WASHINGTON – Credit unions that process checks through the Federal Reserve will find themselves paying more for check services next year, and those that use the agency for electronic payments will pay less. The Fed Board on Oct. 22 approved the 2004 fee schedule for the Federal Reserve Bank priced services, and effective January 2004, the agency will raise prices overall for check services by 5.2%. Fees for forward-collection check products will go up 5.8%, return check products 6.1%, and payor bank check products will be increased 0.7% compared with January 2003 fees. The Fed, conversely, will lower prices for electronic payments by an average of 1%. Its input file processing fee will decrease from $5.00 to $3.75. All other FedACH fees will remain unchanged. In addition, the Reserve Banks: * will retain fees at their current levels for Fedwire funds and national settlement; and * will reduce the online transfer origination and receipt fee from 40-cents to 32-cents, and will reduce the claim adjustment fee from 38-cents to 30-cents. In addition, the Reserve Banks will increase the off-line surcharge from $25 to $28 and will increase the joint custody surcharge from $22 to $30. All other fees will remain at their current level. Those fee increases for check processing and decreases for electronic payments are noticeably higher than in previous years: * effective Jan. 2003, the price level for Federal Reserve priced services was increased less than 1% from 2002 levels. Check service fees, on average, increased approximately 3%, and fees for the Fedwire funds transfer, Fedwire securities, and FedACH declined 5%; * effective Jan. 2002, the price level for Federal Reserve priced services was increased 2.1% from the 2001 level. Fees for all electronic payment services declined 5%, and check service fees increased approximately 4% compared to 2001; * effective Jan. 2001, the price level for Federal Reserve payment services was increased 4.2% from 2000 – check service fees increased about 3%, and electronic payment services fees remained unchanged. CUNA Assistant General Counsel Michelle Profit wasn’t surprised at the latest increase in the Fed’s fees for check services. For a long time, she said, they’ve been reporting that check usage was declining. Now, in accordance with the requirements of the Monetary Control Act of 1990 which requires that fees for Federal Reserve priced services be set on the basis of all direct and indirect costs, the Fed has to raise the fees on its check services to recover the costs lost on diminished check volume, she explained. Although the Reserve Banks recovered 98.8% of their total costs for providing priced services for 1993 through 2002, including operating costs, imputed costs, and targeted return on equity, it estimates cost recovery to be 85.6% in 2003, compared with the budgeted recovery rate of 93.7%. The Reserve Banks expect to incur an overall net loss of $44.4 million, which is $87.3 million less than the budgeted net income of $42.9 million. For 2004, the Reserve Bank projects a priced services cost recovery rate of 93.6%, with net income of $48.2 million, compared to target net income of $112.4 million In its report, the Fed stated that, “The aggregate cost recovery rates are heavily influenced by the performance of the check service, which accounts for approximately 83% of the total cost of priced services, The electronic services (FedACH, Fedwire funds, and national settlement (NSS) and Fedwire securities) account for approximately 17%.” The Fed cited two factors contributing to its 2004 cost recovery and influencing its pricing decisions: one-time costs associated with planned and potential further restructuring of the Reserve Banks’ check operations, and the continued decline in check volume. The Fed’s report noted that through August 2003, its check volume was down 4.8% compared to the previous year, while its ACH volume was up 13.2%. So, with a decline in check volume, there are fewer items over which to spread the fixed processing costs, making each item more expensive. ACH volume was up 13.2%, so there’s greater ACH volume to spread processing costs over. “The volume of checks handled by the Reserve Banks has declined, reflecting the broader market trend in which the use of checks continues to decline,” the Fed wrote. The Fed also addressed this in a release, writing that “since the mid-1990s, there has been a national trend away from the use of checks that has affected the entire industry. This trend, which is consistent with the Federal Reserve’s position of encouraging the use of more efficient electronic payment alternatives, has reduced the Reserve Banks’ check volume.” In 2004, the Reserve Banks plans to focus mostly on opportunities to further streamline check processing and adjustment systems across the Federal Reserve system. The agency expects its multi-year check modernization project, intended to standardize the Reserve Banks’ check processing operations, will be just about completed by the end of 2003. In 2004, the Reserve Banks plan to reduce check costs by $21.2 million by phasing out the check modernization management and implementation teams. But Mike Provensano, executive vp, business operations for Liberty Enterprises cautioned that the Fed’s numbers that show the decline in check volume “have to be taken with a grain of salt,” he said. “Overall the Fed processes about 56% of all checks in the U.S. So when they talk about a decline, you really don’t know if it’s really part of a decline in their market share to other item processors like corporates,” he said. Provensano estimates check volume will decline 2-3%, based on current trends. The decline in check volume will continue, he said, but at the same rate it has been without any significant drop offs. Profit meanwhile opined that “it’s too soon to tell what effect the Fed’s increase in check services fees will have on credit unions,” but she added that “they’re definitely going to feel the increases. Just how much depends on the volume of item processing a credit union does through the Fed.” She hesitated saying whether the fee increase will drive more credit unions to process their share drafts through corporate credit unions. “Each credit union will have to make an individual business decision based on their relationship with their corporate,” she said. Provensano agreed, but he disputes that the Fed’s increase in check services fees will cause credit unions to place less marketing emphasis on checks and more on electronic payments. “There’s no cause and effect relationship. Members are looking for a variety of payment systems to suit their lifestyles. The challenge to credit unions is provide all types of payment choices and to use their creativity in promoting one kind over another.” He added that credit unions will take a “collective approach” that takes in to account the total cost for all their payment choices, in figuring out to price them accordingly. But Eric Kenealy, president/CEO of SunCorp offered that the Fed’s price increase will drive more credit unions to corporates, leagues or league service corporations for item processing services because they by-pass the Fed and can therefore charge less for item processing. SunCorp, for example, has established a direct relationship with the credit unions it processes items for, so the credit unions present their items directly to SunCorp, and the corporate presents the processed items directly back to the credit unions. SunCorp has about an 85% market share among credit unions Colorado and a 90% market share in the Utah market which Kenealy said includes Idaho and Wyoming. He noted that the Fed plans to shut down its Omaha, Neb. office in April 2004 as part of its restructuring initiative. “Those credit unions are going to be looking for an alternative item processor. With the Fed announcing its price increase on check services, that’s a great opportunity for a credit union provider to provide them item processing,” said Kenealy. – [email protected]

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