Jancura, Elise G.

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eGrove (Univ. of Mississippi)

Woman C.P.A. Volume 39 Issue 4 Article 9 10-1977 Electronic Data Processing: A Survey of Electronic Funds Transfer Systems Elise G. Jancura Follow this and additional works at: https://egrove.olemiss.edu/wcpa  Part of the Accounting Commons, and the Women's Studies Commons Recommended Citation Jancura, Elise G. (1977) "Electronic Data Processing: A Survey of Electronic Funds Transfer Systems," Woman C.P.A.: Vol. 39 : Iss. 4 , Article 9. Available at: https://egrove.olemiss.edu/wcpa/vol39/iss4/9 This Article is brought to you for free and open access by the Archival Digital Accounting Collection at eGrove. It has been accepted for inclusion in Woman C.P.A. by an authorized editor of eGrove. For more information, please contact egrove@olemiss.edu. Electronic Funds Transfer (EFT) is a new payment medium which substitutes electronic messages for pieces of paper, such as checks, invoices and deposit slips. EFT can greatly reduce the burden of paper handling and operating costs in recording financial transactions. It is es­timated that the nation’s banking system alone handles a daily load of about 30 billion checks. In addition to banks, EFT will also help relieve the paper handling burden in retail stores, payroll departments and service com­panies that mail out bills at regular in­tervals, such as insurance companies and utilities. The Federal Government already deposits more than 3 million monthly social security checks per EFT.At the same time, EFT also represents potential problems. These are potential loss of control by the consumer over his own financial affairs, concern over the loss of privacy, the possibility of un­authorized access to an individual’s financial records by outsiders, the loss of float, and a number of as yet un­resolved legal issues such as questions of consumer rights, interstate commerce, and the question of legalized branch banking. Other concerns are centered on the potential loss of proof of payment in the EFT system and of the ability to stop payment.Automated Teller MachinesElectronic Funds Transfer facilities can appear in several different forms. One form is the Automated Teller Machines (ATMs) which are unmanned devices capable of dispensing cash and performing certain other simple ser­vices. These devices may be located on the physical premises of a bank itself or be at some remote location. They may be stand-alone or they can be on-line to a central computer. When an ATM is in­stalled as an on-line device to a bank’s central computer, it can provide more extensive services because that arrange­ment allows access to the bank customer’s records and therefore provides the opportunity for greater transaction variety.The use of ATMs is in the period of some uncertainty. There have been con­tradictory court decisions as to whether these ATM devices should be con­sidered a branch bank and therefore be subject to branch approval regulations. ATMs have the potential to materially reduce the investment for branch facilities and to provide considerable savings in the central banking location with a potential for reduction in teller and other operating costs. Proper place-ElectronicData ProcessingA Survey of Electronic Funds Transfer Systemsment of ATMs also represents an im­portant competitive tool for banks which are interested in expanding and increasing their share of the financial business of a given area. One possible solution to the current uncertainty over the definition of a branch bank would be to exclude specific types of transactions performed by these ATMs from the definition of branch banking.One other question which exists in the use of ATMs centers upon the issue of possible sharing of ATMs among all financial institutions of a given area. Many in the banking industry associate the competitiveness of branch placement with the ATM. On the other hand, non­banking interests point out the need for a universal ATM available to their employees and customers whatever bank they may use. The installation of ATMs has been slowed by these as yet unresolved questions and also by the cost of purchasing and installing ATMs. To date these have been relatively ex­Editor, Elise G. Jancura, CPA, Ph.D. The Cleveland State University Cleveland, Ohiopensive facilities to install although the expectation is that the price of these devices may decrease dramatically in the next several years.If, in fact, future developments pro­duce an inexpensive ATM unit and the legislative questions are resolved, one could expect that there will be a great in­crease in the installation of ATM units. These units could be placed in heavy traffic locations providing a convenient cash-dispensing or check-cashing ser­vice on a 24 hour basis. Once users become accustomed to the practice of using an unmanned automated device for cashing checks, the stage might be set for the extension of these automated services to other activities such as transfer transactions or bill paying.Point of Sale TerminalsPoint of Sale Terminals (POS) are manned devices usually located at the checkout counters of retailers. These devices have been in operation for a number of years and have made the 24/ The Woman CPAprocess of maintaining store records on sales, inventories and accounts receivable more efficient, and therefore, less costly. A logical extension of the use of traditional POS devices has been to use these devices to record transactions involving the banking activities of the retailer and the retailer’s customers. Thus the retailer can provide a facility in which the retailer’s customers can cash checks, make deposits or initiate other transfers from their accounts directly to the retailer.The POS devices allow the banks to extend services to their depositors at convenient locations with relatively small investment on the part of the bank. Use of POS facilities diminishes the personal contact between the financial institution and its customers and further, makes it relatively difficult for the customer to distinguish one bank from another. Since the POS devices are manned by the retailer’s clerks, the bank cannot exercise control over the level of customer service and, therefore, satisfaction. On the other hand, POS networks do represent a service to