Electronic Banking

1
Electronic Banking

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

2
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.

3
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.

4
Retail payments and financial services

• ATM fees
• Assume a 300 cash advance is requested by
  customer using Citibanks 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.

5
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.Sgt government payments to individuals
  be made by EFTs.
• Electronic Funds Transfer Act of 1978 provides
  guidelines for financial institutions use of
  EFTs.

6
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.

7
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 Treasurys
  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

8
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
  participants 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.