American Banker/Bond Buyer TransPoint, the bill payment and presentment joint venture between Microsoft Corp., First Data Corp. and Citibank, garnered yet another big bank to pilot its Internet bill delivery program: Wachovia.

Under the pilot, 100 of the North Carolina-based bank’s Internet customers will receive and pay their bills on the bank Web site. The bank joins Bank One, Citibank, First Union Corp., InterWest, Key Bank, Mellon Bank Corp., Merrill Lynch, Norwest and Wells Fargo in the pilot. The venture aims to give market leader, Checkfree, a run for its money. Wachovia already uses Checkfree for electronic bill payment, and is reportedly considering piloting bill presentment with the firm also.

In related news, PNC reportedly will also be offering bill presentment to all of its customers through Checkfree by the end of the year. That would make PNC only the second or third bank after First Union Corp. to have on-line bill presentment, depending on if it can beat Bank One Corp. to the market, as reported in Financial Modernization Report’s sister publication, the American Banker. PNC is also getting ready to test bill presentment software from TransPoint.

Analysts have said that although Checkfree has a good product, banks are willing to give TransPoint a shot so as not to be "beholden" to Checkfree. One phrased the situation as banks wanting Checkfree–which has 80% of the market in bill payment with the all-important pay-anyone capability that TransPoint is still working to perfect–not to think it is the only game in town. Pay anyone means a customer can get all of his or her bills on-line through the bank Web sites whether the bank has a connection with the vendor or not.

Earlier this year, Checkfree announced its impending merger with Internet portal Yahoo! Analysts said the combination would be a potent one and tough to beat if banks didn’t have the cash to go out and strike a deal with another major Internet portal to grab the traffic. Although TransPoint’s program is still being piloted, and may develop even better bells and whistles than Checkfree’s, until it can master the pay-anyone technology, it will not be able to compete effectively, sources said.

A decision by the Office of the Comptroller of the Currency to allow Fleet Financial Group to provide services for its small-business customers over the Internet reopens an issue that was believed to limit the authority of national banks to offer data processing services to retailers.

The 11-page approval letter to Fleet by OCC Chief Counsel Julie Williams reopens an issue long thought to be closed by a court decision.

David W. Roderer, a Washington lawyer with Goodwin, Procter & Hoar, said that in approving the application, the agency noted the so-called "subordination requirements"–which generally limit non-banking data processing services–are not applicable. The agency said that the level of revenues from "associated traditional bank products" offered through the Web site are expected to greatly exceed those relating directly to the Web site services, and so the limits don’t apply inasmuch as "the Web site hosting activity is part, rather than incidental to the business of banking, and is thus not subject to scope limitations that apply to some incidental activities."

The data processing issue deals with a 1979 decision by a panel of the 9th U.S. Circuit Court of Appeals, based in San Francisco. Williams said in her interpretation that a 1995 Supreme Court ruling superseded the 1979 decision. The 9th Circuit decision limited the authority of national banks to offer data processing services to retailers.

The 1995 Supreme Court decision dealt specifically with annuities, but added that the OCC should be granted deference in determining whether a specific product was banking or closely related to banking. Williams argued that the 1995 ruling held that the "business of banking" is an evolving concept not limited to the powers enumerated under the National Bank Act.

The decision, which allows Fleet to help its small business customers to market their services through the Internet, is seen as allowing the majority of retail firms to do business on the Internet relatively inexpensively. It also opens an avenue for banks to expand their service offerings and increase their value to customers.

"The latest ruling acknowledges the ability of national banks to offer their small business customers a package of electronic services consisting of three components: retail Web site housing; retail payments processing; and business checking accounts," said Roderer. He also said that in holding that the business of banking encompasses a wide range of "informational services, the OCC "further opens the ever-expanding world of electronic commerce to banks.

"As full participants in developing and providing e-commerce capabilities to their retailer customers, banks might be expected to play a major role in affording efficient access to electronic markets for small businesses that might otherwise be beyond their reach," he said.

"Numerous concerns still need to be addressed, including tying, customer privacy, security and the full array of issues confronting electronic commerce," he said.

Under the approved product program, the bank will charge a one-time set-up fee and a monthly maintenance fee for a package of services that bundles traditional merchant credit card banking services with the software, hardware and technical support necessary for a small business to have its own Web site "able to accept credit card payments in a secure environment," Roderer noted, citing language in the letter.

