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FD k N EW S RELEASE F E D E R A L D E P O S IT I N S U R A N C E C O R P O R A T I O N Statem ent on E L E C T R O N IC FUNDS T R A N S F E R SYSTEM S Subm itted to the S u b com m ittee on Bank S u p e rv isio n and In su ran ce C om m ittee on Banking and C u rre n cy H ouse o f R e p re s e n ta tiv e s by F ran k W ille , C hairm an F e d e r a l D e p o sit In su ra n ce C o rp o r a tio n N o v e m b e r 27, 1973 FEDERAL DEPOSIT INSURANCE CORPORATION, 550 Seventeenth St. N.W., Washington, D. C. 20429 • 202-389-4221 M r. C h airm an , w ith the S u b c o m m itte e 's p e r m is s io n , I w ould like to file this statem en t o f F D IC 's v ie w s on d e v elop m en ts in the a re a o f e le c t r o n ic funds tr a n s fe r s y s t e m s , o r "E F T S . " E le c t r o n ic fund tr a n s fe r sy s te m s u tiliz e te ch n o lo g y to r e p la c e p a p er ch eck s and m o n e y with e le c t r o n ic in fo rm a tio n . r e a lit y in the c o m m e r c ia l banking w o r ld . E F T S is now a Innovations in the d e v e lo p m e n t and im p lem e n ta tio n o f E F T S have given r is e to a ra p id ly grow in g in d u stry and have led to freq u en t chan ges in the d e sig n and m a n u fa ctu re o f E F T S h a rd w a re . The C o n g r e s s now has so m e fa m ilia r ity with the E F T S is s u e . The p oten tia l im p a ct o f e le c t r o n ic s y ste m s upon v a rio u s s e c t o r s o f the banking com m u n ity w as b r ie f ly d is c u s s e d in the Hunt C o m m is s io n R e p o rt and in the h ea rin g s on NOW a cco u n ts w h ich w e re held b y C o n g re ss e a r lie r this year. T h e re a re th re e m a jo r a r e a s w h ich in v o lv e the a p p lica tio n o f E F T S : autom ated c le a r in g h o u s e s , p o in t - o f - s a le s y s t e m s , and autom ated t e lle r fa c ilit ie s . A u tom ated cle a rin g h o u s e s a re the e le c t r o n ic eq u iva len ts o f the tra d itio n a l, p a p e r -b a s e d c le a rin g h o u s e . The p r im a r y p u rp o se o f the tra d itio n a l cle a rin g h o u se is to p r o c e s s ite m s draw n on ch eck in g a cco u n ts a t p a rticip a tin g b a n k s. the sam e fu n ction . The autom ated cle a rin g h o u se p e r fo r m s e s s e n tia lly W h erea s the tra d itio n a l cle a rin g h o u se handles p a p er - 2 - it e m s , the p a r tic ip a tin g banks in an autom ated s y s te m send d eb it and c r e d it e n tr ie s to the cle a rin g h o u s e v ia m a g n e tic ta p e. The cle a rin g h o u se then a s s im ila t e s th e se m a g n e tic e n trie s and m a k es e le c t r o n ic d ebits and c r e d its to the r e s p e c t iv e b a n k s. One o f the m a jo r s e r v ic e s w h ich w ould n o r m a lly b e p e r fo r m e d b y an autom ated cle a rin g h o u s e is the paym ent o f r e c u r r in g o b lig a tio n s b etw e e n in d iv id u a ls and c o m p a n ie s . E x a m p le s o f su ch r e c u r r in g o b lig a tio n s in clu d e the c r e d itin g o f an e m p lo y e e ’ s p ay d ir e c t ly to his bank a c c o u n t, the paym en t o f d iv id en d s to in v e s t o r s , and the paym ent o f rou tin e h ou seh old b i l l s . T he autom ated cle a r in g h o u s e s w h ich a re o p e ra tio n a l in San F r a n c is c o , C a lifo r n ia , and A tlan ta , G e o r g ia , p e r fo r m th is s e r v ic e fo r th e ir m e m b e r s . T h e se cle a r in g h o u s e s a r e b e in g op era ted b y the F e d e r a l R e s e r v e S y ste m . S im ila r c le a rin g h o u s e s a re planned fo r o th e r m e tr o p o lita n a r e a s . P o in t - o f - s a le sy s te m s in v o lv e the u se o f a bank c a rd b y its c u s to m e r s to m ake p u rch a s e s at r e t a il ou tlets in a given a r e a . T e rm in a ls a r e lo ca te d at the c a s h ie r s .’ sta tion s in the r e t a il ou tlet and a s p e c ia lly e n co d e d ca rd is in s e r te d into the te r m in a l when a p u rch a s e is m a d e . If the te r m in a ls a r e o n -lin e to a ce n tra l sw itch in g and data p r o c e s s in g c e n te r o p e ra te d b y the bank, the am ount o f the p u rch a se w ill be d eb ited a u to m a tica lly to the c u s t o m e r ’ s c r e d it c a rd o r dem and d e p o s it a cco u n t. - 3 - The c u s to m e r w ill su b seq u en tly r e c e iv e a statem ent show ing the ch a rg e s b ille d to his a cco u n t. V a rio u s p ilo t p r o g r a m s u sin g p o in t -o f-s a le te rm in a ls on a lim ite d b a s is have b e e n con d u cted in such p la ce s as C olu m b u s, O h io, and S y o s s e t, New Y o r k . O ther p o in t - o f - s a le sy s te m s a re b e in g planned fo r A tlan ta, G e o r g ia , L o s A n g e le s and San F r a n c is c o , C a lifo r n ia , and C lev ela n d and C olu m b u s, O hio. The th ird a re a in v olv in g the a p p lica tio n o f E F T S te ch n o lo g y is that o f autom ated t e lle r fa c ilit ie s . fa c ilit ie s in v o lv e d . T h e re a re b a s ic a lly two d iffe re n t ty p es o f The f ir s t type is the ca sh d is p e n s e r w h ich p e r fo r m s the sin g le fu n ction o f d isp e n sin g ca sh when the d e p o s ito r in s e r ts a ca rd into the ca sh d isp e n sin g m a ch in e . The secon d is the autom ated tota l t e lle r w h ich can p e r fo r m a p p ro x im a te ly a d o ze n d iffe re n t routin e banking fu n ctio n s. T h e s e fa c ilit ie s can be lo ca te d e ith e r on o r o ff a b a n k 's p r e m is e s and c«tn b e e ith e r on o r o ff-lin e to its co m p u te r. The u se o f autom ated t e lle r fa c ilit ie s b y banks is b e c o m in g w id e sp re a d . One p a r tic u la r m a n ife sta tio n o f this a ctiv ity is the in terch a n g e s y s te m . In an in terch a n g e s y s te m , autom ated t e lle r fa c ilit ie s a re lo ca te d at s e v e r a l d iffe re n t banks and a c u s to m e r o f one bank can use the fa c ilit ie s at any o f the p a rticip a tin g banks. In terch an ge sy s te m s a re p r e s e n tly o p e ra tio n a l in s e v e r a l c it ie s in O h io, in D a lla s and A u stin , T e x a s , - 4 - W ilm in g ton , D e la w a r e , and M in n e a p o lis, M in n esota . It is e x p e c te d that a d d ition a l in terch a n g e s y s te m s in oth er c it ie s w ill b e c o m e o p e ra tio n a l in the n e a r fu tu re. C o n ce iv a b ly , th e re cou ld b e an in terch a n g e p r o g r a m in w h ich so m e o r a ll o f the autom ated fa c ilit ie s w ould be lo ca te d sep a ra te and a p a rt fr o m the p r e m is e s o f any p a r tic u la r bank. M o st o f the is s u e s su rrou n d in g the im p le m e n ta tio n o f E F T S in v olv e b oth le g a l and p o lic y c o n s id e r a tio n s . We do not b e lie v e it p o s s ib le at this tim e to a rticu la te a ll o f the is s u e s w h ich m a y be in v o lv e d sin ce e le c t r o n ic funds t r a n s fe r sy s te m s a re s till in the p r o c e s s o f e v o lu tion . W hile the F e d e r a l D e p o sit In su ra n ce C o rp o r a tio n is m aking e v e r y e ffo r t to k eep a b r e a s t o f d e v e lo p m e n ts in E F T S , c e r ta in le g a l and p o lic y c o n sid e ra tio n s a p p ea r to fa ll ou tsid e the p u rv iew o f the F D IC ’ s r e g u la to r y and s u p e r v is o r y a u th ority . B ra n ch banking is one is s u e in w h ich the FDIC is d ir e c t ly in v o lv e d . A ll in su re d State n o n m e m b e r banks a re r e q u ir e d to obtain the p r io r a p p ro v a l o f the FDIC b e fo r e th ey e s ta b lis h new b r a n c h e s . S e ctio n 