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Thursday, December 2, 1976
1 P.M., C.S.T. (2 P.M., E.S.T.)


Consultant, Board of Governors
of the
Federal Reserve System
Member, National Commission
Electronic Fund Transfers

At a Conference
"EFTS Implementation '77"
sponsored by the
American Institute of Industrial Engineers
Computer and Information Systems Division
and Chicago Chapter
Management Education Corporation
Chicago, Illinois
December 1-3, 1976


The saying that the 11. . .world will beat a path to the door
of the man who builds a better mousetrap. . .1 is a part of our folk­
lore of superficial observations.

Apocryphal at best, the implication

of this old saw is that innovation is self-selling and that innovation
and acceptance of change by consumers proceed pari passu.
innovators know better.


The record of innovation in our time, and

there has been much, is a catalogue of hardships and disappointments.
It portrays the difficulties of reaching potential customers, of dis­
placing established products or services, of coping with vested interests
that have been built up around the "old ways1 and of achieving a profit­
able scale of operation.

Without skillful promotion and costly selling

programs, few innovations escape the laboratory and many that do have
incredibly long periods of infancy.
We are concerned today with innovation in the spending,
receiving and storing of money.

Looking at the unchanging nature of

money itself— whether the sovereign's coin and currency or the banker's
checks and drafts— we should not be surprised that adaptations of
electronic technology to its use have been so slow in coming.


example, the public has been exposed to no real change in coinage for
a century or more other than a shift from precious metals to metallic
compounds, a non-technological evolution growing out of economic neces­

Similarly, present-day currency is like that of 1862 except for

a change in bill size, the discontinuance of very large denominations, and
the periodic death or resurrection of the two-dollar bill.

No significant


denominational change in currency or coin has occurred as the dollar's
value has eroded over the past century.

No differentiation in paper

currency color or size by denomination has been made to help transactors
avoid errors.
Bankers1 money is even more innovation resistant.
celebrated its bicentennial-plus this year too.

The check

It is still a two-

sided instrument of varied size, difficult to store, often cluttered
with house advertising and undecipherable bank endorsements.

It is of

a design totally unrelated to present-day transaction technology.


grafting of the MICR onto the check is the only development which has
saved it from extinction.

Today, it is a basically obsolete instrument

that could not survive outside of a sheltered environment.
Thus, innovation in our time of the money which people per­
ceive and use in their daily transactions has been virtually non­

But innovation in the infrastructure of money handling by

banks is an entirely different matter.

Though the check maintains its

"untouchable1 status as evidence of customer action, record-keeping for
bank money— customer credits, debits and balances--has been almost en­
tirely converted to electronic technology.

The check is not quite

vestigial yet but there is talk about truncating its movement which
would be a significant step in that direction.
There are several reasons why money and money use is innovation

Some have anthropological roots going back to primitive

moneys which were treasure often with mystical properties.


money, exept for pennies, has little or no intrinsic value; most of

our money is in the form of deposits which cannot be seen or fondled.
But the manifestations of human behavior evoked by money as treasure,
such as secretiveness and miserliness, are still with us.

As time

goes on, the idea that money is treasure or has intrinsic value will
die out and will be replaced by the concept of money as a flow of pur­
chasing power used to buy goods and services and to acquire earning
assets, the real treasure of our time.
Since innovators are too impatient to even try to adjust to
the pace of anthropology, I must turn your attention to something you
can do, and some of you are doing, to accelerate the acceptance of your
products by inducing consumers as money users to displace checks with
electronic transfers.
Our check system today handles roughly 100 million payments
every business day among 100 million deposit accounts.

The system is

not nearly as cost- or convenience-effective as a modern electronic
transfer system.

Because cost-effectiveness of electronic transfer

requires transactions in volume, the conversion from checks
must be relatively rapid.

To accomplish this, successor electronic

systems must be designed to handle the most pervasive and repetitive
types of present-day transactions.
These are predominantly of two types, one, payments flowing
from businesses and governments to consumers and the other a reverse
flow of payments from consumers to businesses.

