A flap is brewing between the Federal Reserve banks and National Automated Clearing House Association over how best to market paperless payment services.

Nacha, the rulemaking body for regional automated clearing house associations, wants to finance promotions of direct payroll deposits and other ACH services through small surcharges on standard processing fees.

The Fed opposes such charges, maintaining that banks will have more incentive to promote ACH services if the processing fees are kept low.

Though the disagreement has been subdued and mainly behind the scenes, it recently took on a more serious tone when the Treasury Management Association, a corporate trade group, sent a letter to the Federal Reserve urging it to take a more active role in promoting the ACH.

The central bank and the private sector have long shared a desire to reduce paper check volumes. But a split on how to do it could hold the ACH network back from capitalizing on emerging transaction-processing opportunities in electronic commerce.

"The efficiency of the payment system requires the same fast-paced and aggressive move to electronic systems taking place in other areas of business, and promotions are the key to this effort," said David P. Smay, treasurer of Chevron Products Co. and chairman of the Treasury Management Association's newly formed Payments Advisory Group.

"We are very anxious that the Fed and the Treasury take some additional action," he said.

Observers noted that the success of the national ACH network, automating error-prone and labor-intensive check processing, is in banks'interests.

The banking system handles 65 billion checks a year, it is estimated. The growth rate has slowed to 1% or 2%, but when the federal direct deposit program was launched in the 1970s many bankers assumed that by the 1990s they would have gotten to zero or negative growth.

Last year the regional automated clearing house networks processed over four billion electronic payments. If these payments had been checks, they would have cost the banking industry about $3 billion to process, said Elliott McEntee, president and chief executive officer of Herndon, Va.- based Nacha.

Mr. McEntee considers it imperative that the ACH seize the opportunity presented by consumers' and businesses' increasing comfort with electronic financial transactions. "A lot of people believe the timing is absolutely perfect to start marketing more aggressively," he said.

He supports surcharging as a way to fund marketing efforts and force banks to take an active interest in them.

The Fed is philosophically opposed to such a move. It would be inimical to its mandate of ensuring the lowest possible processing costs.

"You have to think carefully before you increase prices," said Sarah Green, senior vice president at the Federal Reserve Bank of Boston. Ms. Green is the Federal Reserve System's product manager for retail payments.

Since an ACH transaction costs just a few pennies but handling a check costs $1.25, the Fed maintains that banks have an adequate incentive to promote the ACH.

In addition, the Fed said it already participates in several marketing efforts. It has helped produce and mail brochures to tens of thousands of corporations and financial institutions and has helped fund and produce scores of media public service announcements. And last year the Fed participated in a national direct deposit promotion with Nacha, the Social Security Administration, and many of the regional ACH associations.

"The Federal Reserve is very committed to providing effective marketing and education for electronic payments and for the automated clearing house," said Ms. Green, who downplayed the difference of opinions.

"We are just working through a process right now as to how to go about doing that, so I do not see any controversy here."

But Nacha and the corporate treasury managers counter that these efforts have not been enough.

There is a laundry list of reasons for the unexpectedly slow growth of the ACH, including public distrust of electronics, the desire by consumers and businesses to retain float, and the ACH's inflexibility for certain kinds of payments.

Nacha officials said most of these shortcomings are being addressed, and the only remaining hurdle is the lack of sustained marketing.

Mr. McEntee said there is evidence that aggressive marketing can boost ACH usage. For example, the British Automated Clearing System, one foreign equivalent of the ACH, has used a $30 million marketing budget to achieve much higher participation than in the United States.

He also noted the New York Clearing House Association's recent efforts. With a marketing budget of $300,000, New York signed up 440,000 new participants for direct deposit of payroll, saving banks about $11 million annually.

But with only $345,000 in annual marketing funds, down from $1.2 million in 1989, Nacha has little to work with.

Because the Fed processes 80% of ACH volume, and because consolidation continues to reduce the number of dues-paying members of ACH associations, the Fed's support of any marketing campaign is vital. Private-sector ACH processors are in agreement to assessing marketing fees.

Marketing campaigns promoting direct deposit have been the most successful in the past. About 50% of paychecks in the United States are delivered by ACH direct deposit.

Nacha and the Treasury Management Association would like to increase the ACH's number of direct bill payments and electronic data interchange transactions.

Mr. Smay noted that the association does not necessarily favor one method of funding over another. But he said the time is right for a marketing push, and the Fed's involvement is an absolute must.

"It has been kind of disjointed in the past," said Mr. Smay. "It would be much better to have a good concerted effort."

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