development of electronic funds transfer system

Faster than any but the most optimistic thoughtpossible, electronic banking is sweeping the country— overwhelming the laws that govern banks andother financial institutions, changing dramatically thebanking and savings habits of millions of Americans.Ultimately, electronic banking will revolutionize thevery concept of money itself and will probably forcea profound change in how the Federal Reserve regu-lates the nationus money supply. Certainly it willtouch off a flurry of competition for the nation’s finan-cial business unlike anything seen before.~

Developments in electronic funds transfer systems(EFTS) have long been a popular topic of discussionin banking circles, but as the above quotation froma national business magazine indicates, the subject nowenjoys even wider currency. Although it does not ap-pear likely that we are on the threshold of uuthe check-less-cashless society,” recent developments have beenso rapid that predictions of future developments andeffects of EFTS often seem foolhardy at best.

The diversity of views on the subject of EFTS re-flects the broad scope of current developments. Manybankers see EFTS as providing an opportunity forinitiating new services and reducing costs, thus in-creasing profitability. Others, especially those repre-senting small banks, view EFTS as being prohibitivelycostly; they fear that they would not be able to com-pete with the larger banks which could afford thenecessary computer equipment and, as a result, wouldbe forced out of the market. Thrift institutions viewEFTS as a means of obtaining deposits for which onlycommercial banks have heretofore been permitted tocompete and have thus been in the forefront of EFTSdevelopments.

Covermnent will probably play a large role in theevolution of EFTS. Court interpretations of existinglaws have already shaped the direction of some EFTSdevelopments. New legislation and regulations will

~ Cards Take Over the Country,” Business Week(August 4, 1975), p. 44.

0

almost certainly be adopted, but as yet no clear trendin the nature of these changes is discernible. Some ofthese changes may be dependent on the findings ofthe National Commission on Electronic Funds Trans-fers. This commission, which held its first meeting lastFebruary, is due to submit an interim report to Con-gress in October. It expects to complete its study andmake recommendations by the end of 1977.2

EFTS AND THE PAYMENTSMECHANISM

To speak of the electronic funds transfer system isan oversimplification. In fact, EFT developments areproceeding in several directions, with a number ofdifferent systems in various phases of development oruse. The common factor in these systems is that theyspeed the transfer of funds by communicating infor-mation relating to payments by electronic meansrather than by use of paper instruments as is pre-dominant today. Thus, EFT systems are designed toreplace manual processes with electronic data proces-sing and to speed the flow of funds through highspeed data transmission.

Although EFTS is often considered a revolutionarydevelopment with far-reaching effects, EFT develop-ments can be viewed as just another step in the evolu-tion of the payments mechanism — the system bywhich resources are transferred from one economicunit to another. This evolution reflects the continu-ing effort to improve the efficiency of trading. Money,which is simply a device which facilitates trade, repre-sented an improvement over barter in that it reducedtransactions costs and thus freed resources for use inthe production of other goods and services. Checkscame into widespread usage because they offered con-siderable advantages over cash; they were easily trans-

2”EFT Commission Rebuffs Mitchell’s Plea for Comment onProposed Changes to Reg. J,” American Banker (March 15,1976), p. 1.

Development of Electronic Funds Transfer SystemsWILLIAM C. NIBLACK

FEDERAL RESERVE DANK OF ST. LOUIS SEPTEMBER 1976

ported in any amount, easily transferred betweenindividuals, involved much less danger of loss or theftthan cash, and served as proof of payment. Checksthus reduced the transactions costs involved in mak-ing many types of money payments. Still, considerabletransaction costs are associated with the processing ofthese paper documents.

Furthermore, because of the indirect nature of thecheck clearing process, there is often a delay in theavailability of “good funds” for the payee. These de-lays can be costly, especially when large sums areinvolved. The development of wire transfers, throughwhich banks can effect funds transfers by sendingelectronic messages rather than paper documents,represented a major improvement in the paymentsmechanism. One of the large wire transfer networksis operated by the Federal Reserve System, whichtransfers large volumes of funds for member banksand their customers through its computerized com-munications system. The dollar volume of funds trans-ferred by the Federal Reserve CommunicationsSystem in 1975 was almost seven times as large as theamount handled by the Fed’s check clearing system?The average transfer is quite large — about $1.8million in 1975 — but the number of wire transfers isonly a small fraction of the number of checks handled.

