Q: How Would the Federal Reserve System's Anticipated Volume Discounts on Check Clearing Affect the Banking Industry?
We are in the process of putting together a request for public comment. We may be modifying the approach that was in the [research] paper that was originally presented to the Board of Governors in November. It would be useful for people to know that we are continuing to study how volume-based pricing should be used by the Fed, and where it may not be appropriate for us to use it.
We have not reached the conclusion that it should be broadly used in forward check collection, although it may be used in electronic check collection. The cost structure for checks is different than for those other businesses.
Volume discounting is based on the economic theory that in order to achieve scale economies in certain kinds of payment services, there are occasions where you have to reach certain volumes to achieve those economies. The only way you can do that is to provide incentives to high-volume users to use the product.
The theory is that if the service provider is only providing service to the low-volume users, their costs will go up.
We expect to see significant declines in volume once same-day settlement is implemented [this month].
To ensure that the market is truly competitive, we need to attract a sufficient volume to allow us to continue to be an efficient provider.
Obviously, we're operating in a competitive market, but we're not aiming our efforts at any one competitor.
The association has not yet developed an official position. We're waiting for the Fed's proposal to come out.
At first blush, it looks like an attempt to attract high-volume users. We have to evaluate what the long-term effects of that will be on community banks.
Right now, the Fed is dependent on high-volume users to defray its fixed costs. Without those high-volume users the community banks would have to bear those costs.
Most likely, volume pricing will benefit the larger banks. In today's pricing scenario, many districts have a minimum charge, so those institutions that don't clear many items still pay the flat minimum rate. It's not clear how that would be affected by volume discounts.
On the positive side, this gives the bank the option to look at one of two alternatives - fixed rate pricing or volume pricing.
There's been a moderate increase in fees for low-volume users for 1994. We think the Fed may be setting the stage for the future, but we're not sure what that will mean in the long term. …