After years of wrangling over the rules by which they compete against the Federal Reserve system, private-sector payment network operators still cut the central bank little slack.
Given half an opportunity, the Fed's competitors in automated clearing house services will dredge up old arguments about unfair competition, unlevel playing fields, and unintended consequences.
Bankers have been raising questions about the Fed's nonpolicy roles- particularly check clearing and electronic payment services, and the prices charged for them-for much of this century. Explicit pricing pegged to market conditions, mandated by the Monetary Control Act of 1980, was supposed to quiet the unrest.
But with the Fed's publication on May 18 of a request for comments on automated clearing house pricing and settlement deadlines, the private sector is venting frustrations yet again.
For this comment period, which ends Aug. 6, the guns are aimed at the Fed's practice of charging both the receiving and the originating bank in an automated clearing house, or ACH, transaction.
The central bank, besides being the dominant processor of automatic payments such as direct salary deposits and bill payments, is also in a powerful rulemaking position. Though the few organizations that have challenged its ACH stronghold most aggressively want to cut into the Fed's 85% market share, their immediate objective is to eliminate what they consider overcharging.
They want the Fed to adjust its pricing in a way that gives financial institution customers credit for work done by the private operators.
"The work we do provides a subsidy to the Fed," said George Thomas, senior vice president of the New York Clearing House Association, which operates Electronic Payments Network, an alternative to central bank ACH processing. "Our banks have designated us as their primary ACH operator, and they have designated us to process transactions."
Yet the extra charges cost the 885 financial institution participants in Electronic Payments Network-now known as EPN and formerly the New York ACH Association-$1 million a year, Mr. Thomas said.
Besides EPN, the private operations competing with the Fed are the American Clearing House Association in Phoenix and VisaNet ACH Services, a unit of Visa U.S.A. in San Francisco.
The Fed's charge for ACH transactions starts at $0.007 per file and is assessed to banks at each end of a payment.
EPN, which has less than 10% of the total ACH volume, has cleared and settled ACH transactions in the Second Federal Reserve District since the inception of the ACH in the mid-1970s.
EPN charges a bank $0.004 to originate a payment and $0.005 to receive. But these fees are reduced to $0.001 when an EPN member interacts with a bank using the Federal Reserve for its ACH processing.
The private sector must cut prices in these cases to keep from losing bank customers because the Fed still tacks on its $0.007 charge.
As long ago as 1981, John F. Lee, then the president of the New York Clearing House Association, invoked free-market arguments and complained that banks had every incentive to use "the less expensive, subsidized ACH service offered by the Federal Reserve System."
Fourteen years later, Paul Finch, then president of the Arizona (now American) Automated Clearing House, made his views of Fed behavior clear: "I think there has been some serious stonewalling of progress and some very serious structuring to make sure the private sector couldn't compete."
Philip Ahwesh, first vice president of Mellon Bank Corp., said he does not rely on private-sector alternatives because it would be disadvantageous for his company.
That could eventually change, he said, as the ACH business grows in size and importance. He said 50 banks are responsible for 88% of the originated payments, which are growing 15% annually.
Louise L. Roseman, director of Federal Reserve bank operations and payments systems in Washington, said she sympathizes with the concerns expressed.
But the Fed is required by the Monetary Control Act of 1980 to recover its costs, a task complicated by its obligation to provide universal, utility-like services-in contrast to the private sector's freedom to go after the most profitable business.
"I think they have made some legitimate competitive arguments," Ms. Roseman said of the private clearing houses. "We just need to look at what the broader implications of potential changes would be."
The Fed, in its request for comment, warns of potential price increases if its pricing practices are modified. Any reduction in revenues to the Fed "would have to be recouped elsewhere in the ACH service," it said. "Thus it is likely that fees assessed to some Reserve Bank customers might decrease while fees assessed to other Reserve Bank customers might increase."
Mr. Thomas called this a "red herring," as the Fed is forecasting $65.1 million of ACH revenue for 1999, which would be down 4.4% from 1998.
"My feeling is that it will get small banks upset," Mr. Thomas said, referring to potential price increases.
"We wanted to put a place-holder in the budget for 1999" if there are any changes, Ms. Roseman said.
Viveca Ware, director of payment systems for the Independent Community Bankers of America, said she would oppose any Fed change that results in higher prices.
"I can't see where the Fed's modifying its pricing structure for these operators would enhance the options or increase the options available to community banks," she said.
ACH price increases would reverse the downward trend of recent years. For instance, in 1996, the Fed reduced interregional charges to banks to one penny, from 1.2 cents.
Ms. Roseman said declining prices are partly the result of the Federal Reserve's streamlining of its operations. Starting in 1991, the Fed consolidated its 12 district bank processing sites into a central facility in East Rutherford, N.J.
"We centralized our ACH service," she said, "so it is processed in one location rather than multiple locations around the country. It is much more efficient."
Mr. Thomas said private-sector competition has brought about price reductions and all banks have benefited. "If there isn't competition, you know what happens to price, quality, and service," he said.
Moreover, if the Fed carries out its threat and raises prices, EPN would gladly process ACH transactions for any bank anywhere in the nation, Mr. Thomas said.
"Banks have the option of using a private-sector operator if they want a better price," he said. "That is the American way."
The New York Clearing House has yet to formally respond to the Fed's request for comments. Mr. Thomas said a likely suggestion would be that the Fed simply stop charging banks that use private ACH operators.
The New York association would also recommend an extra interoperator exchange period, occurring sometime after the Fed's 3 a.m. deadline on ACH originations for daily processing.
As it stands, banks using private-sector services must enter their data 30 minutes earlier than Fed customers.
Another suggestion, Mr. Thomas said, would be that the Federal Reserve create formal fair-competition guidelines with the private sector.
That is important, he said, because the Fed is both a competitor and a regulator.
Elliott C. McEntee, president and chief executive officer of the National Automated Clearing House Association, said he was heartened that the Fed has brought fair-competition issues into the light of public scrutiny.
Early deposit deadlines and pricing have nothing to do with matters of payment system risk, he said. "It is strictly the relationship between competitors."
"We strongly believe that the Federal Reserve needs to modify its policies and practices regarding how it treats the private-sector ACH operators," Mr. McEntee said.