place as well as, I suspect, a search for new equipment or capability to do this which simply is not available on the market today. That would stop us. If the receipt were construed as having to be given with the check guarantee, that would also stop or slow our development.

Senator SCHMITT. Thank you, gentlemen. I wish we could go on. It's a fascinating subject, not in small part because of the technical capability resulted as a consequence of activities, communications in the space flight with which I had a close association.

Mr. Chairman, I would hope that the record could stay open for me to submit some other questions to the panel and if they felt inclined to answer this I think it would be useful to the committee as well as myself.

Senator RIEGLE. By all means. As a matter of fact, I too may have some questions that I would like to forward to you, but in the interest of time I won't raise now. I agree with Senator Schmitt that this is a very interesting discussion because we're covering so many interrelated things at one time. I think it's important, to the extent that we can, to quantify these cost-benefit relationships. It's not always easy. The space program is a good example. The derivative benefits were very hard for us at the outset to quantify and the cost-benefit relationship, was based very much on faith.

Everything that we do costs us something. These consumer protections, or provisions that assist the banks, are going to have costs attached in one form or another, but presumably for some good purpose. Very often things we don't do cost us as well. The safeguards that we are looking at here are designed to prevent other consequences that would be more adverse. I want to see this technology develop and as chairman of this subcommittee I very much want to try and balance our approach in such a way that we foster the development and consumer acceptance of EFT, without unnecessarily imposing restrictions. That's why I think the Wisconsin experience is expecially important, because a lot of what we are talking about is simply speculative. We have a system in place in Wisconsin quite far down the track and it seems to be working. The only question I want to pose to you, Mr. Ruf, is whether it is your general sense that this sytem is cost effective or has the potential to be cost effective?

Mr. RUF. We feel that the system will be cost effective. It is not today. We are in the developmental stage and there's a great educational link that we are going through with the consumers and the protections that are provided within the Wisconsin statute have substantially aided us in an educational link to get the consumer to have genuine interest in utilization of the system. We do not feel that it will be a cost replacement benefit for the bank but more of a cost displacement. In other words, some of us won't have to open longer hours to meet the customers' needs or expand our lobbies or buy sophisticated check processing equipment to handle the increased volume of checks. It will be these kind of costs displaced that will make it cost effective. It is not today and I don't foresee it being so for the next 3 or 4 years.

Senator RIEGLE. I don't think anybody anticipates that it will be. The bankers that I spoke to in Michigan expect that the front-end

cost of the new technology, the terminals and hardware, will cause a break-even point that's out in the future.

Is it a fair summary of your testimony to say that after several months of actual operation of this system and these rules in Wisconsin that all the major parties of interest are basically feeling pretty good about it? I gather from your testimony that no major party of interest is kicking and screaming and saying that you are really on the wrong track here.

Mr. RUF. Maybe that can best be answered by saying in a recent meeting with the commissioner of savings and loans and banking they have received no complaints from any consumer involved. Complaints they have received from banks or savings and loans participating in the system are ones relating to advertising and feeling there might be some proprietary advertising that isn't within the confines of the statute. But there have been no substantive complaints by any of the parties presently participating in the system.

That might not say that there are no complaints. Maybe some people who are not participating in the system are not participating because they have very real complaints and therefore have chosen not to participate.

Senator RIEGLE. That may well be, but the thing that's interesting to me is that of the major players, the bankers, the equipment providers, the consumers, the retailers, there seems to be a relative degree of harmony. There's nobody kicking over the traces and saying let me out of this arrangement. I think that's significant because in any discussion it's one thing to hypothesize about how things will work and it's quite another thing to live with an actual system. That's why the Wisconsin experience is important for us to look at.

Gentlemen, I appreciate your testimony today and your patience in responding. I think you can look for some questions from members of the committee and we would appreciate your giving us written responses to them. Thank you very much.

[The following information was received for the record:]

Hon. HARRISON SCHMITT,
U.S. Senate, Washington, D.C.

AMERICAN BANKERS ASSOCIATION,
Washington, D.C., November 8, 1977.

DEAR SENATOR SCHMITT: Mr. Eugene M. Tangney has asked that we forward the enclosed responses to the questions posed in your October 20 letter addressed to William Dabagi. We hope these responses provide clarification to the specific questions raised.

We would be happy to provide additional comment, if needed.
Sincerely,

GERALD M. LOWRIE.

Question 1.-You have stated that a three day error resolution period is not feasible. Please explain.

Response.-It is in the best interests of bankers and their customers to resolve errors as soon as possible. In most cases errors are investigated and resolved within a few days, when control to do so is in the bank's province. However, in an EFT environment many alleged errors may involve third parties, such as merchants and other financial institutions. It would be unrealistic operationally in many instances, to generate an explanation regarding the error and resolve that error within three days. This is particularly true since the bill does not require prompt response from third parties to the disputed transactions.

