Weekend Settlement: Potential Benefits, Costs, and Legal Issues  
(25-SEP-02, GAO-02-938).					 
                                                                 
The U.S. payment system is a large and complex system of people, 
institutions, rules, and technologies that transfer monetary	 
value and related information. The nation's payment system	 
transfers an estimated $3 trillion dollars each day--nearly one  
third of the U.S. gross domestic product. Currently,		 
settlement--the final step in the transfer of ownership involving
the physical exchange of payment or securities--occurs only	 
during the business week. Some retailers, however, generate	 
approximately half their weekly sales on weekends--when 	 
depository and other financial institutions generally are	 
closed--receiving cash, checks, and electronic payments that are 
not credited to their accounts until at least the next business  
day. Weekend settlement of financial transactions would provide  
small benefits to retailers and consumers, and little, if any,	 
benefit to the economy as a whole. Because payment system actors 
and processes are interdependent, implementing weekend settlement
would require payment service providers that clear and settle	 
retail and wholesale payments to open on weekends, resulting in  
significantly increased operational costs. Although there are no 
direct federal prohibitions against weekend settlement, state	 
laws that are not preempted by federal laws or regulations	 
providing for weekend settlement could interfere with development
of a uniform, national 7 day settlement system. 		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-938 					        
    ACCNO:   A05183						        
  TITLE:     Weekend Settlement: Potential Benefits, Costs, and Legal 
Issues								 
     DATE:   09/25/2002 
  SUBJECT:   Bank deposits					 
	     Lending institutions				 
	     Interest						 
	     Fedwire						 

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GAO-02-938

Report to the Chairman, Subcommittee on Financial Institutions and
Consumer Credit, Committee on Financial Services, House of Representatives

United States General Accounting Office

GAO

September 2002 WEEKEND SETTLEMENT

Potential Benefits, Costs, and Legal Issues

GAO- 02- 938

Page i GAO- 02- 938 Weekend Settlement Letter 1

Results in Brief 2 Background 5 Settlement of Financial Transactions on
Weekends Would Provide

Small Benefits 11 Weekend Settlement Would Require Payment Service
Providers to

Open on Weekends and Could Significantly Increase Costs 15 Federal Laws Do
Not Directly Prohibit Weekend Settlement;

However, State Closure Laws Could Impede Development of a Uniform Weekend
Settlement System 20 Agency Comments and Our Evaluation 22

Appendix I Scope and Methodology 23 Determining the Potential Benefits of
Weekend Settlement 23 Determining the Potential Costs and Operational
Issues of

Weekend Settlement 24 Identifying Potential Legal Considerations Raised by
Weekend

Settlement 24

Appendix II Operating Hours of Wholesale Settlement Systems in Selected
Countries 26

Appendix III Weekend Settlement of Financial Transactions Forgone Earnings
Analysis 27

Appendix IV Comments from the Board of Governors of the Federal Reserve
System 31

Appendix V GAO Contacts and Staff Acknowledgments 32 GAO Contacts 32
Acknowledgments 32 Contents

Page ii GAO- 02- 938 Weekend Settlement Appendix VI Related GAO Products

33

Tables

Table 1: Annual Forgone Earnings Based on Grocery Industry Sales of $494
Billion for Year 2000 13 Table 2: Estimated Forgone Earnings Analysis by
Payment

Method 28

Figures

Figure 1: The Clearing and Settling of a Check 7 Figure 2: The Clearing
and Settling of a Credit Card 9 Figure 3: Annual Grocery Sales by Payment
Method (in billions) 12

Page 1 GAO- 02- 938 Weekend Settlement

September 25, 2002 The Honorable Spencer Bachus Chairman, Subcommittee on
Financial

Institutions and Consumer Credit Committee on Financial Services House of
Representatives

Dear Mr. Chairman: The U. S. payment system is a large and complex system
of people, institutions, rules, and technologies that transfer monetary
value and related information. The nation*s payment system transfers an
estimated $3 trillion dollars each day* nearly one third of the U. S.
gross domestic product. Because of the payment system*s potential to
affect overall economic activity, increasing payment system efficiency
remains an ongoing goal for its various participants. You asked us to
examine the potential implications of a recent proposal aimed at
increasing payment system efficiency by instituting weekend settlement of
financial transactions. Currently, settlement* the final step in the
transfer of ownership involving the physical exchange of payment or
securities* occurs only during the business week. Some retailers, however,
generate approximately half of their weekly sales on weekends* when
depository and other financial institutions generally are closed*
receiving cash, checks, and electronic payments that are not credited to
their accounts until at least the next business day. These funds currently
earn no interest for the retailers. The grocery industry is one segment of
the retail sector where this is particularly pronounced. Grocery industry
representatives have suggested that extending settlement services over the
weekend could benefit retailers, the payment system, and the economy as a
whole. As agreed with your staff, we identified the (1) potential benefits
of weekend settlement for retailers, consumers, and the economy as a
whole; (2) potential costs and operational issues for payment service
providers 1 as

1 For purposes of this report, payment service providers include
depository institutions; clearing organizations; payment service areas of
the Federal Reserve; private electronic credit card, debit card, and
automated clearing house (ACH) networks; and investment market dealers of
government securities and money market instruments. ACH refers to an
electronic clearing system in which payment orders are exchanged among
financial institutions, via telecommunications networks, and are handled
by a data processing center.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 02- 938 Weekend Settlement

well as lower- cost alternatives to weekend settlement; and (3) legal
considerations related to instituting weekend settlement.

To identify the potential benefits, costs, and operational issues of
weekend settlement, we interviewed consumer groups, retail businesses, and
payment service providers including banking industry and investment market
representatives, clearing organizations, and private electronic payment
network operators. We also spoke with officials from various components of
the Federal Reserve System (Federal Reserve) involved in the provision of
payment system services and with senior staff from the Department of the
Treasury involved in government securities markets and other senior staff.
We obtained and analyzed data from grocery industry representatives, the
U. S. Census Bureau, and the Federal Reserve to estimate the forgone
interest earnings of the grocery industry that result from the current
settlement schedule. 2 We also obtained information from selected foreign
countries about the operating schedules of their respective settlement
systems. Appendix I more fully describes our scope and methodology,
appendix II depicts international settlement schedules; and appendix III
details our estimation of the grocery industry*s forgone interest
earnings.

Overall, we conducted our work within the context of the current
institutional framework, which is based, in part, on current consumer
preferences in payment instruments and existing technology. However,
future changes in consumer preferences in payment instruments or
technological innovations could alter the relative benefits and costs of
weekend settlement.

Weekend settlement of financial transactions would provide small benefits
to retailers and consumers, and little, if any, benefit to the economy as
a whole. Although retail industry representatives stated that weekend
interest earnings were the main potential benefit for businesses, our
estimate of the forgone interest earnings for the grocery industry, which
generates 53 percent of its sales on weekends, indicated that if weekend
settlement were adopted, investment of grocery industry funds would

2 Although depository institutions are forbidden from paying interest on
commercial demand deposit accounts, see 12 C. F. R. S:217.3 and Part 329
(2002), commercial customers can earn interest on funds that depository
institutions place in overnight, uninsured investment accounts. This
arrangement, known as a sweep account, is discussed later in this report.
Results in Brief

Page 3 GAO- 02- 938 Weekend Settlement

provide small interest earnings to the industry. 3 The potential interest
earnings represented less than 1/ 100 of 1 percent of grocery industry
sales for the year 2000, and they would have virtually no positive impact
on earnings or productivity in the retail sector. If accelerated clearing
4 and settlement of checks were adopted as a result of weekend settlement,
both retailers and consumers could gain faster access to their funds.
Additionally, retailers could gain accelerated availability of credit card
receipts and potentially reduce the amount of cash held in their stores.
However, the benefits would represent transfers of benefit primarily from
consumers or depository institutions to retailers rather than new income,
creating no stimulus to economic growth.