the customer by allowing a combination of banking and shopping activities. POS also represents an advantage for the retailer, for it represents another service which the retailer can advertise which will help draw more customers into the retailer’s store. Further, it can help reduce check losses to the retailer through immediate direct verification procedures when a check is presented for payment.EFT provides the technological capability to abuse civil liberties by con­centrating information which was formerly scattered and making that in­formation accessible and processible. Thus on the one hand legislative activity is expected to function in an enabling fashion by encouraging the develop­ment of EFT techniques. On the other hand there is expectation of legislative activity which will regulate EFT development to protect consumers’ privacy and other rights.Many consumer advocate groups and legislators are concerned that EFT could expose confidential records to un­authorized scrutiny, violating the con­sumer’s right to privacy. To protect the consumer’s rights, privacy laws will have to be modified extensively to in­clude EFT facilities. The system developers must be required to incor­porate strict security and control provisions while establishing EFT systems. It is expected that the majority of this legislation will be on a federal level in order to insure consistency and to support interstate operations of the required networks, particularly the use of interstate telephone lines.Most EFT networks under develop­ment are being structured to be shared. This is an economic necessity because of the high cost of development and programming for these projects and the fact that they become economically feasible only if there is a sufficiently large group of users who can participate in the services of a given facility. The regulatory agencies have recognized this need and have encouraged shared networks as a pre-condition to ap­proving a facility. This requirement is expected to become more generalized and be incorporated in legislation governing EFT. Thus it is expected that legislation regarding EFT will probably include anti-trust considerations with rules applied very stringently where ATM and POS devices are installed on a sight other than the location of the spon­soring financial institutions.EFT has the potential to provide sub­stantial operating savings to financial institutions, to private businesses, to retailing operations, and to the con­sumer directly. At the same time, however, EFT also has the potential to introduce certain problems such as loss of certain freedoms and the potential for violation of individual privacy and the loss of a degree of control over one’s financial transactions. The sometimes conflicting interests of the several different groups potentially involved in EFT — the financial institutions, the retail stores, the consumers, and the government — suggest a very important roll for government regulation in the future development of EFT systems. Thus future government action can probably be characterized by two prin­ciple objectives: to insure that the con­sumer shares in the benefits of EFT; and to stimulate greater competition amongst all institutions that provide financial services.Large scale introduction of POS ter­minals as a part of an Electronic Funds Transfer facility requires that there be a fairly significant development of stan­dardized communication systems. The retailers involved do not want to be in the position of determining where customers bank. Therefore, POS ter­minals installed at a retailer’s location to handle EFT functions must be able to communicate with a number of different banks in order to be effective. Further, retailers are concerned with the poten­tial impact of adding banking services to their normal POS activities on the average wait-time for customers as they stand in lines.An indication of the potential of POS terminals for Electronic Funds Transfer is offered by Continental Bank of Chicago. As reported in a recent con­ference, Continental Bank has terminals installed in 300 Kominick stores, 180 National Tea stores, eight Treasure Island stores, twelve Wieboldts, and one regional amusement park. The bank’s network handles 1 million transactions per month. Terminals currently handle Master Charge authorization and check approval in from two to five seconds. In the same processing network, Continen­tal Bank also has fourteen automated teller machines.Many of the POS terminals that are currently linked with financial in­stitutions are presently limited to per­forming check-guarantee or check­verification functions for the retailer. However, several systems are now in operation which have expanded the ser­vice to posting actual monetary transac­tions. The major credit card associations are working on plans for the development of debit card capabilities.Once again, however, the legal situa­tion is somewhat unclear since several courts have ruled that the acceptance of deposits and handling of monetary tran­sactions make these POS devices act as branch banks. To avoid being classified as branch banks, many current POS networks treat monetary transactions simply as transfers between the retailers and the customers accounts.Automated Clearing HousesStill another form of EFT is the Automated Clearing House (ACH). The ACH is an organization which sup­ports the exchange of electronic value transactions between customers of member banks (and in some cases other financial institutions). It is formed by the commercial banks and is patterned after the traditional clearing house associations organized in most cities to centralize the physical exchange of checks among member banks. Current­ly much of the activity in ACHs takes the form of direct deposit of government and payroll checks and of pre- authorized payments.Payments and the off-setting credit are shown by electronic rather than paper entries, and the exchange or clear­ing is performed by transferring elec­October, 1977/25tronic images rather than the physical documents. Typical credit transactions in an ACH are regular pre-authorized deposit transactions recorded on magnetic recording media such as payrolls, interest, and dividend payments. Debit transactions are usual­ly the payment of recurring bills such as insurance, utilities, and