Fed Will Raise Its Fees Next Year For Check Clearing, Wire Transfer
The fees that banks pay the Federal Reserve System for check collections and other services will rise an average 3% next year, the Fed Board of Governors decided this week.
Approving recommendations by the Fed staff, the board voted to boost its operating-services revenue to a projected $785.6 million in 1992 from $758.3 million this year. The increase will come out of the pockets of banks that use the Fed's check clearing services, wire transfer networks, and other facilities.
Each of the Fed's revenue estimates for 1991 and 1992 would yield a thin annual surplus of $4 million.
Realistic Pricing Required
The central bank, which provides its services in competition with correspondent banks and other suppliers, operates under a legal mandate to align revenues closely with costs. It said the price hikes are necessary for 1992 because costs are rising at an annual 2.8% rate, while business volume is flat.
In its document explaining the new fee schedule, the Fed said it is not changing the prices on 54% of its services.
But the percentage increases on those that are rising ranged into double-digit percentages. For example, return items - checks that "bounce" or have to be returned to the originating bank for other reasons - will cost about 14% more. As the Fed seeks to recover more of those costs, they are likely to be passed down to banks and their customers.
Despite efforts to hold the line on automated payment services to encourage a movement away from manual procedures, the Fed is increasing its basic Fed Wire transfer fee by 3 cents, or 6%, to 53 cents. The increase is meant to offset the cost of relocating the data centers of the Federal Reserve banks in New York and Dallas.
There will be no change in the basic price of automated clearing house transactions - direct deposits and bill payments - that the Fed has been promoting since the 1970s. But fees are rising, and new fees introduced, for banks that do not transmit ACH payments via electronic means.
"Generally the new fees reflect the higher costs of providing the nonelectronic parts of each service," said Louise L. Roseman, assistant director of the Fed's bank operations division. "In services such as the ACH, we'll phase out the non-electronic aspect."
The Fed's benchmark for measuring its pricing effectiveness is the "recovery rate" - the relationship between revenue and costs. It aims at 100% and projects that 1991 and 1992 will both be closer to that goal than the 101.5% in 1990.
The Fed's 1991 projected revenue of $758.3 million would recover 100.5% of its $754.4 million in estimated costs. For 1992, total expected revenue from priced services will be $785.6 million, or 100.6% of $781.3 million in costs.
Since 1984, the Fed has failed to recover its costs only in 1988 and 1989. Between 1984 and 1987, the central bank earned "profits" equal to 3.5% to 7.8% of costs, sparking heated criticism from large commercial banks competing in the correspondent arena.
Among the Fed's fee decisions for 1992 are the following:
* Forward collection fees will rise 1.3%. These fees include the first widespread introduction of tiered pricing, which allows a Fed office to vary prices according to a check's destination.
* Return-item fees will rise 13.6%, which the Fed said will better recover the costs it incurs in the return process. Return item volume is projected to decrease 0.7% but the costs are fixed.
* The Interdistrict Transportation System, the Fed's air courier network, will cost 15.9% more on weekdays but 7.7% less on weekends. The Fed's customers will not see these increases directly, since they will be bundled into other check-processing fees.
* Bowing to opposition from the banking industry and the Federal Trade Commission, the Fed abandoned a proposal to give volume discounts to big banks moving large quantities of checks. Critics said the discounts would not cover costs, and drive competitors out of the business.
Will Review Courier Service
In addition, the Fed said it would review the quality of its courier service.
"We're glad to see they're taking another look at improving the quality," said Ian Macoy, Fed representative at the American Bankers Association. "While it's a necessary service, it doesn't match comparable services offered by the private sector."
* As the Fed moves to an all-electronic automated clearing house, a new fee of $15 will be imposed on magnetic tape input of transactions. Existing fees for paper media will rise from about $5.25 to $8. Fees for off-line telephone originations and telephone advise fees also increase.
* In addition to the 6% fee increase for basic Fed Wire transactions, the Fed will increase its surcharge on nonelectronic fund transfers to $7 from $4 to $6 for off-line telephone originations and telephone advices.
* Most book-entry securities fees remain unchanged. However, there is a $1.50 increase in book-entry fees for nonelectronic transactions to $8.50 each.
* Nine districts are proposing fee increases for definitive safe-keeping, ranging from $2 to $8, resulting in fees ranging from $18 to $40. Noncash collection fees will increase 15 cents to 55 cents in nine districts, resulting in fees ranging from $2 to $5. Both services are declining in volume and eventually will be phased out.
* A new payor bank services fee structure will be instituted in all districts in 1992. This fee, which was approved in June 1990, is to result in uniform approach to pricing payor services, including extended MICR capture and truncation services.