Because payment system actors and processes are interdependent,
implementing weekend settlement would require payment service providers
that clear and settle retail and wholesale payments to open on weekends,
resulting in significantly increased operational costs. The biggest
concern that payment service providers expressed to us was the cost of
additional computer system and staffing resources needed to mitigate the
increased risk of operational failures that weekend settlement would
create. They stated that using computer systems to settle transactions on
weekends would increase the risk of operational failures during the
business week by eliminating weekend downtime currently used for computer
system tests, upgrades, and maintenance. Payment service providers also
would incur costs to hire additional staff for weekend operations. They
estimated that the costs associated with these changes could increase
current operating budgets up to 40 percent. Depository institution
representatives we spoke with said that they would need access over the
weekend to government securities and money markets so that they could
obtain the funds needed to pay retailers* interest earnings. 5 However,
investment industry representatives generally expected that weekend
trading activity in government securities and

3 For purposes of this analysis, weekend sales comprise Friday, Saturday,
and Sunday sales. 4 Clearing is the process of transmitting, reconciling
and in some cases, confirming payment orders or security transfer
instructions before settlement, possibly including the netting of
instructions and the establishment of final positions for settlement.
Netting is an agreed upon offsetting of positions or obligations by
trading partners that can reduce a large number of individual obligations
or positions to a smaller number.

5 We did not include equity market instruments in this report because
payment service providers we spoke with stated that these instruments
generally are not used to make lowrisk, short- term investments for
business customers* cash management purposes.

Page 4 GAO- 02- 938 Weekend Settlement

money markets would be low and therefore result in inefficient and
illiquid markets. Lower- cost alternatives to weekend settlement currently
exist and efforts in other areas are under way to increase payment system
efficiency. With regard to lower- cost alternatives to weekend settlement,
we identified banking services that provide business customers with some
of the advantages of weekend settlement, but do not require payment
service providers to incur costs of weekend operations. For example, some
depository institutions currently provide advanced availability of weekend
deposits for selected large business customers through negotiated changes
to the existing banking relationships. According to payment service
providers, ongoing developments to increase the efficiency of the payment
system include the conversion of traditionally paper- based transactions
into electronic format and the extension of Fedwire*s 6 current settlement
hours to facilitate global business activity.

Although there are no direct federal prohibitions against weekend
settlement, state laws that are not preempted by federal laws or
regulations providing for weekend settlement could interfere with
development of a uniform, national 7 day settlement system. 7 Our review
of federal law found nothing applicable to the payment system that would
prohibit weekend settlement. However, some states have laws that prohibit
banks from conducting business on Sundays. 8 Based on provisions in the
National Bank Act and federal law preemption principles, the Office of the
Comptroller of the Currency (OCC) has concluded that national banks are
not bound by state closure laws. 9 On the other hand, federal regulators
do not regulate the hours of operation for statechartered institutions.
Thus, state closure laws, if not preempted, could impede development of a
uniform weekend settlement system concerning

6 Fedwire is the Federal Reserve*s real- time gross- settlement network
that settles largevalue or wholesale payments and book- entry securities
transactions. 7 Preemption* where a federal law or regulation overrides a
state law* can occur when a federal law and a state law conflict.
Preemption of a state law is rooted in the Constitution*s Supremacy
Clause.

8 See, e. g., Md. Code Ann., Fin. Inst. S: 5- 704 (1998 & 2001 Supp.); Ga.
Code Ann. S: 7- 1- 294 (2001). 9 See OCC Interp. Ltr. No. 706 (Jan. 8,
1996); see also 12 C. F. R. S: 7.3000 (2002).

Page 5 GAO- 02- 938 Weekend Settlement

institutions in those states. 10 Preemption of state closure laws would
not necessarily ensure a uniform weekend payment system, however. Under
the Expedited Funds Availability Act (EFAA), as amended, and the Federal
Reserve*s implementing regulations, deadlines for funds availability and
check returns are based on *business days,* a term defined as any day
other than a Saturday, Sunday, or legal holiday, and *banking

days,* which are defined as business days on which a bank is open to the
public for conducting substantially all of its banking functions. 11 Even
if banks were to conduct weekend settlement operations, a corresponding
change in the definition of a business day would be needed in federal law
and regulations to ensure that all participants in the payment system
would make funds available and return checks within the same time frames.

This report makes no recommendations. We received comments on a draft of
this report from the Board of Governors of the Federal Reserve System in
which they agreed with our findings.

Retail payments are relatively high- volume, low- value payments. Retail
payment methods include cash, checks, debit and credit card, and ACH 12
transactions. While depository institutions provide cash processing
services to retailers and other depository institutions, the Federal
Reserve provides cash processing services only to depository institutions
and the U. S. government. The Federal Reserve and correspondent banks 13
provide

10 In other contexts, federal law governing the payments system preempts
inconsistent state laws. For example, federal law and regulations
governing the availability of deposited funds, apply to virtually all
depository institutions located in the United States and preempt
inconsistent state laws. See 12 U. S. C. 4007; 12 C. F. R. S:S: 229.2( e),
229.20 (2002), respectively. In addition, Congress has authorized the
Board of Governors of the Federal Reserve System to regulate any aspect of
the payments system, including the receipt, payment, and collection of
checks. See section 609( c)( 1) of the Expedited Funds Availability Act
(EFAA), 12 U. S. C. S: 4008( c)( 1) (2000).

11 12 U. S. C. S: 4001( 3) (2000); see also 12 C. F. R. S: 229. 2( f),( g)
(2002). 12 Typical ACH credit payments include salaries, consumer and
corporate bill payments, interest and dividends, and Social Security; ACH
debit payments include mortgage payments, insurance payments, and check
payments that have been converted into electronic payments at the point-
of- sale. FedACH is the Federal Reserve*s centralized application software
used to process ACH transactions.

13 A correspondent bank is a depositary institution that* by arrangement*
holds the deposits of another depository institution and provides payments
and other services for that depository institution. Background

Page 6 GAO- 02- 938 Weekend Settlement

check collection and settlement services. The Federal Reserve and private
electronic network operators provide clearance and settlement services for
ACH transactions. Private electronic network operators also provide
clearance and settlement services for debit card, credit card, and
automated teller machine (ATM) transactions.

For consumers and retailers, cash transactions are settled
instantaneously. However, checks require a more complex settlement process
and more time to settle. Depository institutions have several alternative
methods for clearing and settling checks. 14 Figure 1 illustrates an
example of how a check is settled through direct presentment* when
depositary banks present checks directly to the paying bank. In practice,
local checks generally settle in 1 business day and nonlocal checks
generally settle in 1 to 2 business days. Currently, checks are settled on
business days, which do not include weekends, resulting in a delay in the
settlement of those checks deposited during the latter part of the week.

14 We discuss these and other aspects of clearance and settlement
processes in the following: U. S. General Accounting Office, Payments,
Clearance, and Settlement: A Guide to the System, Risk, and Issues, GAO/
GGD- 97- 73 (Washington, D. C.: June 20, 1997).

Page 7 GAO- 02- 938 Weekend Settlement

Figure 1: The Clearing and Settling of a Check

Source: GAO analysis of Federal Reserve Bank of New York information.

