CUNA Comment Letter
Docket No. R-1037, Proposal to Modify Federal Reserve ACH Operations and Pricing Practices Relative to Private-Sector ACH Operators
August 6, 1999
Ms. Jennifer J. Johnson
Board of Governors of the
Federal Reserve System
20th Street Constitution Ave, NW
Washington, DC 20551
Re: Docket No. R-1037, Proposal to Modify Federal Reserve ACH Operations and Pricing Practices Relative to Private-Sector ACH Operators
Dear Ms. Johnson:
The Credit Union National Association (CUNA) is pleased to comment on the notice to modify "Federal Reserve ACH Operations and Pricing Practices Relative to Private-Sector Automated Clearing House Operators" (PSOs). As a national trade association, CUNA represents more than 90 percent of the nation's 11,000 state and federal credit unions and solicits the opinions of these credit unions on relevant matters. The following comments were developed by CUNA with input from credit unions and the Subcommittee on Payment Systems, led by Mr. Stan Hollen, President and CEO of The Golden 1 Credit Union in Sacramento, California. This subcommittee includes officials of credit unions from around the country, which provide financial services, including ACH services to their credit union members.
The Federal Reserve and PSOs provide automated clearing house services (ACH), which is an electronic interbank payment system that handles the transfer of small funds between consumers and businesses. ACH transactions start when a customer initiates an ACH transaction at his or her depository institution, which transmits the payment information and exchanges funds with the recipient's depository institution. This transaction is processed by Federal Reserve Banks (Reserve Banks) or PSOs.
Four providers participate in the ACH market. The Federal Reserve System (Federal Reserve) is the largest provider, processing all ACH transactions initiated by the federal government as well as more than 80 percent of commercial interbank ACH transactions. The other twenty percent of commercial ACH transactions are processed by 3 PSOs: the Electronic Payments Network (formerly, New York Automated Clearing House), Visa, and American Clearing House. These PSOs use the Reserve Banks' ACH services for processing transactions in which either the originating depository financial institution (ODFI) or the receiving depository financial institution (RDFI) is not a PSO customer.
The PSOs maintain that the Reserve Banks' price structure and deposit deadlines do not permit the PSOs to compete effectively in providing ACH services to depository institutions. Therefore, the Federal Reserve has described its current practices as an ACH provider and has requested comments from the public on ways that the Federal Reserve could alter its ACH pricing practices and service deadlines.
In particular, the Federal Reserve requests comments on its pricing practices relative to PSOs. Currently, the Reserve Banks offer depository institutions ACH services under terms established in the Reserve Banks' ACH operating circular and charge fees based on published fee schedules. The Reserve Banks charge the same prices for ACH services to PSOs, depository institutions, and third-party processors. For each transaction that they process, the Reserve Banks consider both the ODFI and RDFI to be their customers and charge each of them a per-item fee. In addition, the Reserve Banks charge a per-file fee for each ACH file they receive. The Reserve Banks also assess monthly account servicing fees to each institution whose ACH transactions they process. The Reserve Banks use their reserve account posting capability to automatically debit the account designated by each ODFI and RDFI for the purpose of settling ACH transactions and fees. Unlike the Reserve Banks, PSOs are not able to charge both the RDFI and ODFI a fee for each item transmitted through, or received from, the Reserve Banks. The PSOs are also unable to charge the Reserve Banks a file fee for each file PSOs receive from the Reserve Banks.
In addition, the Federal Reserve requests comments on its deposit and delivery deadlines and the effect of these practices on PSOs. The Reserve Banks have established the same deposit deadline for all ACH transactions whether they are from a financial institution or a PSO, and the Reserve Banks deliver those ACH transactions at the same time to all institutions including PSOs and financial institutions. Therefore, in order to meet Reserve Bank deposit deadlines, PSOs must establish earlier deposit deadlines and later delivery schedules for the customers of the PSO. The PSOs have stated that because they must set less advantageous deposit and delivery times for their customers PSOs are at a competitive disadvantage.
The Reserve Banks have established their delivery schedules and pricing practices for ACH services in a manner so that it complies with The Monetary Control Act of 1980. The Monetary Control Act and the Federal Reserve's pricing principles require that the fees for ACH operations be set so that revenues and costs match. As a result, any reduction in fees to some users of ACH services would have to be offset by another reduction in services or an increase in fees to other users in order to regain the equilibrium that is mandated by The Monetary Control Act.