"Significantly," Roderer said, "the Web site product, with related system support, will not be available as a separate product offering and cannot be purchased without the entire package of associated banking products and services, such as the checking account and merchant credit card relationship."

A true believer in Internet banking and commerce, Marshall & Ilsley Corp. not only seeks to replicate its banking services on-line but the immediacy of a branch and even a neighborly environment in Cyberspace where customers can talk with one another.

M&I’s own banking Web site has all the bells and whistles provided to the banking clients of its technology outsourcing arm, M&I Data Services, as well as the clients of Security First Technologies, the providers of the cutting-edge Internet banking software. What differentiates M&I’s site, however, is its effort to build an on-line community. The bank sees its Web site as a means to get to know its customers better, rather than simply replicating services on-line and cutting down on customer contact.

A year-old program has given 10,000 bank customers their own home pages that can be accessed through the bank’s Web site, a process Garry McCann, manager of on-line banking for M&I Corp., described as "the start of building an on-line community with customers like you would at a branch level." And, although it might seem the point of the Internet is to bring all customers the same level of service, the bank plans to roll out its first site for an individual branch by the end of the year.

"The virtual branch will take them (bankers) down to a level where the customer is communicating with their branch only," McCann said. The benefit of this arrangement is to strengthen relationships, and tie the customer to a banker who can work with his or her individual financial goals. Also, through the virtual branch, customers can learn about events going on at their local branch that they might have only found out about before through fliers in the building itself.

Another new bell the Web site will be rolling out by the end of the second quarter is its on-line brokerage, called MIBROKERONLINE, which will enable customers to trade on-line and see quotes in real-time.

M&I, which is a major outsourcer to community banks, not only sees getting into e-commerce as imperative for its own survival, but for its bank customers, too.

"The primary reason is delivery channels change over time," said Mike Hatfield, senior vice president and secretary of Marshall & Ilsley Corp. "The volume of traditional channels is declining, but Internet and telephone are growing at tremendous rates. If you want to continue to be in the business, we feel that if we get that hookup with e-commerce we can be viable," he said.

The $21-billion-asset bank is not only the biggest independent bank in Wisconsin, but it may become one of the leaders in home banking, following its recent acquisition of Moneyline Express, the e-payment component of Traveler’s Express, which has 20% of that market.

The company is the only other significant e-payment provider besides industry leader Checkfree, which provides a "pay anyone" service. Pay anyone means that a consumer can enter any biller onto his or her bank’s Web site and that party will be paid. Many systems now can only pay parties the bank or provider already have a relationship with.

Add to that last month’s acquisition of ADP’s electronic banking division, expected to close at the end of this month, and M&I has the business banking piece of the e-commerce puzzle. The three products it acquired from ADP, Business Express, FORTExpress and Cash Express, are cash management programs for businesses that are used by 120,000 corporate clients.

The company plans to integrate Moneyline Express’s pay-anyone capability with the ADP products to provide its bank customers with a business-to-business electronic payment service to offer business customers. Before this year’s Moneyline Express purchase, the bank already had 200 banks outsourcing this service, and it’s working to keep the 500 belonging to Traveler’s Express. The two acquisitions are components of M&I Data’s recently created electronic banking division. The business from the ADP purchase is estimated to bring in $40 million in revenue this year; estimates were unavailable for revenue generated from Moneyline Express.

The only piece of the puzzle missing is e-bill presentment, and industry watchers are eagerly watching to see which way M&I goes.

Mike Hayford, executive vice president of corporate development at M&I Data Services, the bank’s technology arm, said the company, for now, is going to focus on absorbing its new purchases. However, it is thinking ahead to develop an e-billing component. "But I don’t believe it will be via the acquisition route. It could potentially be an alliance or partnership, or we’ll build it ourselves," he said.

So why is the ability for a customer to pull up bills on-line all at once important, since only a small number of billers have relationships with e-bill presenters, and the rest of the consumer’s bills must be acquired over time from the paper mail? Because, as with all things tech, it’s the wave of the future, bank officials said. They believe bill payment service, which is gaining popularity with consumers now, will become even more popular when more billers present their bills on-line. Hayford said he thinks billers will start to provide the service more when they see the economic benefits.

"We think banks have a real opportunity to participate (and) we think banks should be aggressive in pursuing relationships with consumers through electronic banking means. The reason we believe that is we do think the payment system is going through changes and banks have the risk of somebody else coming in and providing those services. We try to make sure we have those products to offer," Hayford said.

