[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]
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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.
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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.
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\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.
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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
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\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).
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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
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\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.
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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.
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\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.
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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.
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\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.
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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.
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\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.
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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.
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\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.
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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