Page 8 GAO- 02- 938 Weekend Settlement

Credit card and debit card payments also require a complex system to clear
and settle transactions. A credit transaction is initiated when a
customer*s card number is entered into a card reader, followed by the
transaction amount. The data are transmitted to the card- issuing bank.
The card- issuing bank accepts or denies the transaction. If the
transaction is authorized, the customer signs to accept liability for the
transaction. In the case of a debit card, the customer enters a personal
identification number or sign the sales receipt to accept liability for
the transaction. 15 At the end of that day, the retailer submits the
customer*s transactions along with all of the other credit card
transactions to its depository institution (retailer*s bank), which
credits the retailer usually in 1 to 2 business days. The credit card
company is then responsible for creating the net settlement positions that
result in the transfer of funds from the card- issuing bank to the
retailer*s bank. These transfers typically occur by Fedwire funds tranfers
through a correspondent bank. The card- issuing bank would then bill the
customer. When the customer pays the bill, the cycle is complete, as shown
in figure 2. Debit card transactions are authorized and cleared in a
similar fashion to credit cards, except that they settle by debiting
customers* accounts and crediting retailers* accounts on the next business
day. Depository institutions use a variety of channels to settle credit
and debit card transactions, including accounts at a common correspondent,
ACH networks, and Fedwire. Final settlement of ACH transfers processed by
the Federal Reserve occurs through debits and credits to the accounts of
depository institutions on the books of the Federal Reserve. ACH transfers
that are processed only by private- sector ACH operators are net settled
through the Federal Reserve.

15 There are two main types of debit cards* personal identification number
(PIN) based and signature based cards* which clear and settle using
different networks. PIN based debit cards clear through PIN debit
networks, which route the transaction message to the card- issuing bank
(or agent) for approval. At the end of the settlement day, the
transactions are accumulated and totaled by the network, and a net credit
is sent to the retailer*s bank and net debits are sent to the card issuing
institutions. Signature based debit cards generally use credit card
networks for approval, clearance and settlement. If the transaction is
approved by the customer*s bank, the customer signs the receipt, therefore
accepting liability. On a daily basis, credit card companies create net
settlement positions for the retailer*s bank and the card- issuing bank.
The net positions generally are settled by Fedwire funds transfers through
a correspondent bank.

Page 9 GAO- 02- 938 Weekend Settlement

Figure 2: The Clearing and Settling of a Credit Card

Source: GAO analysis of Federal Reserve Bank of New York information.

Page 10 GAO- 02- 938 Weekend Settlement

Float is created because of the time it takes to clear and settle
payments, which affects retailers, consumers, and depository institutions.
Float is generally defined as the lag between the receipt of a check or
other payment and the settlement of that payment. This lag differs
according to the method of payment. There is no float for cash. Checks are
subject to the longest float, primarily due to the need to physically
transport checks.

Federal law and regulations prohibit depository institutions from paying
interest on demand deposits consisting primarily of commercial checking
accounts. 16 Many depository institutions, however, offer *sweep* accounts
to business customers as a mechanism by which these customers obtain
interest earnings on account balances above negotiated account minimums.
17 During the business week, the depository institution transfers, or
*sweeps,* commercial checking account balances above an agreed minimum
into other accounts on which interest might be paid, such as MMDAs, or
into interest- earning nondeposit financial instruments. 18 Depository
institutions typically invest these funds in shortterm, low- risk assets,
such as U. S. Treasury bills and notes, or money market mutual funds,
among others. Depository institutions do not pay interest earnings on
funds deposited on the weekend because they are unable to invest these
funds until the next business day.

16 12 U. S. C. S:461( a) and 12 C. F. R. Parts 217 and 329 (2002). 17
Generally, depository institutions use two types of sweep programs.
Wholesale sweeps, which have been offered to business customers since the
1970s, move checking account balances above a negotiated minimum out of
the non- interest- earning checking account and into other nondeposit
financial instruments that earn interest, such as money market mutual
funds or other financial instruments. Retail sweeps, which first appeared
in 1994, move excess checking account balances out of the checking account
and into another deposit account (typically, a kind of savings deposit
account, known as a money market deposit account (MMDA) on which interest
can be paid. See 12 C. F. R. 204.2( d)( 2).

18 Retail sweep programs generally involve software that creates two
subaccounts, an MMDA subaccount and a transaction subaccount, for each
customer checking account. The subaccount structure typically is
transparent to the customer: the customer cannot make deposits into, or
withdrawals from, MMDA subaccount directly. To depositors, the subaccount
structure appears to remain a single checking account; to the Federal
Reserve, the depository institution*s reservable transaction account
balances have decreased. Funds are then swept out of the MMDA back into
the checking account as needed to cover payments up to six times per
month, in accordance with regulatory limitations on the number of monthly
transfers from MMDAs. See 12 C. F. R. S:S: 217.3, 204.2( b), (d) (2002).

Page 11 GAO- 02- 938 Weekend Settlement

Overall, U. S. settlement schedules are similar to settlement schedules in
most G- 10 countries. 19 In some Asian countries, settlement services are
available for a limited number of hours on Saturdays. Specifically, in
Singapore and Hong Kong settlement occurs Saturday mornings, in addition
to Monday through Friday services. Recently, South Korea ended its
Saturday settlement hours because many commercial banks are closed on
Saturdays. Appendix II further illustrates international payment systems*
operating hours.

Weekend settlement of financial transactions would provide small benefits
for retailers and consumers, and little, if any, benefit for the economy
as a whole. Retail industry representatives identified weekend interest
earnings as the main potential benefit for retailers. However, our
analysis of grocery industry data indicated that the grocery industry
currently forgoes small potential interest income on its weekend sales
relative to the grocery industry*s annual sales or the national economy.
If weekend settlement were adopted, retailers also could realize some
secondary benefits such as reducing the amount of cash held in stores.
However, other secondary benefits such as accelerated settlement represent
benefit transfers primarily from consumers or banks to retailers, creating
no economic stimulus to the economy.

Although retail industry representatives identified weekend interest
earnings as the main benefit for retailers, our analysis suggested that
investing retailers* balances in sweep accounts and other investment
vehicles over the weekend would provide minimal additional earnings to
retailers and have virtually no impact relative to the economy as a whole.
According to grocery industry publications, the industry had sales of $494
billion in year 2000, as seen in figure 3.

19 The G- 10 is made up of 11 major industrialized countries that consult
on general economic and financial matters. The 11 countries are Belgium,
Canada, France, Germany, Italy, Japan, the Netherlands, Sweden,
Switzerland, the United Kingdom, and the United States. Settlement of

Financial Transactions on Weekends Would Provide Small Benefits

Forgone Interest Earnings for the Grocery Industry and Retail Sector Are
Small

Page 12 GAO- 02- 938 Weekend Settlement

Figure 3: Annual Grocery Sales by Payment Method (in billions)

Note: Total sale -- $494 billion. Source: Food Marketing Institute year
2000 data.

Therefore, because depository institutions are unable to invest retailers*
weekend cash deposits until Monday, we estimated, based on grocery
industry data, 20 that the grocery industry forgoes approximately $2.6
million each year in after- tax interest earnings, assuming a 2 percent
interest rate, and $6. 6 million a year, assuming an average 5 percent
interest rate. 21 The corresponding forgone after- tax interest earnings
for check transactions are $2.8 million and $7 million annually, at 2
percent and 5 percent interest rates, respectively. Finally, for credit
and debit cards, the forgone interest earnings are $2.5 million and $6.4
million, at 2 percent and 5 percent interest rates, respectively. Table 1
illustrates the estimates. Appendix III provides details of our estimates.
Applying the same assumptions to the entire retail sector, which had sales
of $3. 4 trillion in the year 2000, we estimated that the annual forgone
after- tax interest earnings for that sector would be $53.9 million at a 2
percent interest rate and $134 million at a 5 percent interest rate.
However, these benefits might be reduced if depository institutions raised
their fees, in a

20 According to grocery industry officials, 33 percent of sales are made
with cash, 35 percent are made with checks, and 32 percent are made with
credit or debit cards and other forms of payment.