A relatively inexpensive source of funding for banks, which an amendment to a new accounting standard appeared to threaten, was secured last week when the Financial Accounting Standards Board decided against a move that would have inflated the funding provider’s balance sheet.

The decision affected so-called repurchase agreements, or repos, in which a bank or other borrower pledges collateral in the form of securities in order to receive a relatively inexpensive loan. In what was expected to be its last meeting March 24 on the controversial amendment to Statement 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, the board decided against making the party holding the collateral book it as an asset.

The board had been leaning toward that method, which caused a flurry of protest letters from Wall Street (see FMR 3/15/99 p. 5). The board reasoned that if the collateral holder–usually broker/dealers and large commercial banks–could use the securities and profit from them, the collateral should be accounted for somehow.

Firms complained that making banks and others record the collateral as an asset and the obligation to return it as a liability would create unforeseen effects on other types of collateral arrangements that the board had not considered. Further, "grossing up" the balance sheet would deplete capital, perhaps limiting repo lenders’ ability to do the transactions and tightening an inexpensive source funding for many banks.

"It would make everybody’s balance sheet look larger and more leveraged," said Patricia Brigantic, senior associate general counsel for the Bond Market Association. She explained that besides limiting repo lenders lenders’ ability to do the transactions, a bigger balance sheet would cause frowns among rating agencies, counterparties, and others analyzing the credit.

The board reconsidered the issue last week and after looking at seven different options, decided the holder of the collateral–the "secured party"– would have to report the value of the right to use the collateral during the period it has been pledged. Halsey Bullen, FASB project manager, explained that the amount to be recorded will be relatively small under the new plan, compared with having to book the entire asset.

Several bankers were pleased to hear of FASB’s change of heart, saying that the new accounting should mean a big difference in their repo market activity. John Spiegel, chief financial officer of SunTrust, said the change sounded positive and added that he thought the collaboration of the FASB staff and the banking community is "a good thing."

Although staffers have some draft language for this section of the amendment, the board asked them to check with the Wall Street community "to see how the ideas might best be articulated," Bullen said. Brigantic’s accounting committee and representatives from many Wall Street firms will meet this week to discuss how to allocate a value to the gains from using the collateral for the period it is held. Brigantic added that the new guidance doesn’t just apply to repo transactions, but securities lending, margin loans and collateralized derivatives transactions–in short, any situation in which financial instruments are used as collateral.

Bullen added that apart from possible minor language changes to the proposed amendment, which could result in another meeting, the board now only must review the amendment in its entirety. Five board members indicated at the meeting they would support the statement.

Bank of America is working with California-based Palm Computing to provide its customers with instant account information over the "palm pilot," a computerized hand-held organizer that’s steadily growing in popularity.

The service, which may come out as early as this summer, would initially offer checking and savings account information, which would be updated daily. But B of A is also planning to introduce interactive banking, including a way to buy and sell securities via the personal organizer, according to Nick Berner, Internet alliances manager at Palm Computing. He estimated that the "next step of interactive banking" might be available in early 2010.

B of A hopes the new service will both pull in more high-net-worth customers and show that the bank is on the "cutting edge" when it comes to financial technology, according to sources.

"(Using a palm pilot) is a lot better than lugging a laptop around or some kind of quirky paging device," he said. "They are already something that people are used to carrying around."

The new service will use a wireless modem and be released with Palm Computing’s next organizer, Palm 7, due out in summer. The on-line brokerage company E*Trade is also working with Palm Computing. This summer, it plans to provide regularly-updated stock quotes and some transactional capabilities.

Berner added B of A is hoping to attract more affluent customers. "They won’t necessarily be able to do as many things on-line as they can with their personal computer," he said, "but the bank is providing one additional way for this customer segment to do their banking."

The service will not permit customers to browse the Web. Instead, it will provide so-called "Web clipping," in which owners of the Palm 7 will be able to "lock into" any Web site that has contracted to provide its Internet service through Palm Computing.

The cost of the Palm 7 will be between $600 and $800, according to Berner. Currently, it is possible, but very difficult, to add wireless Web access to old "palm pilot" models. "It used to be a matter of mind-numbing complexity," Berner said. "You would have to buy a separate modem and find some way of integrating the Web sites. In contrast, with Palm 7 you open the device and a few minutes later you can access the content that the providers have made available."

