The Consequences
`of Elect ron ic
`Funds Transfer
`
`A Technology Assessment
`of Movement Toward a
`Less Cash I Less Check Society
`
`Prepared for the
`National Science Foundation
`=tesearch Applied to National Needs (RANN)
`Under Contract NSF-C844
`
`by
`AJthur D. Little, Inc .
`.,.,
`Cambridge, Massachusetts
`
`June 1975
`
`eBay et al., Ex.1010, p.1
`
`

`
`ARTHUR D. LITTLE, INC.
`
`Core Team:
`
`Martin L. Ernst, Project Director
`Edwin B. Cox, Deputy Project Director
`Anton S. Morton
`Paul E. Giese
`Gary A. Marple
`
`Principal Consultants:
`
`Raymond A. Bauer
`Anthony G. Oettinger
`Blair C. Shick
`
`Library of Congress Catalog Card No. 75-600087
`
`For sale by the Superintendent of Documents, U.S. Government Printing Office
`Washington, D.C. 20402- Price $4.25
`Stock Number 038-000-00249-0
`
`ii
`
`eBay et al., Ex.1010, p.2
`
`

`
`mechanisms for making payments will be more
`convenient, more flexible, and possibly less expen(cid:173)
`sive. Almost all of the proposed systems should
`result in net social cost savings once they have been
`implemented and achieved sufficient volume, but
`the latter is a key proviso; unless consumer accep(cid:173)
`tance is sufficiently high that the desired volumes
`are achieved, the introduction of electronic techni(cid:173)
`ques will not provide cost savings to any large group
`of participants.
`The various systems being considered for effect(cid:173)
`ing electronic payments are discussed in detail in
`the text. Briefly, however, they fall into the follow(cid:173)
`ing broad categories:
`
`• Preauthorization Techniques-With present
`systems, a great many sequential steps involv(cid:173)
`ing moves of pieces of paper are necessary
`when an individual receives a recurrent pay(cid:173)
`ment (such as paycheck, stock dividend, or
`welfare payment) or makes one to a business
`(rent, utility bills, insurance premiums, etc.).
`When a worker receives a paycheck, he
`deposits or cashes it at a bank or thrift institu(cid:173)
`tion, cashes it at a store, or makes a mail
`deposit with an accompanying deposit slip.
`When a utility bill is mailed to him, a section
`of the bill is usually returned by mail with a
`check. In both cases the check itself must be
`moved physically back to the bank on which it
`was drawn and is then filed or returned to its
`originator.
`
`Preauthorization schemes generally try to
`short-cut this sequential procedure by using
`electronic transmission instead of paper. A
`worker's pay will be deposited electronically
`in a bank or thrift institution of his choosing;
`an authorized utility bill will be paid
`automatically at an agreed-upon date after
`normal receipt of the bill. In each case, paper
`records are likely to be provided to the in(cid:173)
`dividual, but there will be fewer of them and
`the sequential return process will be ~bbrevi­
`ated.
`
`• Automated Banking-The hours during
`which financial
`institutions are opeii for
`customer service traditionally have been quite
`limited; and the inconvenience of getting to
`
`one during these hours has led to enormous
`numbers of checks being cashed at places of
`employment, food stores, and other retail
`establishments. Various automated banking
`techniques have been proposed that enable in(cid:173)
`dividuals to make deposits or receive cash at
`convenient locations either over a relatively
`long span of hours each day or even on a 24-
`hour basis. The transactions are generally
`recorded in electronic form, thereby cutting
`down on the paper handling necessary to
`maintain account records.
`
`• Point-of-Sale Devices-Systems that operate
`with point-of-sale devices can be regarded as
`supplementing and replacing some portion of
`cash, checks, and the plastic cards and associ(cid:173)
`ated recording equipment now used for credit
`purchases. The systems under development
`generally capture data relating to the transac(cid:173)
`tion (customer, merchant, merchandise, price,
`and date) at the point of sale, so that electronic
`records are generated and can be manipulated
`thereafter. The systems are to be employed to
`authorize and perhaps effeCt credit purchases
`(corresponding to the present mode of card
`use), to verify and perhaps guarantee a check,
`or to make an immediate transfer from the in(cid:173)
`dividual's bank account to the business from
`which he has made a purchase (thus substitut(cid:173)
`ing for cash or check).
`
`In addition to the above items, a variety of other
`systems have been proposed, such as the use of
`pushbutton telephones connected to a computer ~o
`effect some types of payments.
`Not all of these approaches are entirely new. In
`some cases there are existing paper analogs, such as
`direct deposit of payroll by single or composite
`paper check means. This procedure has been availa(cid:173)
`ble for many years
`to employees of some
`businesses. Telephone transfers of funds have been
`possible on a limited and special basis for quite a
`long time. What is new is that a mix of what used to
`be rather specialized services plus a range of en(cid:173)
`tirely new ones are being developed fm widespread
`use through modern· electronic techniques. As has
`been true of all past payment systems, each will
`have its own set of characteristics with regard to
`
`4
`
`eBay et al., Ex.1010, p.3
`
`