21 The forgone interest earnings were estimated by multiplying the
receipts that could not be credited until Monday by short- term interest
rates.

Page 13 GAO- 02- 938 Weekend Settlement

way that passed costs to retailers, to cover the increased costs
associated with weekend operations.

Table 1: Annual Forgone Earnings Based on Grocery Industry Sales of $494
Billion for Year 2000

Dollars in millions

Short- term interest rates Cash Checks Credit /

Debit Total Forgone earnings

as a percent of grocery sales

Forgone earnings at 2 percent $2.6 $2.8 $2.5 $7.9 0.0016% Forgone earnings
at 5 percent $6.6 $7.0 $6.4 $20 0.0040%

Source: GAO analysis of Food Marketing Institute and Federal Reserve data.

Weekend settlement could provide a number of secondary benefits to
retailers and consumers. For example, retailers noted that weekend
settlement would provide secondary benefits, such as reduced amounts of
cash in stores, thereby reducing potential losses due to theft and lower
insurance costs. The accelerated settlement of transactions would also
benefit retailers by lowering accounts receivable balances, as noncash
payments owed to retailers settle faster. 22 Grocery officials stated that
cash represents a large risk for store employees, and therefore, on a
daily basis, grocers tend not to maintain large amounts of cash in stores.
Excess sums generally are sent to depository institutions, usually via
armored car services. Under the current system, depository institutions
are not open to accept retailers* deposits on Saturday and Sunday
evenings; therefore, deposits are generally maintained in store vaults or
in bonded safes at the armored car services* facilities, which is a cost
to retailers. Banking industry representatives stated that retailers
currently must pay to insure large amounts of cash over the weekend.
Finally, accelerated settlement of transactions could also benefit
consumers if they are the recipients of check payments by making funds
available sooner, assuming that the EFAA and the Federal Reserve Board*s
implementing regulations were amended to include weekends in the
definition of *business day.*

22 Accounts receivable are assets created by selling products or services
on credit. Retailers and Consumers

Could Receive Secondary Benefits

Page 14 GAO- 02- 938 Weekend Settlement

The adoption of weekend settlement would transfer float income among
retailers, consumers, and depository institutions rather than create new
earnings. For example, retailers would earn interest income previously
earned by check and debit card users, but no new interest income or wealth
would be created. For credit cards, retailers potentially would obtain
faster funds availability, but because card issuing depository
institutions offer deferred payment to customers, retailers might earn
additional interest income at the expense of depository institutions. For
checks and debit cards, if retailers and consumers both had access to
interest- bearing accounts or services provided by depository
institutions, weekend settlement would move money more quickly out of
customers* accounts and into retail sector accounts. On the other hand,
retail industry representatives also stated that a disadvantage of weekend
settlement would be that checks they had written would clear faster,
thereby reducing interest currently earned on those funds. Faster funds
availability from weekend settlement also could present drawbacks for
consumers. Consumer advocates stated that consumers might face increased
overdrafts if they did not adjust to the accelerated debiting of their
checks. Weekend settlement would negatively affect those people who depend
on check float to avoid account overdrafts. For example, consumers might
write a check on a Friday afternoon for an amount greater than their
account balance, knowing that on the following Monday their paycheck would
be credited to the account and cover the amount of the check.

Further, concerning the economy as a whole, the interest payments that
retailers would receive from weekend settlement reflect transfers within
the economy rather than the creation of income. For example, additional
income that retailers might earn from weekend settlement of checks written
or debit card transactions received from customers would be offset by
corresponding losses of interest by check writers, debit card users, and
depository institutions. Consumers with interest- bearing checking
accounts would lose the interest they would have earned on checks written
on Friday evenings and Saturdays. If checks were drawn on noninterest-
bearing accounts, then depository institutions would lose funds on which
they were not paying interest. Corporate treasurers of retail businesses
noted that although they potentially could accumulate interest earnings if
weekend settlement were adopted and interest- earning accounts were
available, depository institutions might pass along some or all of the
costs of operating on weekends to retailers and consumers in the form of
higher fees, thus lessening the gains to retailers. Depository
institutions stated that to pay interest, they would need to have access
to short- term investment markets on weekends. Our analysis showed that
weekend settlement would be unlikely to provide any stimulus to Weekend
Settlement of

Check, Credit and Debit Card Transactions Would Not Create New Interest
Earnings; Rather, It Would Transfer Float Income

Page 15 GAO- 02- 938 Weekend Settlement

economic growth. Its only impact would be to make funds available on
weekends that would otherwise be available on Monday.

Because payment system actors and processes are interdependent, weekend
settlement would require payment service providers that clear and settle
retail and wholesale payments to open on weekends, resulting in increased
capital and operational costs. The greatest concern that payment service
providers expressed to us was the cost of additional computer system and
staffing resources needed to mitigate the increased risk of operational
failures that weekend settlement would present. Although they could not
provide exact cost figures for the additional resources they would need,
payment service providers stated that costs would be significant and
potentially prohibitive for small depository institutions. According to
payment service providers, these operational costs would exceed any
potential benefits that weekend settlement could create, and likely would
reduce productivity in the payment system. Moreover, they stated that
alternatives to weekend settlement with lower operational costs currently
exist, and that efforts in other areas are under way to increase payment
system efficiency.

Because the payment system consists of interdependent processes and
relationships among payment system actors, weekend settlement would
require many payment service providers to open on weekends. For example,
private and Federal Reserve cash and check processing centers and check
transportation networks would have to be fully operational on weekends so
that cash and check transactions could be cleared. 23 However, banking
industry representatives pointed out that not all depository institutions*
branches would need to open. National and regional clearing organizations
also would need to open so that transactions among depository institutions
could be cleared, netted, and settled. According to depository institution
officials we spoke with, both Federal Reserve and private ACH networks
would have to open on weekends to facilitate settlement of check and debit
card transactions. Similarly, private electronic network providers told us
that Fedwire would need to open on weekends to facilitate final settlement
of credit card transactions. In addition, depository institutions also
stated that once

23 Currently, the Federal Reserve operates limited clearing operations and
uses airfreight forwarding services for check transportation on weekends.
Weekend Settlement

Would Require Payment Service Providers to Open on Weekends and Could
Significantly Increase Costs

Weekend Settlement Would Require Payment System Providers to Open on
Weekends

Page 16 GAO- 02- 938 Weekend Settlement

retailers* transactions are settled and their accounts are credited for
weekend deposits, they would need government securities and money markets
to open on weekends to invest these deposits and pay interest on excess
sweep account balances. Federal Reserve and investment market officials
told us that Fedwire and clearing organizations for investment markets
also would need to open to clear and settle these transactions.

