The Federal Reserve System is condoning a pricing practice in its check-collection services that may skirt its obligations under the Monetary Control Act and other policies designed to regulate the Fed's competitiveness against the private sector.
The practice in question - which represents a fundamental change over traditional Federal Reserve pricing methodology - was approved quietly, after only a staff review and no public comment. Under this change, some banks are now paying the Fed for a service they are not receiving,
Specifically, banks receiving electronic payor bank services from some Fed offices now bear a portion of the costs for collecting those checks.
The |Group Sort' System
Until recently, the collecting bank paid the full cost of collecting a check through the Federal Reserve System. A couple of years ago, the Federal Reserve Board was asked by one of the reserve banks to approve a new service whereby payor banks receiving payor bank service from their Fed office could agree to join a special "group sort," upon which collecting banks could deposit cash letters.
Simple enough. The Fed office would not have to open as many fine-sort cash letters to create the service for the banks that make up the group.
Moreover, collecting banks could free up fine-sort pockets on their reader/sorters for other uses and save money by depositing fewer cash letters with the Fed.
It seems like a well-designed service, and it is.
A Charge to the Payor
But in approving the payor group-sort service, the Federal Reserve Board's staff also approved letting Fed offices charge the payor bank a portion of the costs borne by the Fed in collecting the check.
Under post-Monetary Control Act pricing policy, these costs always have been borne fully by the collecting bank, since it enjoys the full benefit of the Federal Reserve's ability to present the check and collect from the paying bank.
At first blush, this practice might not appear extraordinary or indeed represent any real cause for concern. In fact, the only question that might immeddiately come to mind is why would the payor bank knowingly agree to pay a portion of the collection costs that would, under any other Fed check-collection service, be charged fully to the collecting bank?
Analysis of the fees currently being charged collecting banks for payor group, regional check processing center group, and fine-sort services with comparable deposit deadlines at the Fed offices offering the payor group-sort service reveals that the average per-item discount off regional check processing center group-sort fees was 43%.
Why would a payor bank knowingly subsidize collecting banks? Consider that the payor bank may enjoy indirect benefits when it totals the costs it bears for receiving payor bank services from its Fed office.
Not Everyone Wins
The number of fine-sort packages received by the Fed, and thus the fine-sort payor bank service handling charge assessed to a payor bank receiving this service, could be reduced to the extent that collecting banks deposit group-sort cash letters instead of fine-sort cash letters.
So what is the problem? The collecting bank pays less for collection and frees up reader-/sorter capacity. The payor bank, presumably, pays less at the end of the day for its payor bank service as long as the collection costs it agrees to bear do not exceed the savings in fine-sort handling fees. It appears to be a total win-win situation.
Wrong. If you are a private-sector provider of check-collection services, you have every reason to fear the Fed's bold gamble - so far paying off - of reinterpreting its own pricing and competitiveness policies to permit the practice of Fed offices charging payor banks for check-collection services.
So what exactly is the nature of this challenge to the Fed? As noted above, both the paying and collecting bank now pay a portion of the collection cost for each item drawn on the payor bank and deposited on the payor group.
Thus, the collecting bank's payor group-sort deposit fee is significantly discounted from a comparable group sort fee.
Looked at another way, the payor group-sort fee represents only a marginal increase (as low as a few tenths of a cent) over a comparable fine-sort deposit fee.
Either way one looks at it, collecting banks now have a substantial pricing incentive to collect items through the Fed instead of through a private correspondent.
This pricing policy represents an about-face by the Fed from its longstanding tradition of charging only direct beneficiaries of a service.
Presumably, the Fed's own interpretation of its pricing methodology throughout the 1980s has been overturned, or simply ignored.