[Federal Register Volume 64, Number 98 (Friday, May 21, 1999)]
[Notices]
[Pages 27793-27796]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-12895]


-----------------------------------------------------------------------

FEDERAL RESERVE SYSTEM

[Docket No. R-1037]


Modifying Federal Reserve ACH Operations and Pricing Practices 
Relative to Private-Sector ACH Operators

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice; request for comments.

-----------------------------------------------------------------------

SUMMARY: The Board requests comment on the benefits and drawbacks of 
modifying the Federal Reserve Banks' pricing practices and deposit 
deadlines for ACH transactions they exchange with private-sector ACH 
operators. These modifications may have implications for competition in 
the provision of ACH services, for the efficiency of the ACH system, 
and for long-term ACH volume growth.

DATES: Comments must be submitted on or before August 6, 1999.

ADDRESSES: Comments should refer to Docket No. R-1037 and may be mailed 
to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, D.C. 20551. Comments may also be delivered to the Board's 
mail room between 8:45 a.m. and 5:15 p.m. on weekdays, and to the 
security control room at all other times. The mail room and the 
security control rooms are accessible from the courtyard entrance on 
20th Street between Constitution Avenue and C Street, N.W. Comments 
will be available for inspection and copying by members of the public 
in the Freedom of Information Office, Room MP-500, between 9:00 a.m. 
and 5:00 p.m. weekdays, except as provided in Section 261.8 of the 
Board's Rules Regarding Availability of Information.

FOR FURTHER INFORMATION CONTACT: Jack K. Walton II, Manager (202/452-
2660); Michele Braun, Project Leader (202/452-2819); or Jeffrey S. H. 
Yeganeh, Senior Financial Services Analyst (202/728-5801); for the 
hearing impaired only, contact Diane Jenkins, Telecommunication Device 
for the Deaf (TDD) (202/452-3544).

SUPPLEMENTARY INFORMATION:

I. Background

    The Federal Reserve Banks are collectively the largest ACH 
operator, processing more than 80 percent of commercial interbank ACH 
transactions as well as all ACH transactions initiated by the Federal 
government. Private-sector ACH operators (PSOs) process the remaining 
transactions and typically provide services, including processing and 
settling ACH transactions, similar to those offered by the Reserve 
Banks.1 PSOs also use the Reserve Banks' ACH

[[Page 27794]]

services for processing transactions in which either the originating 
depository financial institution (ODFI) or receiving depository 
financial institution (RDFI) is not their customer.
---------------------------------------------------------------------------

    \1\ The National Automated Clearing House Association is 
currently considering modifications to its definition of an ACH 
operator. For the purposes of this notice, a PSO is considered to be 
any entity that provides ACH services similar to those of the 
Reserve Banks. Currently, Electronic Payments Network (formerly, New 
York Automated Clearing House), Visa, and American Clearing House 
are considered, within the industry, to be private-sector operators.
---------------------------------------------------------------------------

    The Reserve Banks' relatively large market share may be attributed, 
in part, to their involvement in creating a nationwide ACH network, in 
the early 1970s, for exchanging transactions between all depository 
institutions and to substantial scale and scope economies in processing 
ACH transactions.2 Some industry representatives, however, 
believe that the Reserve Banks' price and service level policies have, 
at least in part, contributed to the Reserve Banks' dominant ACH market 
share by impeding competition and threatening the private-sector ACH 
operators' long-term viability. In particular, the PSOs, the National 
Automated Clearing House Association (NACHA), and the Financial 
Services Roundtable (formerly, the Bankers Roundtable) maintain that 
the Reserve Banks' policies, which treat PSOs as the agents of the ODFI 
or RDFI, have created barriers to open and vigorous competition among 
ACH operators.3 Specifically, the PSOs maintain that the 
Reserve Banks' price structure and deposit deadlines do not permit the 
PSOs to compete effectively in providing ACH services to depository 
institutions.4
---------------------------------------------------------------------------