Payment service providers we met with generally viewed weekend downtime
for computer systems as critical to the smooth provision of clearance and
settlement services during the business week. Payment service providers
stated that most computer systems are used to test, upgrade, and maintain
computer- system activities on weekends when production activities are
limited. These ongoing weekend activities reduce the potential for
operational failures during the business week. Business continuity testing
of computer systems remains a high priority for financial markets after
the terrorist attacks of September 11, 2001. These tests generally take
place on weekends and sometimes take more than 1 day to complete.
Depository institution and clearing organization officials also said that
weekend downtime is important for resolving problems that occur when
implementing new software applications or upgrades to existing
applications. Like other payment service providers, Federal Reserve
officials told us that the Federal Reserve uses weekends to maintain and
test its payment service applications and its internal accounting system
that are used to settle payments.

Most payment service providers told us that because tests, upgrades, and
maintenance would have to continue if weekend settlement were adopted,
they would need additional computer hardware and software to
simultaneously perform weekend settlement and regular weekend activities,
thereby increasing capital costs. One private electronic payment network
that moved from a 5 day production schedule to a 7 day production schedule
for transaction processing characterized its costs as substantial. The
network had to purchase additional hardware to double computer system
capacity so that it could maintain complete redundancy in production,
contingency, and testing activities 7 days a week. Representatives for the
network said that their case could be an example of the potential hardware
resources that other payment service providers could face if weekend
settlement were adopted. Officials at a large depository institution and
investment market representatives pointed out that payment service
providers would have to modify each line of relevant software code to
reflect Saturdays and Sundays as valid settlement dates. Eliminating
ComputerSystem

Downtime Would Increase the Risk of System Failures During the Business
Week

Payment Service Providers Would Incur Significant Capital Costs

Page 17 GAO- 02- 938 Weekend Settlement

The depository institution officials said that their retail banking
operations would require code changes for the institution*s 80 software
applications* with estimated costs in the millions of dollars. Clearing
organizations also identified the need for additional software to carry
out settlement on weekends and estimated that software costs would exceed
potential hardware costs.

Additional staff needed to carry out weekend settlement also would
increase operational costs for payment service providers. Some payment
service providers estimated that staffing costs for weekend settlement
could increase current operating budgets by up to 40 percent. For
instance, depository institutions would require additional staff in
departments that currently are not open on weekends, such as staff to
handle check presentments 24 and return checks and staff to manage their
general ledgers and Federal Reserve accounts. Banking industry
representatives noted that small depository institutions that perform
their own clearing and processing activities would need to hire additional
staff to prepare cash and checks for weekend shipment to local Federal
Reserve Banks and branches. This could be particularly costly for small
depository institutions because *back- office* staffs often consist of one
person. Similarly, Federal Reserve officials said that additional staff
would be needed for check processing, ACH, Fedwire, internal accounting,
credit and risk management, and information technology operations, as well
as other support functions. Investment market representatives commented
that the human capital costs of weekend operations would be high because
firms likely would have to pay senior staff at premium rates to work on
weekends.

Investment market representatives said that operating on weekends would
decrease market efficiency and that they generally expected that weekend
markets would be inefficient and illiquid because weekend trading activity
likely would be low. Investment market representatives pointed out that
liquidity in weekend markets would be generated only if there were

24 Presentment of a check occurs when a check is delivered to the bank on
which it is drawn and demand for payment is made. Generally, presentment
requires physical delivery of a check (directly or through the check
collection process) to the bank on which it is drawn. Parties may agree,
however, that delivery of information about the check (such as information
encoded on the bottom of the check, or a copy or image of the check),
rather than delivery of the check itself, constitutes presentment. Human
Capital Needs

Would Increase Operational Costs

Weekend Investment Markets Likely Would Be Inefficient and Illiquid

Page 18 GAO- 02- 938 Weekend Settlement

sufficient numbers of investment firms interested in obtaining retailers*
excess sweep account balances. They noted that investment firms have many
other options for short- term investment beyond government securities and
money market instruments* typical investment vehicles used by depository
institutions for sweep account funds. For these reasons, they noted that
they sometimes recommend closing markets early before holidays, such as
Good Friday, if trading volumes are low, to preserve market efficiency and
create greater liquidity. In general, they did not expect weekend
investment market liquidity to offset the potential operating costs.
Similarly, depository institution officials and clearing organizations
anticipated that weekend settlement would result in the spreading out
current 5- day transaction volume over 7 days of operations, thereby
decreasing system efficiency.

Two proposed variations of 7 day settlement are currently viewed as not
practical and too costly. The first variation involves a 6 day settlement
schedule, where settlement would occur Monday through Saturday. Payment
service providers told us that a 6 day settlement schedule would present
lower operational risk and costs relative to a 7 day settlement schedule,
but currently would be complicated and too expensive. Some payment
providers noted that once technology more generally allows faster computer
processing, 6- day settlement could be possible because it would provide 1
day during which computer system maintenance could be performed. The
second variation relates to selective processing of transactions by
payment method* for example, weekend processing of cash or check
transactions. However, according to banking industry representatives,
processing and settlement by payment method would be impractical because
depository institutions* demand deposit accounting systems, which debit
and credit customer accounts, do not differentiate transactions by payment
methods. Rather, representatives from depository institutions stated that
large batches of transactions are queued for debiting from and crediting
to customer accounts regardless of the payment method associated with the
transaction. Federal Reserve officials also said that selective settlement
also would require the supporting settlement infrastructure to open on
weekends, such as Fedwire funds transfer and securities transfer services.
Therefore, such an approach would not lower operational costs of settling
transactions on weekends.

We identified current banking services that provide business customers
with some of the advantages of weekend settlement but do not require
payment service providers to incur costs of weekend operations. For
Proposed Variations of

Weekend Settlement Are Not Practical

Lower- cost Alternatives Are Currently Available

Page 19 GAO- 02- 938 Weekend Settlement

example, officials at a large depository institution said that one of its
large business customers requested a service whereby, on Mondays, the
depository institution provides backdated interest on funds that the
customer deposits on Mondays, as if the funds had been deposited and
credited to the customer*s account over the weekend. Officials from the
depository institution noted that this service is no different than other
services in that it is provided to the customer for a fee. Banking
industry representatives told us that some depository institutions offer
*fully

analyzed* accounts, whereby they calculate the average daily account
balances 25 of commercial customers and determine daily interest earnings
credit based on those figures. They noted that fully analyzed accounts
allow account fees and charges to be offset by earnings credit based on
the average daily collected account balance. Depository institution
officials and banking industry representatives said that these services
are offered within the context of existing relationships with commercial
customers. They generally viewed these services as alternative methods of
providing weekend interest earnings for business customers that do not
require other payment service providers to be in operation on weekends.

According to Federal Reserve and clearing organization officials, ongoing
efforts to increase payment system efficiency relate to extending
Fedwire*s hours of operation during the business week to correspond with
activity in Asian markets. Although extending Fedwire*s hours of operation
would not provide retailers with weekend interest earnings, it could
increase efficiency in the payment system by allowing firms to consolidate
risk management resources. Payment service providers generally expected
that in the short term, increased efficiency in the payment system would
come from converting traditionally paper- based payment methods into
electronic form. Some payment service providers said that check
truncation* the conversion of a paper check into an electronic equivalent
that is transmitted in place of the original check* would eliminate the
float that transporting checks creates in the check

25 Depository institutions build the cost of maintaining noninterest
bearing required reserves into their calculations. Other Efforts Are Under

Way to Increase Efficiency in the Payment System

Page 20 GAO- 02- 938 Weekend Settlement

collection process. 26 Officials at one clearing organization said that
weekend settlement costs could be lowered if there were an increase in
electronic payment instruments and a corresponding decline in paperbased
payment instruments within the payment system.