Businesses and govern­

ments as payors make periodic income payments for salaries, wages,


commissions, interest, dividends, annuities, social security, welfare,
retirement and the like.

Nearly all of these transactions are initiated

in volume from a very small percentage of the total number of demand
deposit accounts, probably no more than 3-5 per cent.

They are destined

for consumer accounts in banks, savings and loan associations, mutual
savings banks and credit unions.
The payments by consumers for the purchase of goods and
services involve transfers with very different characteristics.


are originated one at a time from literally millions of vendors1 shops,
they involve debits (charges) to the great preponderance of demand
deposit accounts at commercial banks— 95 to 97 per cent--and they move
funds to a comparatively small number of accounts.
EFT technology has been directed at serving these two major
payment flows.

In the vernacular of electronic transfer, ACR (the auto­

mated clearing house) is the essential feature of the system for hand­
ling payments initiated in large volumes, and POS (point of sale termi­
nal) is the essential feature of the system for handling payments for
individual purchases of goods and services.
The ACH is analogous to a traditional banking clearing house
in that it represents a system for the interbank clearing of debits or

The main difference between automated and conventional clear­

ing houses is that the debit and credit items in an ACH exist in elec­
tronic form instead of paper.

The fact that some items may be con­

verted to paper form in order to effect delivery is a purely transitory


feature in the evolution from paper to electronics.

A C H fs are espe­

cially suited for handling large volumes of payments which can be
scheduled in advance, namely: income credits for payrolls, social
security or dividends or debits for insurance premiums, public utility
bills, mortgage payments and the like.
POS systems initiate transfers at check-out counters usually
in conjunction with electronic cash registers.

They may be on-line

terminals or they may accumulate transactions on tape for subsequent
wire or courier delivery to the merchant's bank.

They can be used for

immediate or for a scheduled deferred payment.
Because of their convenience and cost-effectiveness compared
to cash or checks, these two electronic systems have a potential for
significant change in the manner of providing deposit and withdrawal
for certain money services.

As their acceptance grows, major economies

in the operation of conventional facilities now used by commercial banks
and others to supply such services should be forthcoming.
Since money, of necessity, must be universally acceptable to
perform its function, the money services of all banks and other deposi­
tory institutions are, to a degree, interlocked.
accepted everywhere.

Currency as money is

Checks as money are acceptable regardless of the

institution on which drawn if the drawer of the check is judged responsi­

Electronic transfers must enjoy a similar universal acceptance.

We cannot expect the public to differentiate the money of First National
Bank from that of the First State Bank or First Federal.
of this kind is incompatible with the concept of money.


-6Universai acceptance of money is the reason for government
involvement and regulation of the financial institutions offering
money service.

The public is not prepared to entrust its money to

entrepreneurial incentives of a single financial institution or con­
sortia of such institutions.

Nor, so far as I am aware, are there any

institutions or consortia who seek such a responsibility.
The technique for achieving a more cost- and convenienceeffective money system lies in clearly recognizing and differentiating
the public role in money service from that of the entrepreneur.


useful role entrepreneurship might play is to give users of money,
through pricing, the ability to choose the form of payment they employ.
But this is not easily done.

Since by its nature payment involves

several parties— the payor, the payee, their respective banks, and a
clearing facility— costs are dispersed and many are not identified.
It is not even clear who pays for the cost of payment— the payor or the

In general, under the existing check system the party originating

the transaction appears to pay directly or indirectly; i.e., credit transfers
are on the payor, debit transfers on the payee.

The government program

offering electronic crediting of social security, retirement and salaries
is revealing some interesting facts about payment services and costs
including substantial advantages for EFT.
Another role for entrepreneurship is implied in the emergence
of consumerism and growing government concern for consumer interests
in financial practices.

While the issue is controversial, government


action in this area would not have been taken had entrepreneurial com­
petition provided the range of service alternatives that consumers
could obtain by political action*

Granted that consumerism can be

carried too far, particularly when it becomes so encumbered with regu­
latory procedures and administrative cost as to abort its purpose, the
status it enjoys today is a response to real issues and abuses.
The extent to which legislation and regulation will be adopted
to protect the interests of consumers in EFT transactions will depend on
the skill with which technology and entrepreneurial resources are used.
If they enrich consumer money service, the need for public involvement
or regulation will be limited.