mortgage payments. Member banks support this facility because of its function in reduc­ing the substantial check-handling costs incurred in an increasing volume of checks.According to a survey conducted in August, 1976, there are now seventeen operating Automated Clearing Houses which process a total of more than 400,- 000 transactions per month. At that time membership in the seventeen ACHs consisted of more than 5,200 commercial banks and thrift in­stitutions. Sixty per cent of the credits had originated from the government and credit transactions represented 75 per cent of the total volume. The types of transactions currently handled by ACHs are limited because they have been set up to perform transfers among the members of a particular ACH. Gradually, these individual ACH organizations have begun to develop the ability to transfer data amongst themselves. The recent adoption of stan­dards governing inter-ACH processing will greatly facilitate a national informa­tion exchange network and should greatly expand the impact of ACH ac­tivities. everywhere.Presently the Federal Government itself is one of the heaviest users of ACHs. As of January, 1976 over 2.7 million social security checks were being deposited directly into recipient’s ac­counts and will all flow through the national ACH network when it is com­pletely established. In addition, the U.S. Civil Service Commission has an­nounced plans to offer direct deposit ser­vices. Many of the currently existing ACH networks also process transac­tions using Federal Reserve computers.The obvious advantage to a financial institution of an ACH is the reduced operation costs in check handling and teller operations. However, it is general­ly recognized by most financial in­stitutions that paper entries will not totally disappear and therefore the need will continue to maintain a dual process­ing system.Consumers too can benefit from the availability of an ACH facility. Benefits to the consumer are the convenience of having payroll deposits made 26/ The Woman CPAautomatically at a bank of choice and the reduction in clearing delays such as the time required to receive a check in the mail and physically travel to the bank. In addition, the ACH can provide added security since it greatly reduces the opportunity for loss or theft of checks or other materials. Further, pre­authorized payments can eliminate the effort and expenses of writing checks and mailing payments.Despite these benefits, many customers feel uneasy with direct deposit and automatic payment. Some object to the loss of control which they have when they control the initiation of payments or deposit of funds directly. Another matter which concerns some users is the loss of float and the loss of the use of grace period on pre­authorized payments.Automated Telephone PaymentAutomated Telephone Payment (ATP) requires the availability of a Touch-Tone telephone. ATP allows the user to initiate payments or transfer funds between accounts through the Touch-Tone telephone. The user enters an identification number, a transaction code, and the dollar amount via the keys on the telephone. The user established his connection with the network by dial­ing the network’s telephone number and the network then routes the user’s in­structions to the financial institution where the user’s account in maintained.The advantages of an ATP to the financial institution is the reduction of paper handling problems and operating costs. The benefit to the user is ease and convenience. The user does not have to prepare checks, is not limited by bank­ing hours, can save postage and/or travel time, and can draw on funds in in­terest bearing accounts. In addition, with this approach the user can control the actual amount and timing of the funds disbursement as compared to the automatic payments procedure discussed above. ATP systems, however, do have some potential problems or disadvan­tages. To the financial institutions there is a high development and promotional cost which makes this system attractive only when the potential exists for a large volume operation. In addition, the ATP system provides scant or little documen­tation to the user. Many potential customers find it difficult to overcome the fear that such lack of documented proof of transactions, particularly payments made, make resolution of errors extremely difficult.Legislation and Government Regula­tion Affecting EFTSeveral provisions of the McFadden Act prohibit financial institutions from establishing branches across state lines contrary to state law. Currently fifteen states prohibit branch banking. Several court rulings have held that certain EFT facilities, primarily the ATMs or Automated Teller Machines, constitute branch banks. The existence of such legal limits have acted to severely retard the installation and development of EFT facilities.At the INFO ’76 Conference in Chicago, Joel Crabtree of Continental Bank of Chicago predicted the passage of electronic banking legislation at both the state and local level in the coming year. Such legislation is expected to take the form of clarifying the question of branch bank status for EFT units and the expected repeal of those provisions of the McFadden Act that concern themselves with branch banking across state lines.At the Data Processing Management Association’s INFO/EXPO ’76 in Las Vegas, George Glaser suggested that there are four areas of law which bear on EFT. The first he identified as legisla­tion affecting branch banking. In addi­tion, however, he felt that privacy legislation, universal commercial code, and anti-trust legislation represent three other areas of the law which bear on the development of Electronic Funds Transfer and in which one could expect to see future activity.MOVING?The postoffice will charge The Woman CPA 25 cents for each issue that must be returned for an updated address. It will cost you 13 cents, one time, to inform us of your new location.Circulation DepartmentAmerican Society of Women AccountantsSuite 103635 East Wacker DriveChicago, Illinois 60601

Electronic Data Processing: A Survey of Electronic Funds Transfer Systems

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Electronic Data Processing: A Survey of Electronic Funds Transfer Systems

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