    \2\ Other factors may include (1) the Reserve Banks' role as 
processors of all federal government ACH payments, (2) insufficient 
total ACH volume during the early years of service to viably support 
multiple national ACH operators, (3) the Reserve Banks' subsidy of 
their ACH service until the mid-1980s, (4) the generally high 
quality of the Reserve Banks' ACH service, and (5) the previous lack 
of an efficient Reserve Bank net settlement service for private-
sector interdistrict clearing arrangements involving a large number 
of settling participants.
    \3\ Vision 2000 Task Force Recommendations, HA, 1997;  Role of 
the Federal Reserve and the Banking Industry in the Retail 
Electronic Payments Systems of the Future,  Bankers Roundtable, 
April 1998.
    \4\ The PSOs, other private-sector clearing organizations, and 
industry trade groups had also indicated that the design of the 
Reserve Banks' net settlement services created an additional barrier 
to private-sector competition with the Reserve Banks. The Board 
believes that the Reserve Banks' new enhanced net settlement 
service, which was introduced in March 1999, addresses the 
limitations inherent in their net settlement services and should 
provide an effective mechanism for the settlement of private-sector 
clearing arrangements, including large interdistrict settlement 
arrangements (63 FR 60000, November 6, 1998).
---------------------------------------------------------------------------

    The Federal Reserve Board historically has stressed the benefits of 
competition in the provision of payment services. In a 1990 white paper 
on the Federal Reserve in the payments system, the Board stated that 
``the role of the Federal Reserve in providing payments services is to 
promote the integrity and efficiency of the payments mechanism and to 
ensure the provision of payment services to all depository institutions 
on an equitable basis, and to do so in an atmosphere of competitive 
fairness.'' 5 In addition, the Board's standards for priced 
services activities note that ``Federal Reserve actions are implemented 
in a manner that ensures fairness to other providers of payment 
services.'' 6
---------------------------------------------------------------------------

    \5\ The Federal Reserve in the Payments System, Federal Reserve 
Regulatory Service 7-139.
    \6\ Standards Related to Priced-Services Activities of the 
Federal Reserve Banks, Federal Reserve Regulatory Service 7-136.
---------------------------------------------------------------------------

II. Current Federal Reserve Practices

    The Reserve Banks have generally treated PSOs similar to third-
party processors, that is, as agents of the depository institutions for 
which they send or receive items.7 Further, the Reserve 
Banks make little distinction between PSOs and third-party processors 
in processing ACH transactions. As a result, the Reserve Banks' pricing 
of ACH services has not differentiated between PSOs, third-party 
processors, and depository institutions.
---------------------------------------------------------------------------

    \7\ The exception to this practice was the arrangement between 
the Federal Reserve Bank of New York and Electronic Payments Network 
(EPN) from 1975 through 1996. During this period, the New York 
Reserve Bank did not provide commercial ACH services and EPN 
processed almost all commercial items for Second District depository 
institutions.
---------------------------------------------------------------------------

    The Reserve Banks offer depository institutions ACH services under 
terms established in the Reserve Banks' ACH operating circular, which 
is a contractual arrangement, and charge fees for ACH services based on 
published fee schedules. For each ACH transaction that they process, 
the Reserve Banks consider both the ODFI and RDFI to be their customers 
and charge each of them a per-item fee. Further, the Reserve Banks 
charge a per-file fee for each ACH file they receive.8 The 
Reserve Banks also assess monthly account servicing fees to each 
institution whose ACH transactions they process. In addition to ACH 
service fees, the Reserve Banks assess electronic connection fees based 
on the type of connection an institution maintains for sending and 
receiving ACH transactions as well as other transactions or 
information. The Reserve Banks use their reserve account posting 
capability to automatically debit the accounts designated by each ODFI 
and RDFI, either their own or those of correspondents, for the purpose 
of settling ACH transactions and fees.
---------------------------------------------------------------------------