To the extent that wire transfers reduce transactioncosts and processing time they can be said to improvethe efficiency of the payments mechanism. However,the use of wire transfers has not significantly reducedthe vast flow of paper through the payments system.A major reduction in paper volume would requireimplementation of electronic systems designed to beutilized for smaller retail-oriented payments, such asthe systems described below.

DESCRIPTION OF SOME EFT SYSTEMS

For the sake of clarity and simplicity, EFT systemscan be grouped into three categories: teller machines,point-of-sale systems, and automated clearing houses.These systems differ in types of payments handledand in means of processing.

Teller MachinesMachines through which an individual may conduct

various routine banking services can he grouped un-der the heading of teller machines. Much of therecent EFTS development has involved these ma-chines, which are called customer-bank communica-

3Annnal Report of the Board of Governors of the FederalReserve System. (1975), p. 379.

tion terminals (CBCTs) by the Comptroller of theCurrency and remote service units (RSUs) by theFederal Home Loan Bank Board. In principle, thesemachines can be located either on a bank’s premisesor elsewhere, conceivably at great distances from thebank. They may be manned or automatic and varygreatly in complexity, ranging from simple communi-cations terminals to more complicated automatedteller machines (ATMs). Services which ATMs cantypically perform include receiving deposits, dispens-ing funds from checking or savings accounts, trans-ferring funds between accounts, making credit cardadvances, and receiving payments. The less compli-cated manned terminals handle the communicationsbetween the customer and his bank while the receiptor disbursing of funds is physically accomplished bythe clerk who operates the terminal.

Teller machines are usually accessed by a combina-tion of a magnetic stripe card (on which accountinformation is encoded) and a personal identificationnumber which, for security reasons, is known only tothe customer. If the device is connected “o lie~stothe bank’s computer, the customer’s account is up-dated immediately; otherwise, a record maintained inthe machine is periodically delivered to the bank forprocessing.

Point-of-Sale SystemsOn-line systems which allow customers to transfer

funds to merchants in order to make purchases areusually called point-of-sale (POS) systems. Systems ofthis type may be used for check authorizations andcredit card transactions, as well as for so-called “debitcard” transactions in which funds are immediatelytransferred from the purchaser’s account to the mer-chant’s account. Conceivably, they could also be usedfor instantaneously transferring funds between busi-nesses and/or individuals, using terminals or push-button telephones.

Large-scale POS systems generally operate in thefollowing manner. On-line terminals are located atcheck-out counters or other points of sale. When mak-ing a purchase, a customer’s card is inserted into aterminal which “reads” the data encoded on it. Otherdata concerning the transaction are entered manuallyby the clerk or through an electronic cash register orproducts code reader. If the customer’s bank is dif-ferent from the store’s bank, a switching and proces-sing center (SPC) connects the computers of the twobanks. The computer at the customer’s bank verifiesthat the card and identification code are valid andthat the customer’s account has sufficient funds. The

Page 11

FEDERAL RESERVE BANK OF ST. LOUIS SEPTEMBER 1976

customer’s account is debited for the amount of thepurchase while the store’s account is credited for thesame amount. Both parties to the transaction receivea printed statement at the time of the transaction, andthe customer’s regular bank statement contains a de-scriptive listing, much like those which many creditcards presently use. Since some 30 percent of personalchecks are written to grocery or other retail stores,4

this type of system would allow automation of a sub-stantial portion of check payments as well as manypayments presently made by cash or credit card.

Automated Clearing Houses

Another type of EFT system, which is conceptuallydifferent from the two systems described above, is theautomated clearing house (ACH). As the name sug-gests, an ACH is analogous to a traditional clearinghouse, in that it represents a system for the interbankclearing of debits and credits. The main differencebetween automated and conventional clearing housesis that the debit and credit items in an ACH exist inthe form of electronic signals, whereas they are paperitems in a conventional clearinghouse operation. AnACH is thus not a system for automating the handlingand clearing of paper checks. The payment itemsmust enter the system in the form of electronic data,usually computer-generated magnetic tape.

