THE ROLE OF THE FEDERAL RESERVE
AND THE
AUTOMATED CLEARING HOUSE NETWORK
September 16, 1997
U.S. House of Representatives
Committee on Banking and Financial Services
Subcommittee on Domestic and
International Monetary Policy
Elliott C. McEntee
President and Chief Executive Officer
National Automated Clearing House Association
607 Herndon Parkway, Suite 200; Herndon, VA 20170; (703) 742-9190
http://www.nacha.org
My name is Elliott C. McEntee and I am the President and CEO of the National Automated Clearing House Association, or NACHA.
NACHA is the banking industry’s largest not for profit association, representing over 13,000 commercial and savings banks, and credit unions. NACHA’s most important responsibility is to develop and maintain operating rules for electronic payment programs. These programs include the Automated Clearing House (ACH) Network, Electronic Benefit Transfer systems, and emerging electronic commerce and Internet applications. We also promote the use of electronic payments and electronic commerce.
My presentation today is in four parts:
· A brief overview of the ACH Network;
· A discussion of the relationship between the Federal Reserve and NACHA;
· A brief analysis of the competitive relationship between the Federal Reserve and the private sector ACH operators; and
· An overview of a new payment application that has the potential to save billions of dollars.
ACH Network
Almost thirty years ago, the banking industry developed the ACH Network as an electronic payment alternative to the paper check system. The industry requested the Federal Reserve to be an operator of the Network.
Last year, over four billion ACH payments, valued at over $12 trillion, were processed. The ACH Network is used by over 20,000 financial institutions, 500,000 businesses and 60 percent of all households. The ACH Network supports numerous types of payment applications, including direct deposit, consumer bill payment, and corporate trade transactions. The Federal government remains the largest user of the Network, accounting for almost 16 percent of the payments processed. The volume of commercial ACH payments has been growing at an annual rate of about 15 percent.
Studies have shown that using an ACH payment instead of a paper check saves financial institutions and their customers an average of between $1.31 and $1.94 per transaction. NACHA estimates that this year financial institutions and their customers will save over $6 billion.
Despite these impressive growth and cost savings statistics, there are still over 15 times more checks processed each year than ACH payments. There are several reasons for this large disparity. Consumers and businesses find the check system to be convenient to use because the check is readily accepted in commerce. Another reason is that more of the costs to operate the check system are borne by the party collecting the check, not the check writer. There is still one more important fact that I will discuss in a few minutes. That is, the banking industry and the ACH operators do not commit enough resources to promote the use of electronic payments.
NACHA’s Relationship to the Federal Reserve
The Federal Reserve is one of four ACH operators (along with the American Clearing House, the New York Clearing House, and VISA). The four operators and their 20,000 financial institution customers adhere to the same operating rules and standards established by NACHA. This unique relationship allows any financial institution in the country to exchange electronic payments with any other institution under a common set of rules and formats. This also means that members of this Subcommittee, for example, can select any financial institution in the country to receive their pay by direct deposit. Regardless of what financial institution is selected, the payment will be processed in a timely and accurate manner.
When Congress approved the Electronic Fund Transfer Act in 1978 it limited the scope of the law to consumer protection matters. All other matters regarding the handling of electronic payments were left to the private sector to resolve. By relying on the private sector to establish the rules, the ACH Network has been able to respond quickly to marketplace demands to support new payment applications.
Because the Reserve Banks comply with the NACHA rules and require their ACH users to do the same, Federal Reserve representatives participate in the development of the NACHA rules. This allows the Federal Reserve to influence the development of rules but not to control their final outcome. NACHA has a similar relationship with the Treasury Department because of the Federal Government’s extensive use of the ACH Network.
NACHA also works closely with the Federal Reserve and the other ACH operators to help develop new services and applications. For example, NACHA has completed its Vision 2000 plan to prepare the ACH Network to serve the needs of financial institutions and their customers well into the next century. The ACH operators, including the Federal Reserve, will have to develop several new services under this plan.
Promoting the ACH
Eight years ago, NACHA launched its most successful marketing program to promote direct deposit of payroll, and today over 55 percent of all full time employees in the private sector receive their pay by this method. Two years ago the Federal Reserve and NACHA began to work together to promote the use of the ACH Network. Last year the Federal Reserve committed more resources to this effort than NACHA. However, both organizations understand that more resources need to be committed in the future. A significant portion of these resources will be used to promote consumer electronic bill payment services and electronic corporate trade payments. The reason for this is that participation rates for these applications are considerably lower than with direct deposit. For example, less than ten percent of consumer bill payments, and less than five percent of corporate trade payments are now made electronically.
We are discussing with the Federal Reserve and the other ACH operators the best means to fund this increased effort. We are optimistic that an agreement will be reached soon on an appropriate method.
Private Sector ACH Operators and the Federal Reserve
The Federal Reserve’s market share for processing ACH payments is approximately 80 percent. This high market share can be attributed to several factors:
· The Federal Reserve was the first ACH operator;
· The Federal Reserve was the first to offer ACH services nationwide; and
· The Reserve Banks process electronic payments in a highly efficient and reliable manner.
However, another contributing factor is that certain Federal Reserve practices make it difficult for private sector operators to compete effectively. The other ACH operators have brought their concerns to the attention of the Federal Reserve and we understand that the Federal Reserve is studying solutions to the problems.
New Payment Application
Major improvements will be made to ACH services and more resources will be committed to marketing, yet tens of billions of checks will be written each year into the foreseeable future. A new payment application is being developed by the private sector that would allow consumers and businesses to retain the conveniences of writing checks, while allowing businesses and financial institutions to achieve most of the cost savings associated with the use of electronic payments. Pilot programs are now underway that test converting paper checks into electronic payments at a merchant’s checkout counter. Initial results of these tests have been very favorable in terms of consumer acceptance and cost savings. To ensure that the consumer is completely protected during this conversion process, all of the safeguards built into both the check and the electronic payment systems are available for this application.
For this concept to be used for other check applications, such as when a check is mailed to a company to pay a bill or deposited with a financial institution, changes to Federal Reserve regulations may be necessary. We are currently working with the Federal Reserve to identify those changes.
Conclusion
The United States is a recognized world leader in embracing electronic technology for thousands of applications. Unfortunately, sending and receiving payments is not one of these applications. In many countries, electronic payments are used more frequently than checks.
Developing new ACH services and promoting the use of electronic payments more aggressively are necessary if the United States is to catch up with many of the countries we compete with in the world marketplace
In summary, NACHA has an excellent working relationship with the Federal Reserve and we are optimistic that the Federal Reserve will be responsive to the changes that are needed to improve the nation’s payment system, including the changes discussed above.
Again, thank you for inviting NACHA to share its views with this Subcommittee on these important issues and I will be glad to provide additional information or to answer any questions.