    \8\ The sending point for an ACH file is assessed a per-file 
fee. The sending point could be an ODFI that sends its file directly 
to the Reserve Banks, or a third-party processor or PSO that is 
acting as agent for the ODFIs whose transactions are in the file.
---------------------------------------------------------------------------

    On the other hand, PSOs do not have the similar contractual 
arrangements to charge ODFIs or RDFIs that are not their customers. 
That is, PSOs are not able to charge an RDFI per-item fees for 
transactions they transmit through the Reserve Banks nor are PSOs able 
to charge an ODFI per-item fees for transactions they receive from the 
Reserve Banks. Further, the Reserve Banks do not pay file fees for 
files provided to the PSOs.

III. Request for Comment

A. Reserve Bank ACH Customers

    PSOs maintain that, to the extent that depository institutions send 
or receive their ACH transactions through a PSO, the institutions are 
PSO customers and not Reserve Bank customers. The Federal Reserve's 
authority to provide payment services, however, is limited by law to 
services provided to depository institutions.9 Further, many 
depository institutions send transactions directly to and receive 
transactions directly from both the Reserve Banks and PSOs. Thus, 
Reserve Banks consider all depository institutions designated as the 
ODFI or RDFI in ACH transactions they process to be Reserve Bank 
customers, and the PSOs involved in the transactions to be agents of 
the ODFI or RDFI. Given the limitations on the types of entities that 
are eligible to receive Reserve Bank payment services, the Board 
requests comment on how the ACH service might be structured to address 
the differences in the way that the Reserve Banks' and PSOs' customer 
bases are defined. Specifically, the Board is interested in commenters' 
views on whether the Reserve Banks should continue to consider the ODFI 
and RDFI for ACH transactions they process to be their customers, and 
charge them accordingly, even though the institution sent the 
transactions through or received the transactions from a PSO.
---------------------------------------------------------------------------

    \9\ A Reserve Bank may also provide services to a limited set of 
other institutions, such as state member banks that are not defined 
as depository institutions and other entities if the Reserve Bank is 
directed to do so as fiscal agent of the United States.
---------------------------------------------------------------------------

B. Price Structure

    The PSOs maintain that modifications to the Reserve Banks' price 
structure would permit them to compete more effectively in providing 
ACH services to depository institutions. The Monetary Control Act (MCA) 
and the Board's pricing principles require that fees for the ACH 
service be set so that revenues

[[Page 27795]]

match costs. The Reserve Banks set their fees to meet these 
requirements. Thus, any modifications that reduce the revenues or 
increase the costs of the ACH service would have to be offset by 
commensurate increases in revenues elsewhere in the ACH service.
    The Board requests comment on whether the Reserve Banks should 
charge lower fees for ACH transactions that are also processed by a PSO 
than they do for ACH transactions in which the Reserve Banks are the 
only ACH operator, and if so, the basis that should be used to charge 
the different fees.10 With the possible exception of 
customer service costs, the Reserve Banks' costs for handling ACH 
transactions that are also processed by a PSO do not currently differ 
from their costs for handling other ACH transactions. Thus, there may 
be little cost justification for the Reserve Banks to offer lower fees 
to PSOs, unless the Reserve Banks offered different ACH service levels 
for transactions also involving a PSO. Different service levels might 
eliminate some of the processes that the Reserve Banks currently 
perform to process ACH transactions transmitted through PSOs, which in 
turn could provide a justification for lower fees.
---------------------------------------------------------------------------

    \10\ Some ACH transactions processed by the Reserve Banks 
involve two PSOs--a sending PSO and a receiving PSO. Other ACH 
transactions involving two PSOs are settled through the PAX 
(Private-Sector ACH Exchange) network without Reserve Bank 
involvement as ACH operator.
---------------------------------------------------------------------------