A financial institution must be given sufficient information and documentation from a consumer in order to effect a prompt resolution of the error. Without such information, a lengthy search may be required to discover the cause of the discrepancy. Since consumers are required only to notify the financial institution that an error has occurred, and not to provide any supporting evidence, it may often be impossible for the institution to investigate and resolve the error in the time limit allowed.

Additionally, this provision would be difficult to satisfy in a shared interchange environment, particularly where the merchant-to-bank relationships are not direct. Bankers accept their responsibility to serve customers through fast error resolution. However, to legislate a stringent time limit would impose an unfair burden, since the resolution process is not entirely under the financial institution's control. The Congress should consider the precedent of the Fair Credit Billing Act which provides a thirty day schedule for acknowledgment and sixty days for resolution. Question 2.-How could "restrictive legislation" inhibit the growth of customers and transaction volume?

Response.-Pages 2-7 of our testimony delivered on October 5, 1977, addresses the specific impacts of certain restrictive provisions. These are:

Individual notification of each transaction, description requirement on the statement; renewal of pre-authorized transfer agreements; error correction time; $25 liability limit; garnishment exemption; reversal;

Unsolicited debit card distribution.

After discussion of the effects of these restrictions, our testimony concluded that they would have the effect of:

(1) Eliminating incentives for banks to develop innovative and competitive services; (2) Increasing the cost to consumers for electronic services to a prohibitive level; and (3) depriving the public of the opportunity to test the merits of electronic services and to make the judgment as to their acceptability.

Question 3.-You have stated that the check model is more appropriate than the dollar ceiling model proposed in S. 2065 to determine consumer liability. Please justify your position.

Response.-The rationale often given for imposing a dollar ceiling on consumer liability in an EFT system is that electronic funds transfer is most similar to the credit model. However, EFT more closely resembles the check model; both the check and the debit card access funds on deposit, while the credit card does not.

Today, under the rules governing the check system, depository institutions are liable for erroneous, unauthorized, or fraudulent use of a checking account unless it can be proven that the customer negligently or fraudulently contributed to such actions and that the institution used reasonable care.

Likewise, the same standards should apply in the case of debit cards. Both consumers and financial institutions should be responsible for losses over which they have control or substantial influence. Financial institutions should not bear losses due to consumer fraud or negligence. Examples of negligence include:

Carelessness in the security of the PIN; neglect in reporting to the financial institution within a reasonable time the loss of a card or compromise of the PIN; delay in reporting unauthorized use of the EFT account (in which case further losses should be the customer's responsibility).

If the liability of the cardholder were limited to $50 despite his negligence or even gross negligence, the despository institution and ultimately all EFT users would bear the added cost caused by an individual cardholder's failure to protect his own

money.

An acceptable liability provision is extremely important, since the possible loss to the financial institutions can be far greater with the debit card than with the credit card. The credit card has a limited liability-the line of credit. However, no set limit would exist in the case of the debit card. The entire deposit balance would be subject to fraud or carelessness. This balance could range anywhere from $1 to over $100,000, depending on the customer.

Our nation has a long history of regulations (i.e., the Uniform Negotiable Instrument Act of 1896 and the Uniform Commercial Code) which have established dual responsibilities between the despository institution and the depositor. These rules have worked well. The check system in the United States has been a highly acceptable payment method. This precedent, set for the checking system, should be followed when establishing liability provisions for Electronic Funds Systems. Question 4.-How do you think EFT will affect the low-income consumer? Response.-EFT will reduce the cost and increase the availability of consumer credit. The total effect will probably be relatively small, but lower-income or higherrisk borrowers may be benefited to a greater extent than other groups.

Besides enabling a greater amount of credit to be available to low-income customers, EFT would provide this group with greater convenience and safety in their financial transactions. For example, the direct deposit of Social Security benefits eliminates the risk of stolen checks and is also more convenient than the traditional payment mechanism, especially to elderly consumers.

A further advantage of EFT to the low-income consumers is the greater acceptability of the debit card at point of sale transactions. Where these consumers have often found it difficult to pay by check at many retail establishments, the debit card will be more readily accepted.

Question 5.-S. 2065 contains a provision guaranteeing customers the right to reverse an EFT transaction within 3 days. You state that this reversibility clause would "place an unfair degree of liability on the bank." Please elaborate.

Response.-Reversibility of an EFT transaction is not the functional equivalent of stop payment of a check transaction. Under the check system, a consumer must stop payment before the check has cleared and been credited to the payee's account. The reversibility provision proposed in S. 2065 requires the financial institution to reverse a transaction which has already been completed.