3(o) o f the F e d e r a l D e p o sit In su ra n ce A ct d e fin e s the t e r m "b r a n c h " as a p la ce at w h ich d e p o sits a r e r e c e iv e d , ch e c k s paid o r m o n e y lent. The q u estio n a r is e s a s to w h eth er ce rta in autom ated t e lle r fa c ilit ie s and p o in t - o f - s a le s y s te m s con stitu te b ra n ch b a n k s. „ 5 - We a re a ll a w are that the States play a sig n ifica n t r o le in ou r dual banking s y s te m . T h e re have b e e n ce rta in r e c e n t d ev e lo p m e n ts on the State le v e l with re g a rd to autom ated fa c ilit ie s and the b ra n ch banking is s u e w h ich have poten tial s ig n ifica n ce fo r the s u p e rv is io n and re g u la tio n o f such fa c ilit ie s . L e g isla tio n has b e e n in tro d u ce d in o v e r h a lf a d o ze n State le g is la tu r e s w hich w ould p e rm it the in sta lla tio n o f autom ated t e lle r fa c ilit ie s o f f a b a n k 's p r e m is e s w ithout v io la tin g a p p lica b le b ra n ch in g r e s t r ic t io n s . The O ie g o n L e g is la tu re p a s se d su ch a b ill this y e a r and it is re a so n a b le to expect that s im ila r le g is la tio n w ill be en acted in oth er S tates. A n oth er is s u e with w h ich the FDIC is d ir e c t ly co n ce rn e d is the r e la tio n s h ip betw eei} t h ir d -p a r t y paym ent p o w e rs and e le c t r o n ic banking. The F D IC 's regu lation s r e s t r ic tin g th ird i-p arty paym ents in the ca s e o f sa v in g s d e p o sits in c o m m e r c ia l banks c u r r e n tly p ro h ib it savin gs d e p o s ito r s in in su red n o n m e m k r c o m m e r c ia l banks fr o m a rra n g in g fo r the a u tom atic t r a n s fe r o f funds from th e ir savings a cco u n ts to th e ir dem and a cco u n ts . T h is is d e sig n e d tcjp rev en t such d e p o s ito rs fr o m u sin g th eir sa vin gs and dem and a cco u n ts u tandem to cre a te what am ounts to an in t e r e s t-b e a r in g dem and d e p o sit. J o w e v e r, the regulations do not b a r the w ithdraw al o f funds fr o m a savings a cco u n t and the ^redeposit o f th ose funds in a dem and a c c o u n t, re g a rd le ss o f the n u m ber o f tim es the d e p o s ito r c h o o s e s to m ake - su ch w ith d ra w a ls. A r c u a t e w. where a bank allows if«? r la withd , withdraw funds from hi«? ca • 6 - « ^ m no violation of the regulations 40 reqUeSt ^ telephone that the bank T . V & t * & > 'S i - d a in his Thio This same result may well annl.r *. y PPly to the som ew h at a n a log ou s situ ation w h ere a a * M wuere a depositor u«?#*« ~ „ , . a card in a machine to dem and and a cco u n t aem *& - fe ::,h" positors have long been permitted to mail their savin i , savings account passbooks to their bank and have the bank bank withdraw funds from their savings ..... nt-m accounts and redeposit those funds in their demand ..« a .« ..., Much th 6 S 1S£!l° n ° f a Paaibook for this purpose. he Same Pr° « s s is involved in telephone 3 S telephone withdrawals and could presumably be effectuated by usinv a • Ca r ln a m a c ffine p r o g r a m m e d fo r tnat purpose. The nnint Pomt here is simply that electronic modes of hinds transfer reduce both the time aT1d „«• d 6ff0rt re<luired to fbift funds from one account to another, thereh-w j. y ending to blur any real distinctions between savings and demand deposits. In each of the three major EFT'.