Berner said many other banks have expressed interest in working with Palm Computing. "I think once Bank of America comes out with it, almost every other large bank will feel they need to keep up."

Octavio Marenzi, director of electronic delivery services at Meridien Research in Boston, said B of A will also benefit by showing that it is on the "cutting edge" when it comes to new banking technology. "A lot of it is a marketing gimmick," he said.

Despite banks’ apparent fervor to enter new financial services arenas, such as brokerage products and insurance, they have dropped the ball and now must scramble to avoid getting left permanently behind, according to a report released last week by the Bank Administration Institute and the Boston Consulting Group. The report adds, however, that a quick reversal of the current trend could send bank retail revenues skyrocketing.

The report, Putting It Together: Convergence Strategies For Banking, Insurance and Investments, issues the industry a stern warning, citing woeful statistics of its rapidly falling "share of wallet." It proceeds to offer specific advice to turn the bleak situation around, including quickly increasing banks’ commitment to insurance and other mass market products.

The study asserts that the European system of bancassurance, in which banks have fully integrated insurance and investment products with traditional retail banking, should be used as a model by American bankers. The report cites statistics of the 50% share of the life and pension market in France held by banks, and the 30% share in Spain. By comparison, U.S. banks have 1% of the market. The European banks’ costs are 50%-70% lower than independent insurance agencies in Europe, and the branch sales system sells three to five times as many insurance policies as the conventional sales system, the report said.

John Garabedian, a vice president at the Boston Consulting Group who oversaw the study, said banks have fallen down and let business go to other more aggressive financial service firms by only making "halfhearted" commitments to the new markets.

"Banks need to make a commitment to improving the consumer insurance experience and leveraging elements of their existing administrative, marketing and distribution infrastructure to provide these products at a lower cost and with wider margins. By using their own networks efficiently, banks have the potential to double their profit per customer," Garabedian said.

The study cited statistics showing banks’ share of the retail financial services wallet has slid to 34% in the late 1990s from 50% in 1981, and that banks are paying even more to garner new customers, the majority of whom do not turn out to be profitable. The study counters that woeful picture with the assertion that banks are "well positioned" to reverse the trend by getting into the mass market with insurance and investment products.

Like their more successful European counterparts, U.S. banks are more suited to the sale of insurance than traditional insurance agents, the report says, because of their existing administrative infrastructures and customer base, trusted brand and a lower-cost sales force. The report asserts that if banks made a major commitment to insurance and "a more narrowly targeted commitment to investments," retail revenues could jump by almost 50%.

Other strategies the report touts include selling more aggressively to women and members of Generation X, who have traditionally been under-tapped by traditional insurers and financial advisors. Also, the report advises bankers to market more aggressively cash management products that bundle checking accounts with investment products and offer limited investment guidance to first time and young investors, to maintain market share.

The banking industry appears universally opposed to an initiative by the Federal Reserve Board to reduce the availability time on nonlocal checks to four days from five.

While all comments had not been processed by the agency by press-time, many trade groups and banks commenting said the agency should drop the idea. The comment period closed March 15.

Mandates on how long banks can hold up payment of checks were imposed by law in 1987, but the agency does have some discretion in extending or restricting the hold periods. In an advanced notice of proposed rulemaking published Dec. 14, the Fed said it is thinking of shortening the availability schedule for nonlocal checks from five to four business days, with institutions given the option of retaining the five-day schedule for some nonlocal checks. For those categories of checks, a bank must certify that it does not receive a sufficient proportion of returned checks within four days. The Fed also asked institutions to comment on the benefits and drawbacks to amending Reg CC, which governs the availability of funds and the collection of checks.

"Bank of America believes that regulatory and industry focus should continue to be on reducing or eliminating the delay of return information to depositing banks. This, in turn, would allow holds to be more closely tied to actual forward collection times," said Patrick Frawley, director of the bank’s regulatory relations department.

Sharon Royal, a lawyer for First Tennessee Bank, wrote: "The first thing for the Board to consider is simply the cost and disruption associated with requiring thousands of institutions to retrain their employees; to revise and replace hold notices to be furnished to customers; to revise documentation in which the institution’s Reg CC availability policy is explained; and reprogram computer systems "

"The congressional standard for determining whether to shorten the availability schedule–that two-thirds of the checks can successfully be returned within four days–has not been met, based on the Fed’s own survey," said Charlotte M. Bahin, regulatory counsel for America’s Communtiy Bankers. Moreover, she said, "Shortening the availability schedule would increase the probability of check fraud." That is because the Fed has suggested in its request for comments that banks would be required to make funds available even if they cannot determine whether sufficient funds exist to cover the uncollected balance of these checks, she said.