`
`-Government concern over high payroll,
`social security, and welfare check produc(cid:173)
`tion and distribution costs-especially over
`delivery difficulties <!nd theft in the latter
`two categories;
`
`-Government concern over the impact of
`float on monetary control.
`
`Overall, however, the present performance is en(cid:173)
`tirely adequate, and dissatisfaction is not the prim(cid:173)
`ary reason why so many proposals for changes have
`arisen.
`Pl'oposals for Change and Recent History
`
`The two main sources encouraging changes to
`our payment systems appear to be:
`
`• The government, through a variety of facilita(cid:173)
`tive actions, including programs to encourage
`direct deposit of federal payrolls, social
`security, and other transfer payments; and
`
`• The actions of market leaders among
`depository institutions and associated
`organizations, retail merchants, and others.
`
`By providing new systems and services, these
`market leaders introduce a range of competitive
`factors that rapidly force other organizations to
`follow in their path or to develop alternative in(cid:173)
`novative services. This trend is being followed even
`though the immediate financial returns from EFT
`systems might not warrant investment by a prudent
`businessman. The potential future market positions.
`and resulting financial gains have apparently
`seemed adequate to the leaders to start the process,
`and competition takes over thereafter. This leader(cid:173)
`ship process is not confined to large organizations
`with major resources; Citibank, Bank of America,
`Chase Manhattan, and the two bank card. com(cid:173)
`panies are among the leaders, but pioneering work
`has been done by much smaller organizations, such
`as the Hempstead Bank of Long Island and the First
`Federal Savings and Loan Association of Lincoln
`Nebraska.
`The main thrusts of the proposed changes were
`described in Chapter 1 and include the following:
`Preauthorized Procedures
`This is of particular interest for payroll and
`transfer payment (social security and welfare)
`
`depQsits and for payment of relatively fixed, recur(cid:173)
`ring biils-(monthly life insurance premiums, rent
`and mortgage payments, utility bills, etc.).
`. The technical system supporting preauthoriza(cid:173)
`tion techniques is a network of local but intercon(cid:173)
`nected automated clearinghouses (ACH's). Six
`ACH's are now in operation, and current plans call
`for an essentially nationwide network by the end of
`1977. The existing ACH's have been poorly utilized
`to date, at least partly because they have been
`restricted to a few local areas. Growth of the inter(cid:173)
`connected system will be aided by government
`programs that will encourage individuals receiving
`federal payments to accept direct electronic
`deposits.
`
`Automated Banking Techniques
`
`Numerous devices fall in this category-auto(cid:173)
`mated teller machines, credit and check verification
`and check guarantee services, and a range of man(cid:173)
`ned equipment for communications between
`customers and depository institutions of all types.
`These devices provide locational convenience and
`up to 24-hour-a-day availability of access by deposi(cid:173)
`tors to their funds or credit resources. Most systems
`of this type are likely to be established in major
`retail establishments and in places with heavy
`traffic by potential customers, such as airports and
`railroad stations.
`Approximately 3000 A TM's are in use, and 1700
`were on order at the end of 1974. Relatively few of
`the other types of equipment are in place, but rapid
`expansion is under way; many banks and thrift in(cid:173)
`stitutions have specific plans for system installa(cid:173)
`tion, and thousands of units will be operating with(cid:173)
`in the next few years. Consumer acceptance to date
`has been excellent.
`
`Point.,.of-Sale Systems
`
`These systems are aimed almost entirely at retail
`business or service operations; if successful, they
`will replace and supplement current credit card
`systems with electronic devices that will also be
`able to replace some or all usage of cash or checks
`by immediately transferring funds from a con(cid:173)
`sumer's to a retailer's bank account.
`
`9
`
`eBay et al., Ex.1010, p.4