Letter to FRB Supporting ECCHO's Request for Competitive Impact Analysis...

June 8, 2015




Committee on Federal Reserve Bank Affairs


Governors Jerome H. Powell and Lael Brainard Board of Governors of the Federal Reserve System 20th Street and Constitution Avenue N.W. Washington, DC 20551


Re:         ECCHO’s Request for a Competitive Impact Analysis Regarding Federal Reserve Bank Check Services


Dear Governors Powell and Brainard:


The Clearing House Association L.L.C. and the Consumer Bankers Association (together “the Associations”)1 respectfully submit this letter in support of the recent request by the Electronic Check Clearing House Organization (“ECCHO”) that the Federal Reserve Payment System Advisory Committee undertake, or recommend that the Federal Reserve Board (“Board”) undertake a de novo competitive impact analysis of the Federal Reserve Banks’ check image services (“ECCHO Letter”). We understand that the ECCHO letter has been rerouted to the Committee on Federal Reserve Bank Affairs. As explained below, the Associations strongly support the requests set forth in the ECCHO Letter and agree that a de novo competitive impact analysis is justified in light of the impact the transition  to an electronic image-based check collection system has had on the Federal Reserve Banks’ competitive position over private sector competitors.


As ECCHO points out, the Federal Reserve Banks have certain statutory advantages that adversely affect the ability of the private sector to compete effectively with the Reserve Banks in providing electronic check collection services. First, as a matter of federal law, paying banks cannot impose a presentment fee on a Reserve Bank that presents an item for collection. In addition, Reserve Banks are entitled to same day settlement due to statutorily-mandated account relationships. In 1989, the Government Accountability Office found that this “unique ability” of the Reserve Banks to present checks and receive same day settlement without a fee was the “most important competitive difference between the Reserve Banks and their private sector competitors in check collection.”2 The Board addressed this competitive difference in 1992 when it implemented the “same day settlement rule” (“SDS Rule”) in Regulation CC. The SDS Rule requires a paying bank to settle checks presented by a


1 Please see Appendix 1 for a description of the Associations.

2  Federal Reserve System: Mandated Report on Potential Conflicts of Interest (GAO-01-160, November 2000),

available  at  http://www.gao.gov/assets/230/229824.pdf  (citing  Check  Collection:  Competitive  Fairness  Is  an Elusive Goal (GAO/GGD-89-61, May 12, 1989)).


private sector collecting bank on the day of presentment without imposing a presentment fee.3 However, the SDS Rule applies only to paper presentment, which, as ECCHO explains in its letter, is no longer cost effective. ECCHO correctly points out that with the transition to an electronic check collection system, “the competitive balance between the Reserve Banks and the private sector banks that was established with the SDS Rule within the context of the market for paper check exchange services has effectively been eliminated.”


In addition, the Associations agree with ECCHO that the statutory advantages the Reserve Banks enjoy are compounded by certain Reserve Bank service and pricing practices, such as providing discounts on services to encourage institutions to process check images through the Reserve Banks. We also share ECCHO’s concerns about the Federal Reserve’s calculation of the “Private Sector Adjustment Factor” (“PSAF”) as required by the Monetary Control Act,4 including whether the Federal Reserve’s methodology appropriately accounts for the costs that would be incurred by a private sector firm offering similar services. Accordingly, the Associations agree with ECCHO that a competitive impact analysis should include a review of the PSAF as it relates to check image services. Given the significance of these issues to the nation’s payment system, we agree with ECCHO’s view that the Board should provide the public with an opportunity to comment on these issues.


For these reasons, we urge the Board to grant the requests set forth in the ECCHO Letter.

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Thank you for taking the time to consider these comments. If you have any questions or wish to discuss this letter, please do not hesitate to contact the undersigned.



Very truly yours,


Robert C. Hunter



Executive Managing Director and Deputy General Counsel

(336) 769-5314



David Pommerehn



Vice President & Senior Counsel Consumer Bankers Association (202) 552-6368








3 12 C.F.R. § 229.36(f).

4 Under the Monetary Control Act and its pricing principles, the Federal Reserve is obligated to set pricing for its payment products based on its actual costs plus the PSAF that requires the Federal Reserve to take into consideration, among other things, a private sector competitor’s taxes and cost of capital. Principles for the Pricing

of                Federal                   Reserve                   Bank                   Services                   (1980),                   available                    at  http://www.federalreserve.gov/paymentsystems/pfs_principles.htm.



Board of Governors of the Federal Reserve System

Governor Daniel K. Tarullo

Louise Roseman, Director, Reserve Bank Operations



Federal Reserve Bank of New York

William C. Dudley, President



Federal Reserve Bank of Boston

Eric S. Rosengren, President



Federal Reserve Bank of Minneapolis

Narayana Kocherlakota, President



Federal Reserve Bank of Atlanta

Marie Gooding, First Vice President


Appendix 1

Description of Trade Associations

The Clearing House


Established in 1853, The Clearing House is the oldest banking association and payments company in the United States. It is owned by the world’s largest commercial banks, which collectively hold more than half of all U.S. deposits and which employ over one million people in the United States and more than two million people worldwide. The Clearing House Association L.L.C. is a nonpartisan advocacy organization that represents the interests of its owner banks by promoting and developing policies to support a safe, sound and competitive banking system that serves customers and communities. Its affiliate, The Clearing House Payments Company L.L.C., which is regulated as a systemically important financial market utility, owns and operates payments technology infrastructure that provides safe and efficient payment, clearing and settlement services to financial institutions, and leads innovation and thought leadership activities for the next generation of payments. It clears almost $2 trillion each day, representing nearly half of all automated clearing-house, funds transfer and check-image payments made in the United States. See The Clearing House’s web page at www.theclearinghouse.org.


Consumer Bankers Association


Founded in 1919, the Consumer Bankers Association (CBA) is the trade association for today's leaders in retail banking - banking services geared toward consumers and small businesses. The nation's largest financial institutions, as well as many regional banks, are CBA corporate members, collectively holding well over half of the industry's total assets. CBA’s mission is to preserve and promote the retail banking industry as it strives to fulfill the financial needs of the American consumer and small business.