To illustrate how an ACH works, consider how apayroll payment could be made directly to an em-ployee’s checking or savings account through an ACH.The employee authorizes his employer to snake suchdirect payments, eliminating the need for a check topass through the employee’s hands, be endorsed,cashed or deposited, and sent through the check clear-ing process to the employer’s hank. The employerprepares the payroll data on computer tape and sendsit to the company’s bank. The bank directly creditsthe employee’s account if he is a customer and com-bines the data for the remaining payees with thosefrom other employers on a magnetic tape. This con-solidated tape is delivered or transmitted to the ACH,where a computer processes all the data for a day in asingle run, sorting out all payees for each participat-ing bank. Each bank then receives a computer tape(or paper advice if it is not equipped to handle tape)which lists the payees and the amount to be creditedto each account. The employer’s accounts are debitedby the originating banks. Net settlement among the

4This estimate is based on surveys reported in Research onimprovements of the Payments Mechanism: The Final Re-port on Phase I, An Analysis of Payments Transactions andPhase ii, Payments Flow Data, Volume 1 of 3 (Atlanta:Georgia Tech Research Institute, 1971), p. 30.

banks is accomplished in the same manner as withpaper checks.

ACHs are especially suited for handling recurringpayments, such as payroll, social security, or pensionpayments, or recurring payments made by individuals.Payors would authorize their banks to pay a specifiedamount to a payee (mortgage lender, insurance com-pany, etc.) on a specified date. Parties to these typesof payments would receive a descriptive statementdocumenting the payment.

Many types of payments — those where the payeeand amount vary — are not amenable to this type ofpreauthorization. The case of regularly recurring billsof varying amounts, such as utility bills, represents amiddle ground between the extremes of identical re-curring payments and more or less random payments.The customer could, for example, authorize his bankto pay the amount billed by a specified creditor.5

Since many people are reluctant to give such broadpower to their banks, a system called Bill Checkhas been developed.8 This type of payment allowsthe customer to control the amount and timing ofpayments to creditors but still achieves some of thebenefits of ACHs.

An ACH thus differs considerably from teller ma-chines and P05 systems. The ACH is essentially a“batch” processing system used for the interbank set-tlement of recurring credits and debits, whereas manyof the other systems allow instantaneous transfers offunds between the customer and his hank or from thecustomer to third parties.

COSTS OF FUNDS TRANSFERS

Costs of the Check-Based Payments SystemKnowledge of the number of checks written in a

year and the cost of processing them is imprecise.However, it is estimated that in 1975 between 25 and

~American Express has initiated such a service for credit cardcustomers in Califomia. Based on a preauthorization, the fullamount of a credit card bill would be paid from the cus-toiner’s bank account to American Express, unless the custo-nmr objected within a specified period after receiving thebill. See “American Express Will Begin Testing Preauthor-ized Payments through CACHA,” Payment Systems News-letter (February 1975), p. 6.

°The Bill Check itself is a portion of the bill on which thecustomer indicates the amount to he paid and signs his name,and then returns to the creditor. This completed form au-thorizes a debit from the customer’s account to pay the bill.The creditor transfers the data to computer tape and sendsthe tape to the ACLI for processing. The paper Bill Check isretained by the creditor for its records. See Atlanta PaymentsProject, Automated Clearing Houses: An in-Depth Analysis(Atlanta: Committee on Paperless Entries, 1974), pp. 35-39.

Page 12


30 billion checks were written7 involving total proc-essing costs of around $6 billion.8

When a payee cashes or deposits a check through ateller line, lock box, or other arrangement, the firstbank receiving the check must encode the amount ofthe check in magnetic ink character recognition(MICR) readable symbols. This completes the encod-ing of the check (the bank’s routing number andpayor’s account number are already encoded on thecheck), so most of the remaining processing can beconducted by machines capable of reading the MICRcharacters. The transit items (those drawn on otherbanks) are sent to the bank on which they aredrawn, either directly or through a clearing house,correspondent bank, or the Federal Reserve’s checkcollection facilities. ‘When the check returns to thebank against which it is drawn, the writer’s accountis debited, and the cancelled check is returned to thewriter with the periodic statement. Altogether, theaverage check is handled some ten times and passesthrough two and one-third banks.°

Much of the processing described above is nowautomated. Machines read and sort the encodedcheck according to destination and perform most ofthe accounting functions. However, a number of theprocessing functions have not been amenable to auto-mation. Many checks are still handled by tellers, theencoding process requires human handling, and thechecks must still be physically transported throughthe banking system and back to the payor.

