By WILLIAM R. BRYAN
A professor of finance at the University of Illinois, Urbana-Champaign he was formerly an assistant to the director of the Office of Debt Analysis, U.S. Treasury, and a senior economist at the Federal Reserve Bank of St. Louis. Will automated tellers bring branch banking to Illinois?

Electronic banking

EFTS is an abbreviation for Electronic Funds Transfer System — a catchall phrase referring to an arrangement of technology permitting movement of funds from one account to another without accompanying paperwork. The Illinois banking community is now poised for the adoption of this system. About half of the state's 1,300 banks have already taken steps toward doing so. Electronic Funds Illinois (EFI), a not-f or-profit network sponsored by the Illinois Bankers Association, has been extremely successful in building its membership since the fall of 1976. The growth of EFI has brought in its wake a host of controversial issues — all of which are directly or indirectly related to electronic banking.

Unless there is a disciplined consideration of EFTS, the issues become hopelessly chaotic. The ethical and legal questions surrounding the system are both controversial and confusing. The best way to approach the question is to first discuss the economic role played by an EFTS and describe the potentialities of such a system.

The other problems associated with EFTS can best be discussed after these questions have been explored. The promises
"Necessity," it has often been said, "is the mother of invention." The emergence of EFTS clearly illustrates this old saw. During the current year, the nation's banking system will process just under 30 billion checks, double the volume of a decade earlier. By 1990, U.S. banks will be buried under an avalanche of about 80 billion checks a year. The mounting costs of handling this deluge of paper have provided the chief economic impetus for finding a workable alternative. The computer, along with our sophisticated communications know-how, provide the technology that can permit the bulk of the nation's payments to be made without the paperwork currently associated with a check payment system.

The movement toward EFTS can proceed by stages — and can be halted at virtually any stage. For example, in its initial stages Electronic Funds Illinois (EFI) will simply be an association of banks hooked into a computerized communications system that will enable customers to cash checks throughout the association. Upon presentation of an encoded plastic card, a customer will be able to cash a check without charge at any bank belonging to EFI. The bank would be able to get automatic verification of account status by "plugging" the encoded card into the computer network.

A second stage of electronic banking would be the installation of similar terminals at selected retail locations. Most supermarkets are already heavily involved in check cashing for their customers. Point-of-sale terminals for check verification would merely assist retailers with a job they currently perform. Neither of these EFTS stages, however, achieves significant economies; they simply parallel the current check payment system.

Economies would be achieved if checks are eliminated. Even with present technology important steps have been taken to reduce paperwork. Whole categories of payroll workers, and others receiving periodic payments — such as those receiving Social Security benefits — have directed their payments directly into their bank accounts. Also, automatic drafts on bank accounts are used to make a growing number of insurance payments, mortgage payments and other fixed obligations. While important savings are achieved by such arrangements, there will not be really significant savings until it is possible to make final payment directly at the retailer — without currency. This quantum jump would mean that point-of-sale terminals would be used for more than check verification. With the encoded card, funds would be shifted from the bank account of the consumer directly to the account of the retail merchant with no intervening billing process.

Beyond this, a fully developed EFTS might include remote banking machines. By using such devices, consumers would be able to conduct much of their ordinary banking business. They could make deposits to and withdrawals from their checking accounts via a currency dispenser; loan payments could be made; funds could be moved from one account to another. Although such an automated, self-service system is but one possible stage in EFTS, it is the one that has been the subject of so much controversy in Illinois. The problems
There are a number of problems associated with such a fully automated system. Probably the most important long-term problem relates to user reluctance. While EFTS is inevitable, there has been no great hue and cry for its immediate creation. For decades consumers have been taught the advantages of credit. Credit cards have penetrated the retail market to the point

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where they are almost a necessity to many consumers. There is essentially no demand for a method of paying bills instantly at point of sale. Many householders prefer cashing their checks at the supermarket. This give them a few days before the checks clear the bank. Similarly, some businesses have made a consumate art of "working" float — that is, using funds between the time checks are written until they have cleared. Undoubtedly, consumers and businesses must be offered an incentive before they will shift willingly to a direct payment system. Besides an unwilling- ness to give up the few days edge they have under present arrangements, many consumers simply don't like dealing with impersonal machines. Moreover, experience with credit cards has taught them to distrust any obviously computer-based system.