Our legal research found no federal law that would specifically prohibit
banks, clearing organizations, or other entities from engaging in weekend
settlement operations. Some states, however, have laws prohibiting banks
from doing business on Sundays or state holidays. 27 OCC has determined
that state bank closure laws do not apply to national banks. 28 National
banks, therefore, would not be prohibited from engaging in weekend
settlement operations. However, in states prohibiting banks from operating
on certain days, state- chartered banks would be precluded from conducting
such operations on those days unless the closure laws were preempted. The
federal financial institution regulators do not specifically regulate the
hours of operation of state- chartered institutions, so state closure laws
generally have not been preempted with respect to such institutions. 29 We
express no opinion regarding the extent to which the Federal Reserve,
pursuant to its authority over the payment system, could preempt state
closure laws in order to provide for weekend settlement

26 The Federal Reserve recently proposed legislation to facilitate check
truncation. Under the Federal Reserve*s proposed Check Truncation Act,
banks could agree, as they can today, to send check images or information
to each other electronically rather than exchange the original checks. The
proposed legislation would create a new instrument, called a *substitute
check,* from an electronic check image that would be the legal equivalent
of the original check, potentially streamlining the check collection and
return process, even in cases in which banks do not have electronic
exchange agreements. The Federal Reserve indicated that the purpose of its
proposed legislation was to foster payment system innovation and enhance
the efficiency of the payment system by reducing some of the legal
impediments to check truncation that exist under current law.

27 See, e. g., Md. Code Ann., Fin. Inst. S: 5- 704 (1998 & 2001 Supp.);
Ga. Code Ann. S: 7- 1- 294 (2001); La. Rev. Stat. Ann. 1 S: 55. D (2002).
28 See OCC Interp. Ltr. No. 706 (Jan. 8, 1996); see also 12 C. F. R. S:
7.3000 (2002).

29 Hours of operation are pertinent to supervisory determinations
regarding community access to an institution*s services, however. Federal
Laws Do Not

Directly Prohibit Weekend Settlement; However, State Closure Laws Could
Impede Development of a Uniform Weekend Settlement System

Page 21 GAO- 02- 938 Weekend Settlement

services. 30 It appears that Congress could choose to preempt such laws
through legislation. Because they have not been preempted, state closure
laws applicable to state banks could interfere with the development of a
uniform national weekend settlements system. Our research indicates,
however, that a relatively small number of states have Sunday closure
laws.

In addition to state closure laws, development of a weekend settlement
system involves other legal considerations. For example, under the EFAA
and the Federal Reserve*s Regulation CC, deposited funds must be made
available and checks must be returned within time periods based on

*business days* and *banking days.* The term *business day* is defined as
a calendar day other than a legal holiday, Saturday, or Sunday; a *banking

day* is a business day on which a bank office conducts substantially all
of its banking operations. 31 Even if banks were to conduct settlement
operations over the weekend, such operations would not necessarily result
in corresponding funds availability and check returns because weekends are
not counted as business days. Moreover, the settlement process could be
complicated by a lack of uniformity and predictability in bank operations
that might exist if banks were to conduct their clearing and settlement
operations using different timetables.

Other legal considerations include the impact of wage and hour laws and
matters of safety and soundness. To the extent bank employees involved in
settlement operations are subject to federal and state wage and hour laws,
institutions would have to ensure that weekend operations did not run
afoul of provisions requiring, among other things, the payment of overtime
for work in excess of 40 hours per week. Concerning safety and soundness
issues, banks would have to ensure that utilizing computer systems and
other resources on weekends would not compromise their ability to maintain
and update financial and security systems.

30 The Expedited Funds Availability Act (12 U. S. C. S: 4001 et seq.)
provides that the Act and regulations prescribed thereunder shall
supersede inconsistent state law, with one exception. (The Act does not
preempt state laws that were in effect on September 1, 1989, and that
provide for shorter availability periods than does the Act.) See 12 U. S.
C. S: 4007 and 12 CFR 229.20 (2002). Congress has charged the Federal
Reserve with responsibility for prescribing regulations to implement the
as well as for regulating any aspect of the payment system in order to
carry out the provisions of the Act 12 U. S. C. S: 4008( a),( c)( 1)
(authorizing Board of Governors, in order to carry out the provisions of
the Act, to regulate any aspect of the payments system, including the
receipt, payment, and collection of checks).

31 12 U. S. C. S: 4001( 3) (2000); 12 CFR S: 229.2( f), (g) (2002).

Page 22 GAO- 02- 938 Weekend Settlement

We received technical comments and corrections on a draft of this report
from Treasury and the Federal Reserve that we incorporated, as
appropriate. In addition, the Federal Reserve provided written comments in
which it agreed that the potential costs of weekend settlement would
outweigh the associated benefits. These comments are reprinted in appendix
IV.

As agreed with your office, we plan no further distribution of this report
until 30 days from its issue date unless you publicly release its contents
sooner. We will then send copies of this report to the Chairman of the
Committee on Financial Services, House of Representatives; the Ranking
Minority Member of the Committee on Financial Services, House of
Representatives; the Ranking Minority Member of the Subcommittee on
Financial Institutions and Consumer Credit, House of Representatives; the
Secretary of the Department of the Treasury; and the Chairman of the Board
of Governors of the Federal Reserve System. We will make copies available
to others on request. In addition, this report is also available on GAO*s
Web site at no charge at http:// www. gao. gov.

Please contact me or Barbara Keller, Assistant Director, at (202) 512-
8678 if you or your staff have any questions concerning this letter.

Sincerely yours, Davi M. D*Agostino Director, Financial Markets and
Community Investment Agency Comments

and Our Evaluation

Appendix I: Scope and Methodology Page 23 GAO- 02- 938 Weekend Settlement

To determine the potential benefits of weekend settlement, we interviewed
and requested data from consumers groups, retail representatives, and
payment service providers. 32 We focused our study on the clearance and
settlement of retail payments made by cash (which requires no clearing and
settles instantaneously), checks, debit, and credit cards. We spoke with
consumer advocacy groups to obtain the consumer perspective, and we
interviewed representatives from industries within the retail sector,
including grocery industry and home improvement industry representatives.
We focused on the grocery industry because the majority of sales take
place on weekends and primarily involve cash, check, and debit card
transactions.

To estimate the forgone interest earnings of the grocery industry, we
obtained studies from third- party sources, some of which were conducted
by industry participants. We have not assessed the quality of the research
methodologies used in these studies. We used calendar year 2000 grocery
industry sales data from the Progressive Grocer (PG), an industry
publication. This was the latest year for which complete information was
available. We also obtained grocery industry sales data from the U. S.
Census Bureau for comparison purposes. We used the results of a payments
study, performed by a large electronic network provider, that tracked the
purchasing behavior of 20, 000 consumers to determine what percentage of
grocery sales are made with cash, check, and debit cards, respectively. We
also used the results of a consumer survey on when consumers shop during
the week, published in the Progressive Grocer 2001 Annual Report and
short- term interest rate data from the Board of Governors of the Federal
Reserve System. Appendix III provides details on our calculation of the
forgone interest earnings.

32 In this report, we refer to depository institutions, clearing
organizations, the payment service areas of the Federal Reserve System
(Federal Reserve), private electronic credit card, debit card, and
automated clearing house (ACH) networks, and government securities dealers
as payment service providers. Appendix I: Scope and Methodology

Determining the Potential Benefits of Weekend Settlement

Estimation of the Forgone Interest Earnings of the Grocery Industry

Appendix I: Scope and Methodology Page 24 GAO- 02- 938 Weekend Settlement

We spoke with payment system providers to gain their perspectives on the
potential costs and operational issues involving weekend settlement. We
interviewed officials from several depository institutions, banking and
bond market industry representatives, clearing organizations, and private
electronic payment network operators. We interviewed officials from
various components of the Federal Reserve involved in the provision of
payment system services including cash and check processing, check
transportation, ACH services, wholesale payments services, and open market
operations. 33 We also spoke with senior staff from the Department of the
Treasury about the potential implications of weekend settlement on the
Treasury securities market.

