Depository institutions should remain the only financial service providers with direct access to the Federal Reserve's payment system, according to an ABA report on how the payments system should be in future.
ABA's other central finding is that only depository institutions should be allowed to issue third-party instruments that function like cash. This would include stored-value instruments, such as smart cards and electronic money, but not two-party instruments involving just the issuer and the consumer, such as the stored-value cards issued by some transit systems.
The report does provide for exceptions to be made to these proposed rules on a case-by-case basis.
When asked to give an example of an institution for which exception might be made, Murray Lull, chairman of The Task Force, said "I can't see any exception that is not a bank." Even if a contender had the necessary capital--a Microsoft, for example--it would have to be regulated like a bank. I can't see how it would work," said Lull, who is president and chief executive of Smith County State Bank and Trust Co., Smith County, Kan.
As to who would decide such matters, Lull said no single authority decides matters pertaining to the payment system. Congress, the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation already have made their positions clear by not allowing anyone other than depository institutions and government-sponsored enterprises (GSEs) to use the Fed's payment system thus far, he argued.
The week after ABA released its payments system report, at the asociation's annual convention, the Fed announced the appointment of a committee to review the payment services it provides "given the significant changes occurring in payment processing."
A spokesman for the Fed said it had no comment to make on the ABA report, but confirmed that no exceptions have ever been made to the general rule that only GSEs and depository institutions have direct access to the Fed's wire transfer system. "That's the law," he said.
The current Fed Wire system leaves the Fed temporarily exposed because it irrevocably wires funds to the receiving institution before it receives payment from the sending institution. The Fed trusts in the sending institution because it has been examined and found fit.
The ABA questioned how a nonbank could be regulated. The risk-based capital model used for banks would likely not be appropriate because most nonbanks wouldn't have banks' capital levels. Equally, ABA argued that the disclosure-based model used for securities firms would not suit some of the new payment instruments. Although a consumer may be motivated to become an expert on how their investment portfolio works the same will hardly be true of a $25 smart card, sources note.
The association pointed to money recently lost by consumers on prepaid telephone cards as a relatively small example of what could go wrong if nonbanks are allowed access to the payment system. In that case, telephone carriers deactivated the cards provided by unscrupulous operators before consumers could make the calls they had paid for. Were third-party payments involved, consumer confidence in the entire payment system could shatter, the ABA said.
Another key concern is that banks could be placed at a competitive disadvantage by competing with institutions not carrying the same regulatory burden. Banks pay "billions of dollars every year...simply to do business as a bank," the report said.
As Jim Culberson, immediate past president of ABA, told a press briefing at the annual convention, "If we allow somebody into the business we're in without these regulations, we're going to be cut out totally."
Microsoft Corp., the Bellevue, Wash., software giant, is probably the most oft-cited contender to banks ever since chairman, Bill Gates, asserted that "banks are dinosaurs." This spectre was quoted in ABA's report, which asked whether banks will retain their "central role" in the settlement of payments or be reduced to "bit players" by new entrants including telephone, television, and telecommunictions providers. Other potential challengers mentioned by task force participants are American Express and General Electric Corp.
Look for endorsements
At a press conference at which the report was made public, some reporters questioned whether the recommendations weren't self-serving.
James Culberson put it to the gathering, "There's no other industry that has FBI checks to ensure that the people handling money are not felons."
Although John Laware, a consultant to the payments system task force, agrees that the public policy arguments for ABA's position are "overwhelming," he says without nonbank support "it might be argued that this is restraint of trade." Consequently, Laware, who is a former Federal Reserve governor, suggests ABA seek third-party backing for its findings. "If I were king," he said, "I'd want to pursue governmental or judicial endorsement of the position stated."
Indirect support (ABA's report noted) has come from the Congressional Budget Office and the Euorpean Monetary Institute whose reports reached similar conclusions to ABA's. "The European position was established two years ago, " Laware said, adding, "I think the Fed's in a waiting position." In this he echoed others who remarked that the Fed lately has tended to take a hands-off approach to electronic banking.
Where ABA goes from here will be decided by a working group formed under the direction of ABA Chief Economist James Chessen.
Banking representatives on the group currently are being selected by Culberson, who first commissioned the task force in December, 1995. Chessen said ABA will work with the Bankers Roundtable, which released its own report on the payment system in September, one month before ABA. "The important thing is to co-ordinate, not to duplicate, efforts," he said. It has not been decided whether ABA will subscribe to the certification of software, services and, even, players that the Bankers Roundtable proposed, or whether ABA will come up with its own. Given the level of flux in electronic banking, ABA said it was attempting only to establish the broad policy framework.
Laware anticipates that nonbanks will challenge the current operation of the payments system, resulting in case law. Laware, who consulted with the task force as a representative of The Secura Group, is now chairman of The Alliance for the Commonwealth, a trade asociation, which is based in Boston. "Even if the Fed decides on this issue," he said, "it will probably have to be tested in court."
 |
 |