SUMMARY OF CUNA'S POSITION
CUNA supports the manner in which the Reserve Banks currently operate ACH services and believes that the current structure complies with the Federal Reserve's Pricing Principles. As part of its pricing principles, the Federal Reserve considers the objectives of "improving the efficiency of the payments mechanism, and lowering costs of these services to society at large." (The Principles for Pricing of Federal Reserve Bank Services, Federal Reserve Regulatory Service, 7-132.) The Reserve Banks have improved the efficiency of payments mechanisms by providing a nationwide ACH system. Through the FedACH directory the Reserve Banks can process an ACH transaction for any depository institution that uses ACH services. The Reserve Banks have also reduced the costs of ACH services numerous times and will do so again in the near future. The Reserve Banks' ACH operations function so well that all credit unions responding to our solicitations have stated their satisfaction with the way the ACH system currently operates. In light of these achievements in the Reserve Banks' ACH processing, the Federal Reserve should avoid any changes requested by the PSOs that may raise prices and reduce the economic efficiency of a payments system that works so well.
CUNA believes that if the Federal Reserve considers changes to its ACH operations to help PSOs, then these changes should not have a negative impact on credit unions. As stated above, The Monetary Control Act requires that the Reserve Banks offset any reduced revenues from payments services by lowering services or raising prices elsewhere in its payments infrastructure. Some of the changes requested by the PSOs include the elimination of fees for their customers and the provision of more favorable deadlines for PSOs. These changes may require higher fees or less service to other ACH users because of the mandates in The Monetary Control Act. In light of the Reserve Banks' obligation under The Monetary Control Act, the Federal Reserve should not make any change required by PSOs, unless the PSOs can bear the entire burden of that change (i.e. less service) that is required by the law. CUNA's responses to the following questions posed by the Federal Reserve reflect our concern for maintaining the efficiency of the current system without reducing the system's accessibility through higher fees and lower service.
Should the Reserve Banks continue to consider the ODFI and RDFI for ACH transactions they process to be their customers, and charge them accordingly, even though the depository institution sent the transactions through or received the transactions from a PSO?
The Reserve Banks should treat both the ODFI and the RDFI for an ACH transaction that they process as customers of the Reserve Bank. Under The Monetary Control Act, the Reserve Banks only have the authority to provide payment services to depository institutions.
Should the Reserve Banks charge lower fees for ACH transactions that are also processed by a PSO than they do for ACH transactions in which the Reserve Banks are the only ACH operator? If so, on what basis should the different fees be set? For example, should the Reserve Banks offer different ACH services levels for transactions also involving a PSO?
The Reserve Banks should charge the same fees for all ACH transactions if it gives the same level of service to all customers.
The Reserve Banks may charge the PSO customer less if the reduced price covers the cost of a reduced level of service. The Monetary Control Act requires that the reduced revenues from lower fees be recovered somewhere in the payments process. If the level of service for PSO customers were reduced so that the cost of this service matched the lower price, then other depository institutions would not subsidize the lower price. Therefore, the reduced price would be acceptable.
Should the Reserve Banks pay transaction fees to PSOs that send files to the Federal Reserve and transaction and file fees to PSOs that receive files from the Federal Reserve? What services do the PSOs provide to Reserve Banks that would justify the payment of fees to PSOs? Would market discipline constrain the fees charged by PSOs to Reserve Banks? If so, how?
The Reserve Banks should never pay fees to PSOs, because PSOs do not provide any services to the Reserve Banks.
It would be hard for the market to constrain the fees that PSOs charge to Reserve Banks. As a for profit institution, the PSOs would be encouraged to charge higher prices. In addition, the Reserve Banks would not be able to restrain costs by taking advantage of competition among the PSOs. For example, if a PSO initiated an ACH transaction, then the Federal Reserve would have to pay the price charged by that provider because the Federal Reserve would not be able to switch PSOs.
Should the Reserve Banks continue to assess the ACH account-servicing fee to customers that exclusively use PSOs to send transactions to and receive transactions from the Reserve Banks? If not, what would be the rationale for eliminating the fee for the PSO's customers?
The Reserve Banks should continue to assess the ACH account-servicing fee to all customers, including those that exclusively use PSOs, because the Federal Reserve is supposed to maintain a payments system that works nationwide. In fact, The Monetary Control Act charges the Federal Reserve with providing an adequate level of payment system services nationwide. The account-servicing fee pays for the FedACH customer directory that allows the Reserve Banks to deliver ACH transactions to nearly every depository institution in the United States. In contrast, the three commercial ACH providers serve a much smaller set of institutions and rely on the Reserve Banks to deliver transactions to those depositories not served by PSO networks. The Federal Reserve is the appropriate house for a nationwide ACH directory, instead of the PSOs, because the Federal Reserve is required by Congress to serve all depository institutions, regardless of wealth and size, and the PSOs are not. If the Reserve Banks could offer a reduced service level for these inactive accounts that exclusively use PSOs, however, then the Reserve Banks may lower the fees to these account holders, so long as this action would not raise fees to credit unions.