These manual processes appear to he among themost expensive in the check processing function. Theaverage costs of these various processes were esti-mated by the Atlanta Payments Project through sur-veys of Atlanta banks.’° The estimated cost of re-ceiving an item through a branch was 7.4~and thecost of proof and encoding an item was l.3 . To-gether, these accounted for nearly 60 percent of the

~According to one estimate more than 24 billion checks wereprocessed in 1974, with the number increasing at a 7.3 per-cent annual rate between 1971 and 1974. See R. WilliamPowers, “A Survey of Bank Check Volumes,” Journal ofBank Research (Winter 1976), pp. 245-56,

8The latest estimates of average check processing costs ofcommercial banks are in the 16-2k range. To these costsmust also be added the indirect costs bome by writers andreceivers of checks, as well as Federal Reserve expenses forcheck clearing. See Arthur D. Little, Inc., The Consequencesof Electronic Funds Transfers, prepared for the NationalScience Foundation (1975), p. 51.

°Mark J. Flannery and Dwight M. Jaffee, The Economicimplications of an Electronic Monetary Transfer System(Lexington, Mass: D.C. Heath and Company, 1973), p. 41.

lOAtlanta Payments Project, Automated Clearing Houses: Anin-Depth Analysis, pp. 218-19.

l3.9~cost of processing an “on-us” item (a check de-posited in the bank on which it was drawn) and morethan 80 percent of the l0.6~cost of a transit item.11

Given this situation, the prospects of lowering theaverage cost of check processing materially below its

present levels do not appear to be good. Economies ofscale in check processing may well be nearly ex-hausted. As labor and other costs rise, the averagecost of check clearing is also likely to rise.

These factors have led many to believe that radicalchanges in the payments mechanism are necessary ifcosts are to be kept at present levels or be reduced. Ifthe paper document which carries the payments datacan be replaced by an electronic signal, manual han-dling can be significantly reduced and the flow ofpayments data accelerated by high speed datatransmission.

Cost Characteristics of EFTS

Although few cost data are available because of thelimited experience with EFTS, some dated butrepresentative cost estimates are available. Most EFTsystems involve large total cost, much of which isassociated with the expensive computer hardwarenecessary to operate these systems: computers, ter-minals, and communication links. Even teller ma-chines, which are among the less expensive types ofsystems, involve purchase costs that may exceed$40,000 per ATM, depending on features.

More complicated systems involve higher totalcosts. An on-line POS system would involve high costsnot only for the banks’ computers, the terminals instores, and the communications links joining them,but also for the SPC which interconnects the com-puters of the different banks. In one study, publishedfour years ago, the Atlanta Payments Project esti-mated total costs for a proposed POS system linkingthe banks in that city.12 These included about$650,000 for SPC processing equipment and $655,000for SPC development costs, about $1,200 for eachterminal and associated communications equipment,and about $54,000 for bank communications interfaceequipment.

11An interesting sidelight of this study is that much of the costof processing a check is borne by the hank of first depositrather than the bank on which the check is drawn. Ofcourse, the cashing hank frequently receives new deposits inthe process which can compensate it for the costs it bears.

llAtlanta Payments Project, Research on improvements of thePayments Mechanism: Phase iii General Systems Designand Analysis of An Electronic Funds Transfer System, Vol-unie 3 of 6 Systems Design and Analysis-Point of SaleSystem (Atlanta: Georgia Tech Research Institute, 1972),Chapter 8.

Page 13

FEDERAL RESERVE BANK OF ST. LOUIS

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Page 14

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1


The Federal Reserve Bank of Cleveland has esti-mated total costs of operating a larger POS system,which would link 39 banks in the Fourth FederalReserve District.’3 Assuming that the system wouldcapture 6-7 percent of total retail transactions, in thetenth year the average costs of operating the SPCsalone would be an estimated $3.8 million. Costs ofparticipating banks in the tenth year would be an-other $13.9 million, it was estimated. Total costs forthe first ten years of operation would exceed $100million.

Many of the costs tvhich are associated with EFTsystems do not vary with the number of transactionsand thus can be considered as fixed costs. An exampleis the depreciation of the computers, terminals, andother equipment used in the system, which would bethe same regardless of the level of usage. Some othercosts probably do not vary significantly with the levelof usage either. The costs of operating a computerused solely for an EFT system would probably belittle higher at relatively high levels of transactionsthan at low.