In a point-of-sale environment, the amount of the transaction will probably have already been debited from the customer's account and credited to the merchant's by the time the reversal has been ordered. This may cause the financial institution serious problems in attempting to reverse the transaction. There will be occasions when insufficient funds will exist in the merchant's account to cover the disputed amount. Difficulties will also result when the merchant's account is in a different finanical institution than the customer's. S. 2065 requires a financial institution to credit the customer's account, regardless of whether the institution itself can recover the funds.

Thus, an unfair degree of liability would be placed on financial institutions if this provision is enacted. Rather than legislating this issue, the marketplace should be allowed to adapt EFT systems to the particular wants of the consumers. Competition in the marketplace will provide the optimal features desired by consumerswhether it be reversibility, value dating, or alternative mechanisms.

Senator RIEGLE. Now let me call our second panel, and I appreciate their patience this morning. Mr. Maurice Gregg, Ms. Karen Brown, Mr. Milton Schober, and Mr. David Huemer.

Mr. Gregg, would you like to identify yourself and proceed? STATEMENT OF MAURICE W. GREGG, ON BEHALF OF THE NATIONAL RETAIL MERCHANTS ASSOCIATION

Mr. GREGG. Chairman Riegle, the National Retail Merchants Association, NRMA, appreciates the opportunity to appear before you today to present its views on S. 2065, the Electronic Fund Transfer Consumer Protection Act. I am Maurice Gregg, vice president for finance of Gimbel Bros. and I am chairman of NRMA's committee on EFT. I am accompanied today by Sheldon Feldman of Weil, Gotshal & Manges, NRMA counsel.

NRMA is a national nonprofit voluntary association representing the general merchandise retail industry. It is composed of over 3,500 members operating more than 30,000 retail outlets. NRMA's members account for about $90 billion in sales annually and range in size from the largest department and chain stores to small specialty shops.

The introduction of a new payment mechanism to the American marketplace is a matter of great concern to retailing, particularly since virtually every one of NRMA's members extends credit directly through their own credit card, or indirectly by accepting third-party credit cards. Further, many of these businesses have already invested large sums in sophisticated electronic equipment for purposes of in-house credit authorization, recording of merchandise information, inventory control and debiting and crediting customer accounts. Thus, the manner in which EFT systems develop

and are regulated will have significant impact upon NRMA's members and their customers.

NRMA does not oppose the concept of Federal legislation in the area of EFTS. To the contrary, we see the need for uniform standards by which all affected businesses will be guided. Our concern is with the timing of this legislation. As you know, the National Commission on Electronic Fund Transfers was directed by Congress to conduct a thorough study and investigation and recommend appropriate administrative action and legislation necessary in connection with the possible development of private or public EFTS. While an interim report entitled EFT and the Public Interest was issued by the Commission in February 1977, the commission's final report is just now being issued. It should deal with a number of major issues such as a cost benefit analysis of EFT, the potential impact of EFT on the availability of consumer and business credit, the cost and allocation of credit to consumers and other customers of depository institutions and a number of unresolved issues such as the element of stop payment or transaction reversibility. [See EFT and the Public Interest, p. 117].

Until all interested persons have had the opportunity to evaluate and comment upon the Commission's final report, we believe that enacting legislation in the area of EFT would be premature. We would therefore prefer that consideration of this bill be deferred until sometime during the next session of Congress. However, in the event that this subcommittee decides that enactment of legislation at the present time is essential to protect the public, NRMA welcomes the opportunity to participate in this important undertaking.

At the outset, NRMA wishes to endorse the primary objective of S. 2065, which is the protection of individual consumer rights in an EFT environment.

As a preface to our specific comments on this bill, some general statements about the policies of retailing with regard to EFT may help to place our specific views in perspective.

Electronic fund transfers is being developed and promoted by financial institutions in an effort to cut the increasing costs of operating a paper-based payments system. Neither consumers nor retailers have expressed dissatisfaction with the current payments system or have demanded these changes. While retailing recognizes the existing as well as the potential usefulness of electronic equipment and systems for the transfer of information and funds, there are certain fundamental concerns which must be taken into account before retailing will be receptive to EFT as an industry. For example, retailing believes that electronic fund transfer systems must be developed and maintained in a free and open competitive environment to insure the availability of a maximum number of payment methods, with consumers having the option to select the one most appealing to them in completing a transaction.

EFT must not interfere with current credit granting practices of retailers. Because merchants use credit to enhance their capability to sell goods and services, they are more likely than other credit grantors to make credit available at times, at prices and under other conditions that will benefit consumers. The ability of retailers to make credit available to eligible consumers must not be