The payment of explicit interest to consumers has two primary benefits. First, it provides the consumer with additional interest income and allows him to spend his income in any manner he chooses. Thus, the consumer is able to weigh the personal value of a service against its actual price and make a more informed choice. This is a key element of NOW accounts-promoting a consumer's spending choice. At present, the consumer can only effectively "spend" his "interest" on whatever free services or gifts are offered by the depository institution. NOW accounts provide consumers the means and opportunity to spend such additional interest income as they see fit and to buy only those banking services they desire.

Second, NOW accounts give the consumer improved convenience. At present, a depositor who wishes to earn interest on a checking account must continually transfer funds from an interest-bearing savings account to a checking account at the time of payment. This process, in addition to causing increased costs for the institution, is time-consuming and wasteful for the consumer. NOW accounts allow depositors to spend less time and effort managing deposit balances.

In addition, depositors at thrift institutions who are now precluded from withdrawing funds by negotiable draft will be able to make thirdparty payments without the inconvenience of a trip to the teller's window or a telephone call to the institution. The NOW account offers a simple, covenient, straightforward payment mechanism that completely avoids the necessity of transfers between accounts.

Low income households have particularly benefitted from NOW account availability at thrift institutions. Individuals with low incomes. often do not have checking accounts at commercial banks and keep all: of their funds in thrift institutions. The availability of NOW accounts: at thrift institutions has permitted these individuals to enjoy the convenience of a third party payment account without losing significant interest income.

The committee is mindful of the importance of NOW accounts to the thrift industry generally. Family and personal savings represent 87 percent of the total resources of thrift institutions. Yet the old ways of saving are changing, as are attitudes and practices of the public toward convenience. If thrift institutions are to remain able to continue their present commitments to home mortgage financing, they must continue to accompany progress in the way the public handles its money. A savings account which must be accessed by the presentation in person of a passbook at the teller's window is no longer adequate. Thrift institutions must have transactions accounts to provide the full family financial service which is needed and demanded.

The committee realizes that developing electronic funds transfer systems are making it increasingly convenient for depositors to withdraw funds from their accounts.

For thrift institutions, as for depository institutions generally, EFT developments are becoming increasingly important in terms of service to the public. Cheaper and more efficient services can be performed by taking advantage of automation of family transaction accounting. Automated receipt of employer's payrolls, development of automated debits for payments of insurance, rent, utilities and other regular bills, plus telephone-ordered bill paying can reduce the cost of family banking. The NOW account serves as a base for this development.

There was substantial discussion during both the hearings and the committee deliberations regarding the extent to which consumers benefit from NOW accounts. Concern was expressed that the NOW account holder who keeps a low balance and writes checks frequently will find service charges outstripping the interest earned.

It must be emphasized, however, that the NOW account is an option; no financial institution will be forced to offer a NOW account and no consumer will be forced to give up a conventional checking account in favor of a NOW account. Anyone who wishes to keep a low balance and write numerous checks may well continue to find a conventional checking account better suited to his needs and is free to continue to hold such an account.

In addition to the advantages of combining both savings and checking accounts, there are advantages to consumers from the fact that many more institutions will be offering NOW accounts than are presently offering conventional checking accounts. As a consequence, competition for consumer deposits will be active, and should result in improved quality and variety of consumer financial services.

In the final analysis, however, the Committee believes that the issue of whether or not NOW accounts benefit consumers must be resolved by consumers themselves. In New England, consumers have shown a widespread acceptance of NOW accounts. In New Hampshire and Massachusetts, which have the longest experience with NOW accounts. Federal Reserve estimates show that as of March, 1977, the ratio of NOW accounts to households in Massachusetts is 60 percent, with a ratio 54 percent in New Hampshire. For New England as a whole, the figure is 36 percent. The ratios of NOW accounts to married households are substantially higher, averaging 93 percent in Massachusetts. 78 percent in New Hampshire, and 54 percent in New England as a whole.

Measured another way, by the end of 1976, NOW accounts were estimated to be equal to 40 percent of all personal third-party payment accounts and NOW balances were equal to 53 percent of all personal third-party payment balances.

The extension of NOW accounts nationwide will also result in a more efficient banking system. The Committee fully anticipates that NOW accounts will bring with them more explicit pricing of services by depository institutions, as, for example, some form of charge per draft or minimum balance requirement. The present system of free or below-actual-cost checking encourages the inefficient use of resources

because depositore have no incentive to economize ca check writing even though, check clearing costs are substantial. Some direct pricing for checks will prompt depositors to write fewer decks and result in substantial reduction in the cost of clearing checks.

For example, in 1976, the Federal Reserve System processed over 12 billion private checks at an average cost to the banking system of approximately 50 cents per item. A reduction of 20 percent certainly a reasonable assumption based on the New England experience of the number of NOW's versus the number of checks written per monthwould represent a substantial saving to the banking system.

