Magazine article American Banker

Changes in the Fed's Pricing Policies Appear to Have Helped Eliminate Its Unfair Advantages, GAO Study Says

Magazine article American Banker

Changes in the Fed's Pricing Policies Appear to Have Helped Eliminate Its Unfair Advantages, GAO Study Says

Article excerpt

WASHINGTON -- Congressional investigators reported Wednesday that recent changes in check-processing charges and services by the Federal Reserve Board appear to have eliminated key advantages the Fed had over private sector competitors.

An outline of the findings from the General Accounting Office were presented at a Senate Banking Committee hearing on Fed pricing policies.

Many banks, particularly large ones, have argued that the Fed has an unfair competitive advantage in providing payments services.

In its first annual report on pricing policies, the Fed this week outlined additional changes that may possibly be made this year. However, the Fed stressed in the report that fewer modifications in prices or service levels are expected in 1984 than were made in the two previous years.

At the Senate Banking Committee hearing Wednesday, William J. Anderson, director of the general government division of the GAO, said that at the start of 1983, Fed prices were low enough to confer a subsidy on its users, to the disadvantage of competitors.

But the GAO study shows that this changed during last year, he said, when the Fed began pricing check float, increased its prices, and altered the mix of services.

"Average revenue per check increased by 38% over the course of the year," the GAO official told the committee. "There no longer appears to be a subsidy in the pricing of Federal Reserve check-clearing services," he said in describing the "bottom line" of the GAO findings.

The Fed's performance also was defended by E. Gerald Corrigan, president of the Federal Reserve Bank of Minneapolis.

But as expected, Barry Sullivan, chairman and chief executive officer of the First National Bank of Chicago, told the committee that Congress must redefine the Fed's role in the national payments system. He said the Fed's dominant share of payment processing and its "conflicting roles are as rulemaker and service vendor" are among the reasons that the Fed is not "just another competitor" and that its duties must be redefined by Congress.

Mr. Sullivan, testifying on behalf of the more than 50 banks in the National Payments System Coalition, suggested that among other things Congress consider limiting the Fed's share of any core payment service to no more than 50%, with the rest to go to private providers.

Both Mr. Sullivan and Christopher J. Murphy 3d, a South Bend, Inc., banker testifying on behalf of the American Bankers Association, recommended that the Fed periodically disclose to the public its long-term plans for competing in payments services.

In general, the ABA witness said, the group agreed that the Fed has made significant strides to improve private sector competition but that more needs to be done. The Changes Slated for '84

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