We obtained information from corporate treasury representatives on the
perceived advantages and disadvantages of weekend settlement. Finally, to
analyze and compare U. S. settlement schedules, we obtained information
from representatives of central banks in selected foreign countries on the
operating schedules of their respective settlement systems. We also
obtained information from central banks* Web sites. We focused our
analysis of international settlement schedules on countries with
relatively modern, industrialized economies in selected geographic areas*
specifically, Asia, Europe, North America, Australia, and New Zealand, as
depicted in appendix II.

We based our analysis of potential legal considerations involving weekend
settlement on research of relevant federal and state statutes,
regulations, judicial decisions, and other legal databases, and conducted
interviews with banking agency attorneys and representatives of payment
system providers.

33 Through open market operations, the Federal Reserve buys and sells U.
S. government securities in the secondary market to directly adjust the
level of nonborrowed reserves in the banking system. This adjustment to
reserves influences the federal funds rate. Changes in the federal funds
rate often have a strong effect on other short- term interest rates. The
Open Market Desk of the Federal Reserve Bank of New York engages in the
trades on behalf of the Federal Reserve System. Decisions about the
purchase or sale of securities in the open market are based on a directive
that was developed by the Federal Open Market Committee. Determining the

Potential Costs and Operational Issues of Weekend Settlement

Identifying Potential Legal Considerations Raised by Weekend Settlement

Appendix I: Scope and Methodology Page 25 GAO- 02- 938 Weekend Settlement

We conducted our work in Washington, D. C., Atlanta, Georgia, and New
York, New York, between February and September 2002 in accordance with
generally accepted government auditing standards.

Appendix II: Operating Hours of Wholesale Settlement Systems in Selected
Countries

Page 26 GAO- 02- 938 Weekend Settlement

Country Wholesale System Days Hours in Local and Greenwich Mean Time (GMT)
Zone

United States Fedwire Mon * Fri 12: 30 am * 6: 30 pm (GMT *5) CHIPS Mon *
Fri 12: 30 am * 5: 00 pm (GMT *5) Japan Bank of Japan * Network (BOJ *
NET) Mon * Fri 9: 00 am * 8: 00 pm (GMT +9) Canada a Large Value Transfer
System (LVTS) Mon * Fri 8: 00 am * 6: 00 pm (GMT *5) European Union b
Trans- European Automated Real- time Gross

settlement Express Transfer (TARGET) Mon * Fri 7: 00 am * 6: 00 pm (GMT
+1) Australia Society for Worldwide Interbank Financial

Telecommunications * Payment Delivery System (SWIFT * PDS)

Mon * Thu Fri

9: 15 am * 4: 30 pm (GMT +10) 9: 15 am * 5: 00 pm

New Zealand Exchange Settlement Account System (ESAS) Mon * Fri Sat - Sun

9: 00 am *7: 00 pm (GMT +12) 8: 00 pm *8: 40 am (+ 1 day) Closed 12: 01 am
Sat * 11: 59 pm Sun Hong Kong Hong Kong Dollar Real Time Gross Settlement

(HKD RTGS) Mon * Fri Sat

9: 00 am * 5: 30 pm (GMT +8) 9: 00 am * 12: 00 pm Singapore Monetary
Electronic Payment System * Interbank

Funds Transfer (MEPS * IFT) Mon * Fri Sat

9: 00 am * 6: 30 pm (GMT +8) 9: 00 am * 2: 45 pm Korea Bank of Korea *
Wire Mon * Fri 9: 30 am * 4: 30 pm (GMT +9)

Source: GAO analysis of central bank data. a All countries have real- time
gross settlement systems except Canada, which has a net- settlement
system. b The following European Union countries participate in TARGET:
Austria, Belgium, Finland, France,

Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal, and Spain.

Appendix II: Operating Hours of Wholesale Settlement Systems in Selected
Countries

Appendix III: Weekend Settlement of Financial Transactions: Forgone
Earnings Analysis

Page 27 GAO- 02- 938 Weekend Settlement

Grocery industry representatives said that because the settlement system
is not open on weekends, retailers are losing money because the funds they
receive on Friday evening, Saturday, and Sunday cannot be credited to
their accounts and earn interest before Monday, at the earliest. These
calculations estimate the amount of interest forgone to the grocery
industry for retail transactions made by cash, checks, and credit and
debit cards. This calculation measures the upper bound of forgone
earnings. It assumes that every store would deposit every dollar and every
check at the bank on the day that it is received. It also does not take
into account that payments made by retailers, under weekend settlement,
would be debited from their accounts earlier, thereby potentially
decreasing their interest earnings.

To measure forgone interest earnings, we used the federal funds rate, the
rate at which a bank with excess reserves at a Federal Reserve district
bank charges other banks that need overnight funds. This is an appropriate
measure because the excess grocery funds would be invested in a similar,
short- term fashion. The average federal funds rate from January 1, 1998,
to January 1, 2002, was approximately 5 percent. The current federal funds
rate is approximately 2 percent. We estimated forgone earnings at both of
these rates.

To gain credit for deposits for a given day, retailers must have deposits
collected by approximately 2: 00 p. m. on that day. Grocery industry
representatives stated that most Friday sales tend to occur after that
hour; therefore, we assumed that all proceeds from Friday, Saturday, and
Sunday do not get deposited until Monday. However, Sunday proceeds
deposited on Monday generally would be processed as quickly as money
deposited Monday through Thursday; therefore, we did not include Sunday
proceeds as idle balances. Appendix III: Weekend Settlement of

Financial Transactions: Forgone Earnings Analysis

Interest Rates Period of Lost Earnings

Appendix III: Weekend Settlement of Financial Transactions: Forgone
Earnings Analysis

Page 28 GAO- 02- 938 Weekend Settlement

Table 2: Estimated Forgone Earnings Analysis by Payment Method Payment
method Cash Calculations

The Food Marketing Institute (FMI) reports grocery sales of $494 billion
per year in 2000. They also report that 33 percent of sales, approximately
$163B, are made in cash.

In weekly terms this amounts to cash payments of $3. 1B. FMI reports that
12 percent of grocery sales are made on Fridays and 21 percent are made on
Saturdays.

On Saturday mornings, grocery stores have on average $377M in cash.

On Saturdays, grocery stores take in another $659M in cash. If stores
could gain credit for weekend deposits, they could lend out Friday*s cash
proceeds of $377M every Saturday and Sunday, and Saturday*s proceeds of
$659M every Sunday.

If the annual interest rate is 2 percent per year, the daily interest rate
is approximately .000055 per day.

If the annual interest rate is 5 percent, the daily rate is approximately
.00014 per day.

If groceries could lend the $377M they receive on Friday on both Saturday
and Sunday (a total of 104 days), and the $659M they receive on Saturday
(52 days) for Sunday, they would earn approximately $4M per year, before
taxes.

If the interest rate were 5 percent, groceries could earn approximately
$10.3M, before taxes.

According to FMI, the *average effective income tax rate* (federal, state,
local) for grocery stores is 35 percent. This reduces the after- tax
losses due to idle funds to $2. 6M annually if the interest rate is 2
percent and $6.6M annually if the interest rate is 5 percent.