Payment of competitive interest rates will lower operating costs by reducing the need to transfer funds between transaction accounts and other interest-bearing accounts. The elaborate and costly transfer mechanisms now employed by institutions to allow depositors to "conveniently" transfer funds can be reduced or eliminated.

To the extent that checking accounts and savings accounts are consolidated, significant savings will result. From 1976 functional cost data of the Federal Reserve, the non-interest cost of maintaining a NOW account was 23 percent less than the combined costs of maintaining two separate accounts.

In addition, existing inequities whereby some depositors subsidize the expense of servicing others' accounts will be eliminated. The consumer will receive the full value of his money to the bank in the form of explicit interest, and will pay only for those services he "consumes". Under the present "no interest" scheme, the depositor who writes few checks is subsidizing the depositor who writes many. Under NOW accounts and explicit pricing, such inequalities will be eliminated and efficiency rewarded.

3. Impact of NOW accounts on financial institutions

Despite the benefits of NOW accounts, the committee is mindful of the transitional concerns facing financial institutions offering such new services. Thrift institutions availing themselves of the NOW account authority will be faced with new expenses in providing check services, while commercial banks offering NOW's face the adjustment of paying explicit interest on transaction accounts after almost 45 years during which such payments were prohibited.

The Committee is concerned about the impact the extension of NOW accounts may have on earnings of depository institutions. The experience in New England demonstrates that thrift institutions and commercial banks alike can compete in a wholly safe and sound fashion. Table III shows the size distribution of institutions offering NOW accounts in New England as of March 31, 1977. Of particular note is the fact that 74 percent of institutions in Massachusetts and New Hamp shire under $50 million in size were offering NOW accounts. In New England as a whole, 64 percent of smaller institutions offered NOW

accounts.

TABLE III-SIZE DISTRIBUTION OF INSTITUTIONS OFFERING NOW ACCOUNTS AS OF MAR. 31, 1977

While NOW accounts did bring an initial decline in bank profits, testimony from the FDIC indicated that there is no bank on their problem list as a result of NOW accounts. Furthermore, recent FDIC studies indicate that while some banks offering NOW accounts have suffered an earnings decline, it is not clear that NOW accounts are the cause.

As is the case with any new promotional offering, well managed banks should experience no significant adverse effects from NOW accounts, although marginal banks may experience somewhat greater adverse effects in absorbing costs and employing funds profitably. In the last analysis, the ability of an institution to manage change and maintain profitability depends predominantly on the caliber of the management.

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*****not for the most pan woped by manizal In the sper Yew England Stites. JeanVera and New Hampshire Lave Loopred more raTearings bedtimes. Indeed, en Hamrehire mat represent a worst-case 571umpace of NOW Assoonte on bank earnings 45 persent and 64 pement of Massachusetts and New Hange * presTET, Tish ofered NOW's lerted service saga, ompanse figures were 20 persent in Connecticut. 57 percent Maine, and 10 percent in Rhode Island, and Vermont. a. wings banks were 29 pement and 32 percent in Maeve Jetta and New Hampshire but 51 percent in Connecticut 88 percent in Maine, and 100 percent in Vermont.

In regard to topical pricing schemes, table IV indicates that pricing schemes ou for Vixen the "old" States of Massachusetts and New Hampte, and the "new" States of Connecticut, Maine, Rhode Island. and Vermon In the two fold" States, the most common pricing scheme among commercial banks is a required minimum balance in the range of 5296 to 2300 per month, with a charge per draft of 10 cents to 25 cents if balances should fall below the minimum. Among thrift institutions the most common pricing scheme is still the no service charge, no minimum balance NOW account.

In the four new States, both thrift institutions and commercial banks are offering more conservative packages. The most common pricing scheme among commercial banks is a required minimum balance of $500 to $1,000 with charges per draft if the minimum requirement is not met. A majority of the mutual savings banks also require minimum balances in the $200 $300 range with a charge per draft if balances should fall below the minimum. The savings and loan associations are more aggressive in their pricing, with a majority of the S&L's offering NOW's as of March 1977 doing so on a free basis.

Overall, of the commercial banks offering NOW accounts in New England as of March, 1977, 14 percent offered free NOW's, 8 percent imposed a charge per draft, and 78 percent had some other pricing scheme, usually a required minimum balance. Among the New England thrift institutions offering NOW's, 62 percent offered free NOW's, 10 percent imposed a charge per draft, and 28 percent had some other. form of pricing scheme.

The service charge plans of commercial banks in Connecticut, Maine, Rhode Island, and Vermont have encouraged high NOW account balances, ranging from $3,500 to $5,700 versus approximately $2,000 in Massachusetts and New Hampshire. Accounts with high balances generally are more profitable than those with lower balances.

The committee fully expects depository institutions in the other States to learn from the New England experience and price their services accordingly.