Bankers are crying foul over new Federal Reserve Board pricing initiatives for electronic payment and check clearing services.
While the individual initiatives taken early this month are seen as relatively insignificant, some bankers say they represent troubling precedents.
At the heart of the issue, bankers say, is the old argument over whether the Fed can be both a regulator and a service provider in competition with the banks it regulates.
The issue has gained urgency over the past year as the Fed prepares for necessary system changes.
Costs will rise with an upgrade of the Fed's technology, while revenue for some of its services is expected to decline sharply with the introduction next year of government mandates such as same-day settlement.
Banks that do significant business with each other are expected to clear their payments directly, bypassing the Fed, in order to meet the 8 a.m. deadline set by the same-day regulations.
Also at issue is the ability of several fledgling private-sector alternatives to the Fed to build profitable businesses.
Part of what makes these initiatives competitive is their ability to charge less than the Fed, while bypassing the Fed so that participating banks need not pay the central bank on top of the private sector fees.
Visa U.S.A. and the New York Clearing House Association are trying to expand their automated clearing house services, which compete with the Fed's, nationwide. And the National Clearing House Organization is establishing a nationwide check-clearing network for large banks.
Some bankers are asking whether the Fed's recent pricing actions comply with the spirit of the Monetary Control Act of 1980, which attempts to promote private-sector competition by requiring the Fed to charge market prices and recover its costs.
Meeting on Nov. 3, the Board of Governors approved proposals from the Fed banks in Minneapolis and Richmond, Va., to offer volume discounts on an interim basis for several check clearing and collections services.
The discounts could slash as much as 50% off the normal per-item cost for large volume users of the service. Bankers say the discounts are far higher than correspondent banks typically offer.
The Fed Board did instruct its staff to come up with a formal proposal to base some fees on volume rather than purely on cost.
That proposal, the board said, would go out for public comment. The interim services offered by Minneapolis and Richmond would then be subject to whatever decision was made on the overall proposal.
Driving volume-based pricing is an attempt by the Fed to maintain the cost-effectiveness of its services. The Fed expects to lose about 10% of its check volume next year as same-day settlement takes effect.
As a …