Cash sales = .33($ 494B)= $163B Weekly cash sales = $163/ 52= $3.1B
Saturday morning cash= .12($ 3. 1B)= $377M

Saturday cash proceeds = .21($ 3. 1B)= $659M .02/ 365= .000055 .05/ 365=
.00014 Annual earnings at 2 percent = (104)($ 377)(. 000055) + (52)(
659)(. 000055) = $2. 16+ $1. 84 = $4. 0M

Annual earnings at 5 percent = (104)($ 377)(. 00014) + (52)( 659)(. 00014)
= $5.49 + $4. 80 = $10.3M

($ 4.04M) (1-. 35) = $2.6M at 2 percent, and ($ 10. 2)( 1-. 35) = $6.6M at
5 percent

Checks

FMI reports grocery sales of $494B per year. They also report that 68
percent of sales are made in cash and checks. Additionally they note that
33 percent of retail sales are made in cash. Therefore, check sales must
represent 35 percent.

In weekly terms this amounts to check payments of $3.3B. Cash and check
total = .68

Cash = .33 Check = .35 Check sales = .35($ 494B) = $173B

Weekly check sales = $173/ 52 = $3.3B

Appendix III: Weekend Settlement of Financial Transactions: Forgone
Earnings Analysis

Page 29 GAO- 02- 938 Weekend Settlement

Payment method Cash Calculations

FMI reports that 12 percent of grocery sales are made on Fridays and 21
percent are made on Saturdays. On Saturday mornings, grocery stores have
on average $396M in checks. On Saturdays, grocery stores take in another
$693M in checks.

If stores could gain credit for weekend deposits, they could lend out
Friday*s check proceeds of $396M every Saturday and Sunday, and Saturday*s
proceeds of $693M every Sunday.

If the annual interest rate is 2 percent per year, the daily interest rate
is approximately .000055 per day.

If the annual interest rate is 5 percent the daily rate is approximately
.00014 per day.

If groceries could lend the $396M they receive on Friday on both Saturday
and Sunday (a total of 104 days), and the $693M they receive on Saturday
(52 days) for Sunday, they would earn approximately $4.25M per year,
before taxes.

If the interest rate were 5 percent, groceries could earn approximately
$10.82M, before taxes.

According to FMI the *average effective income tax rate* (federal, state,
local) for grocery stores is 35 percent. This reduces the after tax losses
due to idle funds to $2. 8M annually if the interest rate is 2 percent and
$7M annually if the interest rate is 5 percent.

Saturday morning checks = .12($ 3. 3B) = $396M Saturday checks proceeds =
.21($ 3.3B) = $693M

.02/ 365 = .000055 .05/ 365 = .00014 Annual earnings at 2 percent =
(104)($ 396)(. 000055) + (52)( 693)(. 000055) = $2.27+ $1. 98 = $4. 25M

Annual earnings at 5 percent = (104)($ 396)(. 00014) + (52)( 693)(. 00014)

= $5.77 + $5. 05 = $10.82M ($ 4.25M) (1-. 35)= $2.8M at 2 percent, and ($
10. 82)( 1-. 35) = $7M at 5 percent

Credit/ Debit Cards and Other

FMI reports grocery sales of $494B per year. They also report that 68
percent of sales are made in cash and checks. Therefore, credit/ debit/
other sales must represent 32 percent.

In weekly terms this amounts to credit/ debit/ other payments of $3.0B.

FMI reports that 12 percent of grocery sales are made on Fridays and 21
percent are made on Saturdays.

On Friday evenings, grocery stores have on average $360M in credit/ debit/
other transactions.

On Saturdays, grocery stores take in another $630M in credit/ debit/ other
transactions.

If stores could gain credit for weekend deposits, they could lend out
Friday*s credit/ debit/ other proceeds of $360M every Saturday

Cash and Check total = .68 Credit/ Debit/ Other = .32 Check sales = .32($
494B) = $158.1B

Weekly sales = $158.1/ 52 = $3.0B Friday evening credit/ debit/ other
transactions = .12($ 3.0B) = $360M

Saturday credit/ debit/ other proceeds = .21($ 3.0B) = $630m

Appendix III: Weekend Settlement of Financial Transactions: Forgone
Earnings Analysis

Page 30 GAO- 02- 938 Weekend Settlement

Payment method Cash Calculations

and Sunday, and Saturday*s proceeds of $630M every Sunday. If the annual
interest rate is 2 percent per year, the daily interest rate is
approximately .000055 per day. If the annual interest rate is 5 percent
the daily rate is approximately .00014 per day.

If groceries could lend the $360M they receive on Friday on both Saturday
and Sunday (a total of 104 days), and the $630M they receive on Saturday
(52 days) for Sunday, they would earn approximately $3.9M per year, before
taxes.

If the interest rate were 5 percent, groceries could earn approximately
$9.8M, before taxes.

According to FMI the *average effective income tax rate* (federal, state,
local) for grocery stores is 35 percent. This reduces the after tax losses
due to idle funds to $2. 5M annually if the interest rate is 2 percent and
$6.4M annually if the interest rate is 5 percent.

.02/ 365 = .000055 .05/ 365 = .00014

Annual earnings at 2 percent = (104)($ 360)(. 000055) + (52)( 630)(.
000055) = $2.1+ $1.8 = $3.9M

Annual earnings at 5 percent = (104)($ 360)(. 00014) + (52)( 630)(. 00014)
= $5.2 + $4. 6 = $9.8M

($ 3.9M) (1-. 35)= $2.5M at 2 percent, and ($ 9.8M)( 1-. 35) = $6.4M at 5
percent

Note: *M* represents dollars in millions, and *B* represents dollars in
billions. Source: GAO analysis of Food Marketing Institute and U. S.
Census Bureau data.

Appendix IV: Comments from the Board of Governors of the Federal Reserve
System Page 31 GAO- 02- 938 Weekend Settlement

Appendix IV: Comments from the Board of Governors of the Federal Reserve
System

Appendix V: GAO Contacts and Staff Acknowledgments Page 32 GAO- 02- 938
Weekend Settlement

Davi M. D*Agostino (202) 512- 5431 Barbara I. Keller (202) 512- 9624

In addition to those named above, Tonita W. Gillich, Marc Molino, Robert
Pollard, Carl Ramirez, Barbara Roesmann, Nicholas Satriano, Paul Thompson,
and John Treanor made key contributions to this report. Appendix V: GAO
Contacts and Staff

Acknowledgments GAO Contacts Acknowledgments

Appendix VI: Related GAO Products Page 33 GAO- 02- 938 Weekend Settlement

U. S. General Accounting Office, Payment Systems: Central Bank Roles Vary,
but Goals Are the Same, GAO- 02- 303 (Washington, D. C.: (February 25,
2002).

U. S. General Accounting Office, Check Relay: Controls in Place Comply
With Federal Reserve Guidelines, GAO- 02- 19 (Washington, D. C.: December
12, 2001).

U. S. General Accounting Office, Federal Reserve System: Mandated Report
on Potential Conflicts of Interest, GAO- 01- 160 (Washington, D. C.:
November 13, 2000).

U. S. General Accounting Office, Retail Payments Issues: Experience With
Electronic Check Presentment, GAO/ GGD- 98- 145 (Washington, D. C.: July
14, 1998).

U. S. General Accounting Office, Payments, Clearance, and Settlement: A
Guide to the Systems, Risks, and Issues, GAO/ GGD- 97- 73 (Washington, D.
C.: June 20, 1997). Appendix VI: Related GAO Products

(250067)

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