From: Black Unicorn <unicorn@access.digex.net>
Date: Thu, 6 Oct 94 10:29:03 PDT
To: cypherpunks@toad.com (Cypherpunks List)
Subject: Digital Cash:  Impact of Interstate Banking Act of 1994
Message-ID: <199410061728.AA00139@access1.digex.net>
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The Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994, 
Electronic Banking and Digital Cash:  A brief impact survey.

+++


Last month the President signed into law the Riegle-Neal Interstate 
Banking and Branch Efficiency Act of 1994.

The act is the result of almost sixteen years of attempts to revise and 
ease long standing restrictions on commercial banking entities.  The 
aspects of the bill which in my opinion hold the greatest implications 
for electronic banking, internet banking and digital cash are the 
lifting of basic geographic restrictions on commercial banking are 
outlined below.

Commenting after the bill cleared the Senate, Secretary Bentsen 
indicated the following:

++ Begin excerpt

This legislation represents a major step forward for the American 
banking system that has been sought by both parties for years.  Efforts 
to ease interstate banking and branching restrictions were proposed by 
the last four administrations.  I applaud the bipartisan effort to enact 
this important legislation.

Interstate banking and branching will be beneficial to banks and their 
customers as well as the nation's economy as a whole.  This bill will 
allow banks to reduce expenses by structuring themselves more 
efficiently.  It will also promote the safety and soundness of the 
banking system through geographic diversification, which will enable 
banks to better withstand regional recessions and meet the needs of 
customers in times of stress.  Customer convenience will be greatly 
enhanced by eliminating arbitrary restrictions on interstate deposit 
taking.  Competition among banks will be encouraged by making it easier 
for them to enter markets that are not now full competitive.

[...]

The [Act]:

* Permits a bank holding company to acquire a bank located in any state, 
beginning one year after enactment.

* Allows a bank to merge with a bank in another state, beginning June 1, 
1997, so long as neither state has taken legislative action to prohibit 
interstate mergers....

[...]

* Allows foreign banks to establish branches, either de novo or by 
acquisition and merger, in any state outside the state in which the bank 
has its U.S. headquarters to the same extent that a domestic bank may 
establish such branches....

[...]

++ End of excerpt.

Since the Glass-Stegall Act, which established strict separation of 
commercial and investment banking services, commercial banking has 
suffered in the marketplace due to investment services and investment 
banking competition.  Investment banking and banking services could 
often offer services resembling those offered by traditional banking 
without enduring the strict geographical restrictions imposed on banks.  
At the same time, reduced deposit insurance regulation made the cost of 
these services lower.  Even entities like insurance companies could 
offer loan services, and often offer them at better rates, that banks 
could no longer soundly approach.

The most obvious impact of geographical restrictions to the average 
consumer was the restriction on traditional banks in regard to accepting 
out of state deposits.  Most readers will recognize this manifest in the 
inability to deposit to an account from an out of state automatic 
teller.  While withdrawals are possible through interstate networks like 
Cirrus, Most, NYCE and the Military Financial Network, deposits are 
restricted to in state entities only and as a result associated fees of 
any interstate transactions are a function of the number of financial 
institutions which the transaction must bridge, as the local banks are 
institutions unable to structure their own networks to avoid middleman 
cost.  Similarly, wire transfers are presented with an identical cost 
bridge, as geographic restrictions have often required the adoption of 
several different networks between banks instead of a single network.  
Costs are predictably affected.

With the introduction of the Interstate Banking Act banks will be free 
to expand their deposit taking functions across state lines (within the 
general restrictions of the Act).  As a result Automatic Teller Machines 
may soon be able to provide many of the same services as a "Full Service 
Bank" provided merely that they have a customer service phone attached.

The foreseeable impact on Digital Cash projects as well as online and 
offline cash and banking systems falls within a few brackets.

1>  Positive effects for start up domestic efforts associated with
    geographic deregulation.
2>  Positive effects for depositors in general.
3>  Negative effects for start up overseas efforts.
4>  Negative effects for overseas expansion efforts.
5>  Negative effects for digital cash generally.


1>  Domestic efforts:

Because limitations on interstate banking are being lifted, those 
projects intending to start up a full or partial service financial 
institution with advanced electronic transaction services will obviously 
be more feasible on a nation wide scale.

Prospects for nation wide, fully automated and cost effective electronic 
banking are greatly increased with the removal of the restrictions on 
geographic expansion.  Look to see increased interest in long term 
banking customer relations as banks and depositors recognize that it may 
no longer be necessary to change institutions when changing domiciles.  
An immediate expansion of automatic teller networks and associated 
agreements with service providers is likely.

2>  Depositors in general:

Can expect to transact all types of basic banking functions nationally 
without the necessity of a local branch of their bank being accessible.  
As banks begin to realize the profits from interstate banking fees 
directly without dilution to the institution local to the transaction, 
expansion of electronic networks is a likely reaction.

3>  Overseas efforts:

Efforts to provide depositors with access to overseas institutions will 
be hampered in two ways:

A>  Investment prospects will decrease.
Investors recognizing that overseas institutions which offer services in 
the United States have one less advantage over domestic banks will be 
less likely to participate in such a venture.

B>  Customers recognizing that overseas institutions offering services 
in the United States provide few, if any, needed services that local 
banks cannot also accommodate will reduce depositor interest in overseas 
electronic banking.  (Note the cyclic effect of this on potential 
Investors in A)

4>  Overseas expansion of existing institutions to the United States.

Is less likely in so far as competition among domestic banks is 
stronger, and the potential market share is reduced.

5>  Impact on digital cash.

A>  Because of the depositor interest in new local banking services, 
depositors are less likely to be interested in digital cash potential 
where a domestic checking account accomplishes the same basic goal.  In 
so far as digital cash ventures depend on the general populations 
interest, as compared with the interest of the "enlightened population" 
(in my meaning, those who understand the privacy and liquidity 
advantages of digital cash over traditional banking services), the 
market share of digital cash ventures is reduced by the number of 
general population more comfortable with traditional banking services.  
(I feel this to be a significant number).

B>  Note the impact on potential investors in digital cash ventures of 
A.


Not the end of digital cash by any means, but a blow for start up 
efforts.

Anyone interested in a much more detailed analysis of the Act, I will 
provide one to the list if enough e-mail interest is shown.

- -uni- (Dark)

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