* m a jo r E F T .n c a t e g o r ie s - - a u to m a te d c le a r in g h o u s e s , p o in t - o f - s a le s y s te m s and y s t e m s , and a u to m a te d t e lle r f a c i l i t i e s C o rp o r a tio n c o n s id e r s its d e c is io n s . the I II I 1 1011 0 be an im p o rta n t e le m e n t in flu en cin g - 7 - The is s u e has a lre a d y b e e n c le a r ly r a is e d in the autom ated c le a r in g hou se a r e a . The C a lifo rn ia A utom ated C le a rin g H ouse A s s o c ia t io n (h e r e in a fte r "C A C H A ") has is s u e d a p o s itio n p ap er w h ich d en ies to sa vin gs and loa n a s s o c ia t io n s d ir e c t a c c e s s to its sy ste m with re g a rd to b oth d eb it and c r e d it e n tr ie s . It is m y un derstanding that both this p a p er and a r e s p o n s e b y the savin gs and loa n in d u stry a re a v a ila b le should the C om m ittee o r its s ta ff w ish to r e v ie w them . The q u estion h e re is w hether the e x c lu s io n o f sa vin gs and loan a s s o c ia tio n s fr o m an autom ated cle a rin g h o u se o p e ra tio n w ould con stitu te an a n tico m p e titiv e o r u n fair tra d e p r a c t ic e . We note that CACH A has not p re se n te d s p e c ific e v id e n ce to support its c la im that sa vin gs and loan p a r tic ip a tio n , if lim ite d to c r e d it e n t r ie s , w ould c o n s t i tute an in eq u ita b le sh a rin g o f the b e n e fits and b u rd en s o f A P D . On the o th e r hand, the FDIC is p re s e n tly unaw are o f any e v id e n ce to su p p ort a c la im b y the sa vin gs and loan a s s o c ia t io n s that th e ir e x c lu s io n fr o m A P D , o r any oth er autom ated cle a rin g h o u se a c tiv ity , w ould cau se them su b stan tial injury, taking into a cco u n t p re s e n t lim ita tio n s on th e ir op era tin g p ow ers. The e x c lu s io n o f savin gs and loan a s s o c ia t io n s and oth er th rift in stitu tion s fr o m d ir e c t p a r tic ip a tio n in an autom ated c le a r in g house o p e ra tio n w ould ce r ta in ly be an a p p ro p ria te su b je ct o f co n c e r n to both C o n g r e s s and the F e d e r a l a g e n cie s ch a rg e d with p r im a r y e n fo rc e m e n t - 8 - o f the F e d e r a l T ra d e C o m m is s io n A c t and the F e d e r a l a n titru st laws# E v en in the a b s e n c e o f a C o n g r e s s io n a l o r a F e d e r a l a g e n cy r e s o lu tio n o f th is q u e s tio n , c e r ta in o th e r d e v e lo p m e n ts m ig h t w e ll d icta te the e n try o f sa v in g s and lo a n a s s o c ia t io n s in to autom ated cle a r in g h o u s e m e m b e r sh ip . F o r e x a m p le , sa v in g s and loan a s s o c ia t io n s and o th e r th rift in stitu tio n s m a y gain expanded th ir d -p a r t y p a y m en t p o w e r s . A ls o , a u tom ated cle a r in g h o u s e s m a y expand th e ir ra n g e o f a c t iv it ie s b ey on d the n o r m a l c le a r in g h o u s e t a c t i o n s # T h e d ir e c t d e p o s it o f p ay roll! c h e c k s and a u tom ated b ill p a y m en ts s e e m t o r e p r e s e n t fo r m s o f su ch expansion# In the a r e a o f au tom ated t e l l e r f a c ilit ie s , a n tico m p e titiv e c o n s id e r a tio n s m a y b e in v o lv e d i f a c o m m e r c ia l b a n k i s d e n ie d a c c e s s t o a n in t e r chan ge sy stem # I f su ch m a ch in e s a are c o n s id e r e d b r a n c h e s , th en p r o h ib it in g a bank f r o m g a in in g a c c e s s to an in te rch a n g e s y s t e m m ig h t p re clu d e that bank f r o m b r a n c h in g in to c e r t a in lo c a t io n s and* thus p la c e i f a t a c o m p e titiv e disadvantage# T he c u r r e n t d e fin itio n <s£ ’’branch!