    In addition, the Board requests comment on whether the Reserve 
Banks should pay transaction fees to PSOs that send files to the 
Federal Reserve and transaction and file fees to PSOs that receive 
files from the Federal Reserve. A PSO's costs for handling ACH 
transactions that are also processed by the Reserve Banks likely differ 
from the costs for handling other ACH transactions only with respect to 
costs related to customer service and settlement. The Board is 
interested in commenters' views on what services PSOs provide that 
would justify the payment of fees to PSOs, on whether Reserve Banks 
should pay fees to PSOs, and on whether, and how, market discipline may 
constrain the fees charged by PSOs.
    The Reserve Banks assess an ACH monthly account servicing fee for 
each routing number that a depository institution elects to have 
included in the FedACH customer directory. The Reserve Banks must 
maintain routing numbers for depository institutions served by PSOs to 
provide processing, routing, accounting, and settlement services for 
ACH transactions exchanged between PSO and Reserve Bank customers, and 
charges this fee to recover associated costs. NACHA and the PSOs 
believe that it is inappropriate for the Reserve Banks to assess 
monthly account servicing fees to ODFIs and RDFIs that do not send 
transactions directly to or receive transactions directly from the 
Reserve Banks. The PSOs maintain that the imposition of this fee on 
their customers allows the Reserve Banks to establish lower transaction 
fees and competitively disadvantages the PSOs. The Board requests 
comment on whether the Reserve Banks should continue to assess this fee 
to customers that use PSOs to send transactions to and receive 
transactions from the Reserve Banks and, if not, the rationale for 
eliminating the fee for the PSOs' customers.
    Any of the changes to the ACH system's price structure discussed 
above could lead to a reduction in Reserve Bank net revenue either 
through reductions in Reserve Bank fees or increases in Reserve Bank 
costs. To fulfill the requirements of the MCA and the Board's pricing 
principles, however, any reduction in ACH net revenues would have to be 
recouped elsewhere in the ACH service. Thus, it is likely that fees 
assessed to some Reserve Bank customers might decline while fees 
assessed to other Reserve Bank customers might increase.

C. Deposit Deadlines and Processing Schedule

    The Board requests comment on the benefits and drawbacks of the 
Reserve Banks establishing different deposit and delivery deadlines for 
PSOs and depository institutions. The PSOs maintain that the Reserve 
Banks' deposit and delivery deadlines place them at a competitive 
disadvantage. To meet Reserve Bank deposit deadlines, PSOs must 
establish earlier deposit deadlines and later delivery schedules for 
their customers than those offered by the Reserve Banks to their 
customers. For example, the Reserve Banks have established a 3:00 a.m. 
eastern time deadline for the deposit of ACH transactions for all 
depositors, and make those ACH transactions available to the RDFI or 
its agent (including a PSO) by 6:00 a.m. eastern time. If the Reserve 
Banks were to offer different deposit and delivery deadlines to PSOs 
and depository institutions, PSOs would be able to establish deadlines 
for their customers that would be equivalent to those offered by the 
Reserve Banks. If the deadlines were changed, however, the Reserve 
Banks either would have to move the depository institution deposit 
deadline to earlier in the evening or reduce the time they have to 
process ACH files. In either case, the level of service offered to 
depository institutions that deal with the Reserve Banks directly may 
be reduced.

D. Correspondent Banks and Third-party Processors

    If the Reserve Banks were to modify their price structure or 
deadlines to treat transactions also processed by PSOs differently, the 
Board requests comment on whether this treatment should be limited to 
transactions processed by PSOs or expanded to encompass other ACH 
transactions, such as those sent or received by correspondent banks or 
third-party processors. The Board is interested in commenters' views on 
the extent to which the arguments to modify Reserve Bank practices 
regarding PSOs also apply to other entities that act as sending and 
receiving points for multiple institutions. The Board requests comment 
on how the Reserve Banks should determine the entities that qualify for 
treatment as PSOs if the Reserve Banks were to modify the terms of 
their ACH services to treat transactions involving PSOs (but not 
correspondent banks and third-party processors) differently.