If consumer interests are given short

shrift, greater public involvement seems to me inevitable.
There are several examples of consumer concern.
payment is one.

Proof of

Diminished control over bank balances which might re­

sult from uncertainty as to the timing of preauthorized deposits or
withdrawals is another.

Some consumers want to retain existing stop-

payment privileges and most are concerned about acceleration in the
timing of charges to their accounts involving a loss of float.


wonder if errors in their accounts might turn out to be costly to them.
If cancelled checks are phased out most consumers will want the trans­
action record on their bank statement to be of comparable value in
disclosing payees and establishing proof of payment.


Uncertainty regarding these considerations will act as a
constraint on the many potential advantages that EFT offers consumers
unless attention is given to dealing with them.
Let me be more specific.

Consider consumer interest in the

timing of debits to bank accounts for local purchases.

Under present-

day practices checks written on local banks on any given day are
usually charged to consumer accounts on the next business day and
certainly not later than the day after unless the merchant is indif­
ferent as to his funds availability.

A POS terminal has the capacity

to make immediate payment or to defer payment for one or two days or
longer at the option of the merchant.

In fact, some deferral makes

it possible to avoid the cost of an on-line system and accumulate
transactions on tape for day-end delivery to the merchant's bank.
Deferral also makes it possible to conform to present-day timing, i.e.,
next-business-day funds transfer for local transactions, and thus
gives the consumer the same leeway in stopping payment.
Customers accustomed to a check as a receipt can use an
equally valid receipt printed by the POS terminal.

Thus, elimination

of a hard copy sales receipt, while possible under EFT, would not meet
the needs of most consumers relying upon proof of payments such as a
voucher or receipt at the point of sale.

I doubt any system of pay­

ment which does not generate a hard copy consumer record can survive
the volume of disputed transactions that the absence of such a record
would generate.


Consumers will not forego cancelled checks with their bank
statements unless such statements are descriptive and include the names
of payees as well as the dates and amounts of the transactions.
will want preauthorized payees to be identified.


A timely bank state­

ment with an accurate identification or description of transactions is
essential to dealing with the burden of proof in resolving errors.


addition to a tangible record in cases of disputed billing, personnel
error, and system malfunction, descriptive statements are of value to
consumers in personal financial management and for tax purposes.

All of

the foregoing suggests bank statements meeting standards similar to those
imposed on two- and three-party credit cards.

These needs may make EFT

services somewhat more expensive but they seem essential if EFT is to
be acceptable for broad consumer use.
Billing and statement uncertainties or errors will arise and
take other forms under EFT.

Because any system generates errors and,

of necessity, a system for dealing with them, a procedure for detecting
and correcting EFT errors is needed to enable consumers to raise ques­
tions and get prompt and accurate responses and adjustments where

A pattern for such consumer protection exists under the

Fair Credit Billing Act which allows consumers to challenge the accuracy
of their credit bills.
Another aspect of consumer concern has become manifest in
direct deposit of salary, social security and other types of income pay­

Recipients have been uncertain that scheduled deposits have been


credited to their accounts on a given date.

Mail notices of receipt

detract from the efficiency of the system and probably should be replaced
by warranties of receipt unless a notice of non-receipt is given the
To conclude, there is no doubt in my mind that, inherently,
EFT is more convenient, more secure, more private and less costly than
currency or checks.

But in order to attract customers it must not only

have these characteristics, it must be perceived as having them.
To work, EFT needs the rapid build up in volume which goes
with widespread public acceptance; it cannot be cost-effective without
consumer acceptance.

The best approach to the development of EFT,

therefore, is to focus on features which offer the greatest promise
for meeting the needs of consumers.

Those consumer rights and protec­

tions which have been established for other types of financial trans­
actions are a guide to the consumer interests to be safeguarded in
electronic funds transfers.

They must be served one way or another

through technology, entrepreneurship or regulation.