Bankers are crying foul over new Federal Reserve Board pricing initiatives for electronic payment and check clearing services.
While the individual initiatives taken early this month are seen as relatively insignificant, some bankers say they represent troubling precedents.
At the heart of the issue, bankers say, is the old argument over whether the Fed can be both a regulator and a service provider in competition with the banks it regulates.
The issue has gained urgency over the past year as the Fed prepares for necessary system changes.
Costs will rise with an upgrade of the Fed's technology, while revenue for some of its services is expected to decline sharply with the introduction next year of government mandates such as same-day settlement.
Banks that do significant business with each other are expected to clear their payments directly, bypassing the Fed, in order to meet the 8 a.m. deadline set by the same-day regulations.
Also at issue is the ability of several fledgling private-sector alternatives to the Fed to build profitable businesses.
Lower Fees
Part of what makes these initiatives competitive is their ability to charge less than the Fed, while bypassing the Fed so that participating banks need not pay the central bank on top of the private sector fees.
Visa U.S.A. and the New York Clearing House Association are trying to expand their automated clearing house services, which compete with the Fed's, nationwide. And the National Clearing House Organization is establishing a nationwide check-clearing network for large banks.
Some bankers are asking whether the Fed's recent pricing actions comply with the spirit of the Monetary Control Act of 1980, which attempts to promote private-sector competition by requiring the Fed to charge market prices and recover its costs.
Meeting on Nov. 3, the Board of Governors approved proposals from the Fed banks in Minneapolis and Richmond, Va., to offer volume discounts on an interim basis for several check clearing and collections services.
The discounts could slash as much as 50% off the normal per-item cost for large volume users of the service. Bankers say the discounts are far higher than correspondent banks typically offer.
The Fed Board did instruct its staff to come up with a formal proposal to base some fees on volume rather than purely on cost.
That proposal, the board said, would go out for public comment. The interim services offered by Minneapolis and Richmond would then be subject to whatever decision was made on the overall proposal.
Driving volume-based pricing is an attempt by the Fed to maintain the cost-effectiveness of its services. The Fed expects to lose about 10% of its check volume next year as same-day settlement takes effect.
As a result of rising costs, the Fed expects a return on equity in 1994 of $14.4 million less than its targeted return, based on a model, called the Private Sector Adjustment Factor, that is designed to level the playing field for the Fed and its private sector competition.
"Our strategy is not just to raise check fees, but rather to recognize some level of price stability until the Fed banks have been able to adjust their resources" on the basis of lost volume, said Florence Young, assistant director of the Fed's operations and payments system division.
Concern on Underpricing
Bankers said they were worried that the Fed would underprice its services to retain check volume.
"I am very much concerned about the precedent of under-recovering on check services in anticipation of a loss in market share," said Gerard Milano, president of the California Clearing House Association.
The Fed says it is not using its central bank status to regulate pricing. "This is in no way a regulatory issue," said Ms. Young "It's a look at how we can set prices, so we can continue to provide services in a cost-effective way."
In the same board meeting, the Fed also doubled a controversial participant's fee for automated clearing house transactions from $10 per routing transit number to $20 per number.
While the fee itself is small, bankers say they are disturbed because the Fed charges the fee regardless of whether a bank uses private sector automated clearing house processing or the Fed. Many banks have multiple numbers, incurring a fee for each number.
"It's a good idea to get rid of these multiple routing numbers, but to apply [the fee] fairly it should not apply to financial institutions that use private sector processors," said William Nelson, executive vice president of the National Automated Clearing House Association.
But the Fed says it incurs accounting and processing costs for automated clearing house items even if destined for private sector processors.
The Fed also says that for those banks with many routing numbers, "we have attempted to moderate the increase by lowering" the fee charged for sending transactions from one region to another, said Ms. Young.
According to the Fed's latest fee schedule, large-volume processors of automated clearing house transactions will see their total processing costs, including the transit routing fee, reduced by 2%.
The Fed's clearing and collection services are under greater scrutiny than usual because of a bill before Congress that would increase congressional oversight over the Fed.
At a recent hearing concerning the bill, which is sponsored by Rep. Henry B. Gonzalez, D-Tex., several bankers representing clearing organizations said the Fed seems to be changing pricing schedules without asking for public comment.