If the Reserve Banks were to modify their price structure or deadlines to treat transactions also processed by PSOs differently, should this treatment be limited to transactions processed by PSOs or expanded to other ACH transactions, such as those sent or received by correspondent banks or third-party processors. Why or why not? Do the arguments to modify Reserve Bank practices regarding PSOs also apply to other entities that act as sending and receiving points for multiple institutions? Why or why not?
All of these entities should be treated equally. These entities should face the same price structure unless they receive different levels of service, which could warrant a multi-tiered pricing system. The Federal Reserve states in its Standards Related to Priced-Service Activities of the Federal Reserve Banks that the: "Federal Reserve exercises care to ensure that it provides payment services to all depository institutions on a equitable and impartial basis." (Standards Related to Priced-Service Activities of the Federal Reserve Banks, Federal Reserve Regulatory Service, 7-136.) The spirit of this standard requires that the Federal Reserve appear to treat depository institutions, PSOs, and other third party entities equally. Therefore, the Federal Reserve should not appear to be granting PSOs or any other group favorable treatment in the payments system.
What are the benefits and drawbacks of the Reserve Bank's established different deposit and delivery deadlines for PSOs and depository institutions? Should the Reserve Banks set different deposit and deadlines for PSOs and depository institutions?
The Reserve Banks should establish the same deadline for PSOs and depository institutions. According to the spirit of the Federal Reserve pricing principles, which are mentioned above, institutions should appear to receive the same impartial, fair treatment. If the PSOs would like a later deposit deadline and an earlier delivery deadline so that Reserve Bank customers and PSO customers have the same deadlines and delivery times, then the PSOs should be willing to pay a premium for better service. The deposit deadline for credit unions should not be set earlier nor should the delivery time to credit unions be set later. The receipt of ACH transmissions later in the day would delay the internal processing deadlines for credit unions.
What are the implications on competition, the efficiency of the ACH system, and overall ACH volume growth if the Reserve Banks were to modify their price structure or deadlines to treat transactions processed by PSOs differently than those received from or sent to other parties? To the extent that you are suggesting modifications to the Reserve Banks' ACH service, please indicate whether and how those modifications are likely to affect competition in the provision of ACH services, the efficiency of the ACH system, and the growth of the ACH system?
The current ACH system is competitive, efficient, and growing. PSOs currently process approximately twenty percent of commercial ACH transactions. PSOs maintain that competitive barriers can explain the dominant market share of the Reserve Banks. Other factors, however, account for the Reserve Banks' market share. According to the Federal Reserve's 1998 white paper, the ACH has high fixed costs for powerful computers and low marginal costs that result in economies of scale that lead to one or two providers dominating the ACH market. (See The Federal Reserve in the Payments Mechanism, Committee on the Federal Reserve in the Payments Mechanism, January 1998). Moreover, other factors discussed in the notice, such as the high quality of the Reserve Bank's service and their role as founders of the ACH network have helped their market position. As discussed earlier, numerous credit unions that use the Reserve Banks' ACH processing have complimented the current system which continues to be efficient and cost-effective through consistent price reductions. Finally, the ACH network continues to grow. According to the white paper, the volume of ACH transactions has grown at an average rate of over 15 percent per-year for the last ten years.
The current ACH system balances the mandates of Congress by promoting competition and providing nationwide access to the payment system. First, the Federal Reserve's pricing principles encourage competition because they require the Federal Reserve to set prices that are similar to those a private sector firm would set. These prices must include the imputed costs of taxes and profit that a private sector firm would incur. Second, the Federal Reserve delivers ACH transactions to nearly every depository institution in the United States, often through third-party service providers and correspondent banks. In contrast, the three PSOs serve a much smaller set of institutions and rely on the Federal Reserve to deliver transactions to those depository institutions not served by their networks. The Federal Reserve should maintain the current price structure because it is necessary to maintain a nationwide payment mechanism that benefits society as a whole. To force the Federal Reserve's customers to subsidize the PSOs, which do not have a nationwide network and which are not charged by Congress with serving every depository institution equally, may harm a nationwide payment mechanism.
In closing, CUNA strongly commends the Federal Reserve for conducting this review and appreciates the opportunity to provide our comments. CUNA urges the Federal Reserve to leave the current system intact. If the Federal Reserve does modify ACH operations for the benefit of PSOs, then CUNA urges the Federal Reserve to ensure that the PSOs, and not other financial institutions, bear all the associated costs that those modifications produce.
Assistant General Counsel