E. Other Implications

    Finally, the Board requests comment on the implications on 
competition, the efficiency of the ACH system, and on overall ACH 
volume growth should the Reserve Banks modify their price structure or 
deadlines to treat transactions processed by PSOs differently than 
those received from or sent to other parties. One of the Reserve Banks' 
primary objectives is to foster competition, improve the efficiency of 
the payments mechanism, and lower the cost of these services to society 
at large, while maintaining the integrity and reliability of the 
payments mechanism and providing an adequate level of service 
nationwide. To the extent that commenters are suggesting modifications 
to the Reserve Banks' ACH service, the Board requests that they 
indicate whether and how those modifications are likely to affect 
competition in the provision of ACH services, the efficiency of the ACH 
system, and the growth of the ACH system.

IV. Summary of Comments Requested

    To assist commenters in the preparation of their responses to this 
notice, a summary of the questions on which the Board is requesting 
comment follows:

[[Page 27796]]

A. Reserve Bank ACH Customers

    1. Given the limitations on the types of entities that are eligible 
to receive Reserve Bank payment services, how should the ACH service be 
structured to address the differences in the way that the Reserve 
Banks' and PSOs' customer bases are defined?
    2. Should the Reserve Banks continue to consider the ODFI and RDFI 
for ACH transactions they process to be their customers, and charge 
them accordingly, even though the institution sent the transactions 
through or received the transactions from a PSO? If not, why not?

B. Price Structure

    1. Should the Reserve Banks charge lower fees for ACH transactions 
that are also processed by a PSO than they do for ACH transactions in 
which the Reserve Banks are the only ACH operator? If so, on what basis 
should the different fees be set? For example, should the Reserve Banks 
offer different ACH service levels for transactions also involving a 
PSO?
    2. Should the Reserve Banks pay transaction fees to PSOs that send 
files to the Federal Reserve and transaction and file fees to PSOs that 
receive files from the Federal Reserve? What services do the PSOs 
provide to Reserve Banks that would justify the payment of fees to 
PSOs? Would market discipline constrain the fees charged by PSOs to 
Reserve Banks? If so, how?
    3. Should the Reserve Banks continue to assess the ACH account 
servicing fee to customers that exclusively use PSOs to send 
transactions to and receive transactions from the Reserve Banks? If 
not, what would be the rationale for eliminating the fee for the PSOs' 
customers?

C. Deposit Deadlines and Processing Schedule

    1. What are the benefits and drawbacks of the Reserve Banks 
establishing different deposit and delivery deadlines for PSOs and 
depository institutions?

D. Correspondent Banks and Third-party Processors

    1. If the Reserve Banks were to modify their price structure or 
deadlines to treat transactions also processed by PSOs differently, 
should this treatment be limited to transactions processed by PSOs or 
expanded to other ACH transactions, such as those sent or received by 
correspondent banks or third-party processors? Why or why not? Do the 
arguments to modify Reserve Bank practices regarding PSOs also apply to 
other entities that act as sending and receiving points for multiple 
institutions? Why or why not?
    2. How should the Reserve Banks determine the entities that qualify 
for treatment as PSOs if the Reserve Banks were to modify the terms of 
their ACH services to treat transactions involving PSOs (but not 
correspondent banks and third-party processors) differently?

E. Other Implications

    1. What are the implications on competition, the efficiency of the 
ACH system, and overall ACH volume growth if the Reserve Banks were to 
modify their price structure or deadlines to treat transactions 
processed by PSOs differently than those received from or sent to other 
parties?
    2. To the extent that you are suggesting modifications to the 
Reserve Banks' ACH service, please indicate whether and how those 
modifications are likely to affect competition in the provision of ACH 
services, the efficiency of the ACH system, and the growth of the ACH 
system.

    By order of the Board of Governors of the Federal Reserve 
System, May 17, 1999.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 99-12895 Filed 5-20-99; 8:45 am]
BILLING CODE 6210-01-P