There are other costs which do vary with the levelof output or usage. For example, labor costs associ-ated with operating a manned terminal may be greaterat higher levels of usage than at low. The cost ofcomputer time necessary to process teller machine orPOS transactions would also depend on the numberof transactions. One study estimated the cost ofthe infinitesimal amount of computer time neces-sary to process a POS transaction to be about l~pertransaction.14

To date, ACHs have utilized an existing computer(in most cases at a Federal Reserve Bank), since acomputer run processing a whole day’s accumulateditems usually takes an hour or less. The processingtime and labor costs do not appear to vary greatlywith the number of transactions processed. Estimatedcosts of operating the Atlanta ACH at various levelsof output are shown in Table I.

A characteristic of the costs of many EFT systemsis evident in this table: the average cost of a transac-tion declines significantly as the number of transac-tions increases. This is caused by the predominanceof relatively fixed costs in most EFT systems. Fromthe standpoint of the Federal Reserve System, whichoperates most ACHs, a high level of output would

“Arthur D. Little, Inc., The Conseqnences of ElectronicFunds Transfer, pp. 195-8.

i4Atlanta Payments Project, Research on improvements of thePayments Mechanism: Phase iii, Vol. 3 of 6, p. 166.

table

ESTIMAT D ACM OPERATING COSTS

MonthlyTrqssgct,as Monthly CQSt Per

Yotumt Costs Tronsocher,

20,000 $2150 lOse

152500 2650 033

285000 3,150 01.8

417000 3650 07.7

550000 4160 008

Note These estimates S the Atlauts CE The ro~ram satr about one boa C process,s&g tune to an daily oiurn lip to 2 ,G4)0 Thus axe costs U be mint vt fixed ontot)*mothl vohun afgs 000 h a atabl.TheP met antleis, that sottwa cbs g e Id ~ian 0,homed votume to I - tO 00 oiieit a wout& ems ‘ishout be sCale and th of an aet,oi, ottdmp to about 0

Soar Atlailta Payments Pn,j ,ste8natcd clean if AiDp Sal chad

have to be reached before the average cost of atransaction would fall below the Fed’s average cost ofclearing a check, which is about l . The data onFederal Reserve check processing and ACH costspresented in Table II indicate that, at current vol-umes, processing an ACH item is much more expen-sive to the Fed than processing a check. Of course,this means that ACHs are presently operating at farless than efficient volumes. Furthermore, potentialcost savings to participating banks from making elec-tronic payments through an ACT! rather than usingchecks should also be considered. Data from theAtlanta Payments Project suggest that monthly vol-umes of more than 160,000 transactions at the AtlantaACH would result in the average cost of an ACHtransaction falling below the average cost of a check.11

Estimates of average costs of POS transactions alsosuggest that if sufficiently large volume is attained,the average cost of a P05 transaction can fall belowthe average cost of a check. In the Cleveland Fedstudy, referred to above, the average cost per trans-action over a three-year period was estimated to be11.3?; this would be reduced to 7.l~by the tenth yearbecause of expected economies of scale in operationof the system.’6

llAtlanta Payments Project, Automated Clearing Houses: Anin-Depth Analysis, p. 229. This estimate assumes no hankmarketing costs associated with the ACFI operation.

~iArthur D. Little, Inc., The Consequences of ElectronicFunds Transfer, pp. 195-98. The Cleveland Fed Studyestimates that the POS system would generate cost savingssuch that the annual savings would exceed annual costs bythe seventh year and cumulative savings exceed cumulativecosts by the tenth year. This estimate did not include sav-ings experienced by merchants as a result of using the PUSsystem.

Page 16


Table II

FEDERAL RESERVE PAYMENTS MECHANISM EXPENSES — 1975

CONVENTIONAL CHECK PROCESSING AUTOMATED CLEARING HOUSE PROCESSING

Checks Processed Total Expense cost Per Check’ Check Images’ Processed Total Expense Cost per Image

housands ) Itl,ousands

11,411.337 5120,559,005 0.995c 5.941 5431.883 7.27c

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1.oi’t.

