Electronic Banking Outline Retail payments and financial services Electronic banking products for the wholesale market Electronic money Large-dollar transfers

Electronic Banking Bank and nonbank providers of bill paying, money market accounts, automatic teller machines, debit cards, and other electronic financial service. Began with telegraph in 1870s. ATMs are best example, which began in 1968 and now about 200,000 in number in the U.S. Internet is stimulating rapid growth of electronic financial services. Cash and checks dominate volume of payments transactions, but value of transactions is dominated by electronic transfers.

Retail payments and financial services Individual payments for goods and services by cash and checks. Electronic payments will lower the costs of operating the payments system. Geographic boundaries for delivering retail banking services is diminished or eliminated by electronic services. Privacy issues and potential for fraud and theft. Internet banking for bill payments and brokerage services. Also wholesale services for corporate customers, such as derivatives trading, foreign exchange, letters of credit, and global treasury services. Automatic Teller Machines (ATMs) can be proprietary systems, shared/regional systems, and national/international systems. Full-service ATMs to merely cash dispensers are available.

Retail payments and financial services ATM fees: Assume a $300 cash advance is requested by customer using Citibank’s Gold Advantage credit card. Finance charge = 3% or $9. Interest rate on cash advance = 19.99% or $3.97. Annual Percentage Rate (APR) = ($9 + $3.97) x 12/$300 = 51.88% Interest rate accrues daily until payment is made in full. Conclusion: cash advances are encouraged due to high yields for banks.

Retail payments and financial services Electronic bill presentment and payment (EBPP): Recurring bills and preauthorized debits to checking accounts (e.g., utility, insurance, and credit card bills). Decreases transactions costs of bill payments, as well as time to process payments. System operator (e.g., bank or computer company) presents bill to customers, who direct payments to made immediately or later. Paper based systems are diminishing in importance with internet. Electronic funds transfer (EFTs): Debt Collection Improvement Act of 1996 required that all U.S> government payments to individuals be made by EFTs. Electronic Funds Transfer Act of 1978 provides guidelines for financial institutions use of EFTs.

Retail payments and financial services Electronic money: Many forms including On-line accounts for transfer over the internet Stored value cards and smart cards that can be reloaded with funds for payments Credit cards Advantages and disadvantages Fast and convenient, can be used over internet. Not all merchants accept all forms of electronic money. Security and privacy could be problems. Need to verify identity. Government policy is unclear on deposit insurance, who can “coin” digitized money, and control of this money supply.

Retail payments and financial services Seigniorage: Difference between the monetary value and cost of production of money (e.g., $0.25 coin costs $0.05 to produce, so seigniorage is $0.20). Today in the U.S., seigniorage is interest saved by the Treasury by issuing currency, which is non-interest bearing debt. New electronic forms of money are a type of private money, which will diminish the Treasury’s profit on seigniorage. Home mortgage loans over the internet: Direct lenders Brokers to find the best deal for their customers and do paperwork Referral services that find the best deal but do not do paperwork Mortgage auction sites that solicit bids from lenders for customers

Large-dollar transfers Wholesale payments: Fedwire or Clearing House Interbank Payments System (CHIPS), as well as the Society for Worldwide Interbank Financial Telecommunications (S.W.I.F.T.). Fedwireis a real-time gross settlements (RTGS) system that processes each transaction individually rather than in batches. The Fed grants finality (or assumes credit risk of transfer). CHIPS, located in New York since 1970, is for international funds transfers. Operated since 1970 as an electronic replacement for paper checks in international dollar payments. Multilateral netting is provided to get each participant’s single net position vis-à-vis other participants. Largest privately operated payments system with settlement risks (e.g., credit risk, unwinding risk, liquidity risk). S.W.I.F.T. in Belgium is cooperatively owned by banks around the world. This system is used primarily for communications, and CHIPs and Fedwire handle payments transfers.