’s tra
ditional payments mechanism responsibilities.
II. I nterregional C learing and S ettlement
S ervices T hrough A utomated Clearing
H ouses
On the basis of its review of the recently completed
pilot study, the Board of Governors has determined
that it is appropriate for the Federal Reserve System
to establish an Interregional Automated Clearing House
system. The Board believes that interregional clearings
will facilitate the development of a more efficient nation
wide payments system available to depository institu
tions and will provide research and development data
and experience that should be of assistance to other
potential developers of automated clearing services.
Provision of this interbank service also should enhance
the opportunities open to depository institutions for
developing improved “retail” payments services for the
public. The Board intends to have the Federal Reserve
interregional ACH system operational by the end of
1978.
Since 1968 the Federal Reserve System has assisted
groups of depository institutions in the development
and operation of automated clearing houses (ACH s)
that provide facilities for the exchange of payment in
formation on magnetic tape (1976 Fed. Res. Bull. 481).
These facilities were developed as a means of reducing
the growing volume and increased cost of processing
paper checks. At the present time, the Federal Reserve
provides processing, settlement and delivery services
on a regional basis for 31 automated clearing house
associations and makes available settlement and delivery
services for two privately operated ACHs. These facili
ties are also used in connection with the Federal Re
serve’s participation as fiscal agent in the Federal gov
ernment’s recurring payments program. At the present
time the major portion of Federal Reserve System
ACH transactions consist of direct deposit and other
funds transfers for the United States Treasury.
In 1976, the National Automated Clearing House
Association (N ACHA ) requested Federal Reserve
participation in a pilot study to determine the feasibility
of handling inter-District ACH items over the Federal
Reserve Communications System. Ten ACHs partici
pated in the interregional pilot. Depository institutions
belonging to the participating ACH associations re
ceived instructions from corporate customers to pay
out or collect funds from customers who elected to
participate in the program. Generally, under the pilot,
the instructions were for the collection of insurance
payments and for income payments. The customers
deposited these instructions on magnetic tape with their
local Federal Reserve clearing and settlement facility,
and the instructions were transmitted to the receiving
facility using the Federal Reserve Communications
System. The receiving Federal Reserve ACH facility
processed and delivered the instructions to the appro
priate depository institutions for debiting and crediting
to the accounts of their customers. Settlement for the
funds transferred was through the reserve accounts of
member banks.
The feasibility and potential benefits of a nationwide
ACH facility has been demonstrated in the Treasury’s
direct deposit program and in the pilot test of interre
gional commercial payments. The Board believes that
the probable long run efficiencies resulting from inter
connection of all operating ACH facilities justify the
Board’s action at this time to provide these services to
the Treasury, member banks and other members of
ACH associations. Moreover, the Board regards its
action to interconnect the current regional ACH facili
ties as a research and development program that will
provide technical data and experience in the operation
of nationwide ACH facilities. The Federal Reserve
System intends to make this information available to
those in the private sector interested in the develop
ment of alternative systems.
3
The Board intends to continue to reevaluate Federal
Reserve participation in the ACH program in order
to assure that its actions remain consistent with its
payment mechanism responsibilities. In this regard, the
Board views its participation in a nationwide ACH
facility providing services to member banks, other de
pository institutions and the U.S. Treasury as an
appropriate activity. The Board has carefully con
sidered the report of the National Commission on Elec
tronic Fund Transfers to the President and Congress
with regard to the Federal Reserve’s role in the devel
opment of ACH systems. The Board’s participation in
a national ACH system for depository institutions was
specifically considered by the Commission and was de
termined to be a proper action for the Federal Reserve
(Final Report — National Commission on Electronic
Fund Transfers (1977), p. 214). In addition, upon
review of the results of the interregional pilot, the Na
tional Automated Clearing House Association, com
prised of 9,000 member and nonmember banks and
1,000 thrift institutions offering ACH retail payment
services to their customers, has requested that the Fed
eral Reserve take action to interconnect local ACH
facilities nationwide in order to provide financial de
pository institutions with access to a basic level of
automated clearing and settlement nationwide, as in
the check system.
The technical procedures and time schedule employed
in the pilot test of interregional clearing and settlement
are expected to serve as the model to be used in pro
viding such service nationwide. The longer-term objec
tive is to provide a clearing and settlement system that
is more efficient than the check system. The Board
anticipates that Reserve Banks will work closely with
the national and the local ACH associations in imple
menting interregional ACH services as it believes such
cooperative efforts are necessary and have been success
ful in the past.
Currently, member banks and members of automated
clearing house associations, including thrift institutions,
may utilize the ACH clearing and settlement facilities
operated by Reserve Banks locally in 31 regions for
commercial payments. The procedures described in
Treasury regulations for the delivery of government
payments nationwide by Reserve Banks are not affected
by today’s announcement.
In a related matter, the Board is continuing to de
velop a regulatory framework for Federal Reserve Bank
ACH clearing and settlement operations that will ac
commodate current ACH arrangements. The proposed
Subpart C to Regulation J has been revised since its
most recent publication for comment in January 1976
(30 Federal Register 32952 and 41 Federal Register
3097) when it was proposed along with Subpart B to
that Regulation. Subpart B was adopted by the Board
in September 1977 (42 Federal Register 31763). The
Board intends to republish the proposed Subpart C in
revised form for public comment in the near future.
To aid the Board in its final consideration of these
plans, interested persons are invited to submit com
ments, views or arguments. Any such material should
be submitted in writing to the Secretary, Board of
Governors of the Federal Reserve System, Washington,
D.C. 20551, to be received not later than February 28,
1978. Such material will be made available for inspec
tion and copying upon request except as provided in
§ 261.6(a) of the Board’s Rules Regarding Availability
of Information.
@FedFRASER