Another cost concept should be considered. This ismarginal cost, which is simply the change in totalcost which results from increasing output by one unit.Marginal cost is thus not affected by fixed cost butonly by variable costs. In the case of EFT systems,the marginal cost would be the change in cost thatresulted from conducting one additional transaction.The considerations described above suggest that themarginal cost of an EFT transaction is likely to bevery low. In most cases, little or no additional labor isinvolved, and only an infinitessimal amount of com-puter thne is used. Thus, an additional transactionshould add very little to the cost of the system. Incomparison, the marginal cost of a check is probablyrelatively high because of the labor intensiveness ofcheck processing.17

In summary, many EFT systems will involve largefixed costs but relatively small variable costs. Becauseof this predominance of fixed costs, average costs ofEFT transactions will probably decline over a fairlylarge range of output. The hypothetical cost curves

NUMBER 01 TRANSFERS

presented in the accompanying figure show the aver-age cost of an electronic funds transfer to be greaterthan the average cost of a check at relatively lowvolumes, Beyond some point, however, the averagecost of checks levels off while that of electronic fundstransfers continues to fall. The average cost of elec-tronic transfers is less than that of checks for relativelylarge volumes. Although these cost relationships arehypothetical, they demonstrate the general relation-ship between the costs of check systems and EFTS.

CUSTOMER ACCEPTANCE OF EFTS

If the potentially lower unit costs of EFTS are to berealized, a substantial proportion of present paymentsmust be switched to electronic means. Otherwise,banks may find themselves \vith the worst of bothworlds: a large, slow, expensive check handling sys-tem, plus a very expensive underutilized EFT net-work. Thus, failure to consider customer acceptanceof EFTS could have exactly the opposite effects fromthose hoped for.

At present, there seems to be little incentive forcustomers to change their payments practices fromusing checks to EFT systems. Surveys have found thatindividuals are generally satisfied with the presentpayments system. Using checks provides many bene-fits, including unquestioned proof of payment. Thesurveys also indicate that many individuals, especiallythose in lower income groups, have a negative atti-

Average cost oi tude toward many aspects of EFT systems.18 Custo-ci loads t,a,sferby check mers tend to fear a “loss of control” over their financesAverage cost of which would result from preauthorized deposits or

withdrawals, as well as possible losses of privacy,loads transfer

costly errors, and lack of proof of payment. Thus, inmany cases, it may take considerable incentive toinduce individuals to shift their payments from checksto electronic means.

‘tSee Arthur 1). Little, Inc., The Consequences of ElectronicEundr Transfer, pp. 43-46, 253-63.

COST

Hypothetical Costs of Funds Transfers

“One study estimated the marginal cost to be l4

c, not muchbelow the average cost estimated in the same study. Flan-nery and Jaffee, The Economic implications of an Elec-tronic Monetary Transfer System, p. 42, footnote 10.

Page 17


Such an incentive could be provided if the costsavings which would result from a fully utilized EFTsystem were passed on to the customer. However,current regulations reduce the likelihood of banks pro-viding such incentives. For example, since banks areprohibited by Regulation Q from paying an explicitreturn on demand deposits, they usually pay an im-plicit return by subsidizing the checking costs of theircustomers, either totally or in part.1° Thus, the costto the individual of writing an additional check isusually less than the marginal cost to society ofprocessing the check. As a result, “too many” checksare written, and a greater than optimal quantityof resources is allocated to check processing. Aslong as banks are prohibited from explicitly payinginterest on demand deposits, it does not seem likelythat they will charge fees for checking services whichapproximate the marginal costs of the checks. As aresult, the prospects of banks providing sufficientincentives for customers to switch from checking tothe lower-marginal-cost electronic funds transfer serv-ices are reduced.

19” ‘Yields’ on Checking Accounts Rise in Recent Years,”Federal Reserve Bank of Philadelphia Buriness Review(March 1975), pp. 14-15.

The underutilization of EFT systems which wouldstem from the prohibition of interest on demand de-posits could be worsened if customers receive addi-tional disincentives to use EFT systems. Such disin-centives could take the fonn of high initial prices forEFT services which banks may charge, predicated onthe notion of recovering the large fixed costs of theEFT systems relatively quickly.

SUMMARY

Many of the questions surrounding EFTS cannotyet be answered definitely, since they depend oncosts, regulations, and other factors for which thereare few or no data. However, it is reasonable to expectmarginal costs of making a transfer through EFTS tobe less than through the check system; average costsof transfers could also be lower, if a sufficiently largevolume is achieved. Such possibilities for reducingcosts, other things equal, would encourage banks andother producers to increase their supply of these serv-ices relative to checking services. However, such fac-tors as the prohibition against paying interest on de-mand deposits appears to reduce the incentive forcustomers to use EFT systems, thus slowing theirdevelopment.

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development of electronic funds transfer system

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