*' in the F e d e r a l Bepoeiti: Baeurance A c t is s u ffic ie n t ly b r o a d to c o v e r m a n y the a c t iv it ie s w M c h m a y b e c a r r i e d on b y autom ated, t e lle r fa c ilitie s ^ A rg u a b ly ,, the F B IC cann ot d iv o r c e i t s e l f fr o m i t s sta tu to ry r e s p o n s ib ilit y to a p p r o v e tike e s t a b lis h m e n t oft s u c h fa c ilit ie s # H o w e v e r, t h is i s n ot too i m p l y th a t the- F B 1X & should! a p p ly tr a d itio n a l b ra n ch in g c r i t e r i a in e v a lu a tin g p r o p o s e d 9 autom ated f a c ilit ie s . N or do we su g g est that the p r o c e d u r e s e m p loy ed b y the FDIC in p r o c e s s in g b ra n ch a p p lica tio n s should be u sed fo r autom ated fa c ilit ie s . T h e se p r o c e d u r e s a re r e la t iv e ly c o m p le x and t im e -c o n s u m in g . T h ey a re g ea red in la rg e p art to the co m p e titiv e a s p e cts o f b ra n ch banking and a re m a in ly d esig n ed to in su re that the FDIC is a p p ris e d o f a ll re le v a n t in fo r m a tio n n e c e s s a r y to r e a c h an in fo r m e d d e c is io n as to the need fo r the p r o p o s e d b ra n ch and its im p a ct on p oten tia l c o m p e tit o r s . W hether o r not the in sta lla tio n o f autom ated fa c ilit ie s at lo ca tio n s o f f the p r e m is e s o f a b a n k 's m ain o r b ra n ch o ffic e s in v o lv e s the sam e co m p e titiv e co n s id e r a tio n s m a y w e ll depend upon the ev olu tion o f such fa c ilit ie s . If banks a re a llow ed to u se autom ated t e lle r fa c ilit ie s on an u n r e s tr ic te d sh arin g o r in terch a n ge b a s is , the co m p e titiv e im p lica tio n s a r is in g fr o m the e sta b lish m e n t o f such fa c ilit ie s m a y be m in im a l o r even n on ex isten t. H o w e v e r, r e s t r ic tio n s on su ch sh arin g a rra n g e m e n ts m a y w e ll lead to sig n ifica n t co m p e titio n betw een in stitu tion s o r grou p s o f in stitu tion s. T h is w ould p re su m a b ly t r ig g e r the F D IC 's b ra n ch a p p ro v a l p r o c e d u r e s and su b sta n tia lly in c r e a s e the tim e and e ffo r t n e c e s s a r y to put a p r o p o s e d autom ated fa c ilit y o r grou p o f fa c ilit ie s into o p e ra tio n . Anticompetitive considerations may also be involved in the opera tion of point-of-sale systems. Assume that a particular area has only one such system comprising most of the major competing banks but is 10 - ca p ab le o f su p p ortin g s e v e r a l co m p e tin g s y s te m s . In such a c a s e , the q u estio n m a y be r a is e d as to w heth er this one s y s te m co n stitu te s an unlaw ful m o n o p o ly . On the oth er hand, it should be kept in m ind that the c o s t o f o p e ra tin g s e v e r a l co m p e tin g p o in t - o f - s a le sy ste m s m a y p rove to be p ro h ib itiv e in som e m a rk e t a r e a s . T he F e d e r a l D e p o sit In su ra n ce C o rp o r a tio n r e c o g n iz e s the need fo r in n ovation s in banking. It is ou r v ie w that the v a rio u s fo r m s o f e le c t r o n ic funds tr a n s fe r a r e lo g ic a l p r o g r e s s io n s f o r the n a tio n 's c o m m e r c ia l banks and w ill b e n e fit bank c u s to m e r s through out the co u n try . Bank r e g u la to r y a g e n c ie s should be w illin g to use th e ir good o ffic e s to e n co u ra g e the new banking s e r v ic e s w h ich te ch n o lo g y m a k es p o s s ib le . T h e se a g e n c ie s should a ls o se e k n e c e s s a r y ch an ges in the law and in th e ir s u p e r v is o r y p o lic ie s that w ill e n co u ra g e banks th e m s e lv e s to m ov e fo rw a rd in th is a r e a . It is ou r op in ion that C o n g re s s and the bank r e g u la to r y a g e n cie s should e n co u ra g e the d e v e lo p m e n t o f E F T S a lo n g lin e s that w ould m a x im iz e com peti tio n and m in im iz e any p o te n tia lly u n fa ir o r r e s t r ic t iv e p r a c t ic e s . Taking into a cco u n t the v a ry in g p o w e rs o f d iffe re n t types o f fin a n cia l in stitu tion s, we w ould fa v o r m a x im u m p a r tic ip a tio n in fe d e r a lly - a s s is t e d E F T S fa c ilit ie s « b y a ll d e p o s ito r y in stitu tio n s.
@FedFRASER