The banks are on the move in debate to allow automated system to replace checks as payment method

A second major problem relates directly to banks. EFTS technology is very expensive. Given the generally unenthusiastic public reception, many banks are reluctant to commit the necessary funds. In addition to the technological hardware required, there are a great many organizational difficulties that must be ironed out. Automated clearing houses must be developed in market areas; regional switching centers must be developed to connect local markets; in turn, regional centers would be hooked together with nationwide communication lines. Such system development takes time and money.

Another thorny area is that of ownership and regulation. Who will own the networks and price the services? Who will be responsible for safeguards against theft or fraud? Who will cover losses in case of computer errors? Who will own the information generated as a by-product of such a system? How can the privacy of consumer information be safeguarded? Questions such as these are not uniquely related to EFTS, of course, but they must be dealt with anew when such a system emerges. Thus, the regulatory authorities must be prepared to handle a new set of problems.

Branch banking?
The really contentious debate regarding EFTS in Illinois has been over the role of automated tellers. At this stage EFTS has been seen as the precursor to branch banking. The courts have held that automated tellers are branch banks — and the U.S., Supreme Court has declined to review the relevant decisions. Branch banking is not permitted by Illinois law. So, as matters now stand, automated tellers can't play a major role in the development of EFTS in Illinois.
According to federal law, a branch is any place "at which deposits are received or checks paid or money lent." Consequently, whether an automated teller is a branch depends upon the technical interpretation of whether a machine actually completes a transaction. Proponents of automated tellers have argued that the machines merely assist a bank; they are a facilitating mechanism but do not complete transactions. The U.S. comptroller of the currency has ruled that most EFTS machines are not branches. The courts have tended to disagree.
Interest groups have begun to articulate their positions on the issue. The Association for Modern Banking in Illinois (AMBI) has long been a vigorous proponent of limited branch banking and multi-bank holding companies. The Illinois State Chamber of Commerce has announced its support for a change to a more modern banking structure. The Illinois Bankers Association, whose members have been split over the branching issue, has sponsored Electronic Funds Illinois. Spokesmen for EFI have declared that they are not political. They are simply positioning themselves to do what the law permits — when and if it changes.
The stage is set for a protracted legal controversy. Step-by-step the courts may be called on to grind out decisions on just what a machine can do without violating state branch banking laws. As an alternative, the states may change their banking laws to permit EFTS to develop without legal encumbrances. It is certain these matters will be vigorously debated in the General Assembly.
Pending bank bills
PREVAILING court decisions hold that electronic terminals are branches although they are not manned by bank personnel. Two bills introduced this session of the General Assembly would create the Electronic Financial Services Act, which would allow banks to install electronic terminals at locations such as supermarkets and drugstores. These are S.B. 605, introduced by Sen. Prescott Bloom (R., Peoria) and H.B. 2184, introduced by Rep. J. David Jones (R., Springfield).
Bills which deal with different aspects of the branch banking question are under consideration in the House Financial Institutions Committee. The principal bill, H.B. 294, allows "limited" branching to the county in which the main bank is located. Sponsored by Rep. Michael Brady (D., Chicago), the bill would also limit a bank to opening not more than two branches in each of the first two years and four branches in any subsequent year. Another bill along the limited approach is H.B. 450, introduced by Rep. Raymond Ewell (D., Chicago) which limits branches to the legislative district in which the bank is doing business. H.B. 494, introduced by Rep. Gerald Bradley (D., Bloomington), would eliminate the restrictions in the Banking Act which prevent the establishment of a new banking facility within 600 feet of any existing main banking facility of another bank.
The proposed Illinois Bank Holding Act would allow branching under a different form. H.B. 492, introduced by Rep. Richard Luft (D., Pekin), would break the state into five regions and would permit banks to acquire and I operate other banks within their regions. Under this bill several banks could pool their resources to buy a computer and coffer specialized services./ M.C.G.

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