The Commerce Committee, the next stop for financial services modernization legislation in the House, is likely to change the bill to require banks to conduct securities activities in holding company affiliates under total Securities and Exchange Commission oversight, according to officials and lobbyists.

And, in the Senate, where the Senate Banking Committee passed a similar bill, but without bipartisan support, Sen. Phil Gramm, R-Texas, the panel chairman, said he also hopes to put the bill on the Senate floor in early May.

However, big obstacles remain for passage this year. For example, the Commerce panel is seen as likely–under pressure from the securities industry–to toughen privacy provisions now contained in the bill that would limit banks’ ability to use their existing customer database to market investment products. Representatives of major money-center banks made clear last week at a meeting of banking industry lobbyists in Washington that if the privacy provisions are toughened they will drop support of the entire bill. And unitary thrift holding company provisions in both the House and Senate bills are under heavy fire from bank trade groups and the Federal Reserve Board.

Both changes, plus amendments to the bill passed by the House Banking Committee March 11, are likely to reduce banking industry support for the measure, which is already eroding.

The bill that passed the House Banking Committee by a huge margin repeals the Glass-Steagall Act and allows banks to conduct most non-banking activities in either an affiliate of the bank or an operating subsidiary. In general, both bills allow banks to conduct insurance, securities underwriting and merchant banking activities, but only under the oversight of existing regulators.

However, the bills differ in the areas of permissible operating subsidiary activities and Community Reinvestment Act requirements.

The Commerce panel has oversight over the SEC and is seen as unwilling to give up oversight of securities activities.

Congressional work on bankruptcy reform is intensifying, with Senate and House panels planning markups this week on legislation similar to that which failed to pass Congress last year.

But the bills are different, with the Senate’s more bipartisan bill substantively diluting the "means test" provision in last year’s bill which was very strongly opposed by consumer groups, Democratic members of the Senate and the Clinton Administration. That opposition is what killed the bill, which is supported by the credit card industry.

Rep. George Gekas, R-Penn., head of the commercial and administrative law subcommittee of the House Judiciary Committee, has scheduled a markup on his more restrictive bill for March 24-25. In the Senate, Sen. Charles Grassley, R-Iowa, chairman of the Judiciary Subcommittee on Administrative Oversight and the Courts, scheduled a markup of his bill March 25. The Senate Republican leadership is indicating it wants the bill on the floor in April, with or without Democratic support. But Grassley does have Sens. Robert Torricelli, N.J., and Joe Biden, Del., as Democratic co-sponsors.

Even though House Republicans have been able to win significant Democrat support for their bill, it is still likely to face opposition if the means-test provision is included.

The seeds of a compromise on the House bill could be in the form of legislation recently introduced by Rep. John LaFalce, D-N.Y., ranking minority member of the House Banking Committee. LaFalce, who testified last week in support of his bill before Gekas’s panel, is calling for far greater disclosure by credit card companies of the potential pitfalls of credit card debt.

The bill requires a more complete disclosure of all credit card terms and costs, including "teaser rates." It also bans credit card issuers from canceling an account or imposing new fees on card holders who routinely pay off monthly card balances in full. The bill also prohibits credit card companies from issuing credit card accounts to people under 21 years of age, except with parental approval or evidence of means of payment.

There are four main differences between the two bills. First, the means test in the Senate version gives bankruptcy judges greater discretion in considering whether to transfer a debtor from Chapter 7, which means the debts are fully discharged, to Chapter 13, where the debtor needs to repay all or some of the debt. The Senate version also has greater consumer protections designed to lessen pressures from creditors for debtors to "reaffirm" debt that would normally be discharged in bankruptcy, plus greater protection for child support payments. Finally, it has a reduction in the amount of unsecured debt that would be made nondischargeable by the new law.

International banking supervisors are considering raising capital requirements on loans to developing countries and hedge funds, a senior regulator said recently.

The new system would use bond ratings to determine the capital charge on loans to sovereign governments, said Stephen C. Schemering, deputy director of banking supervision at the Federal Reserve Board.

Reserves would not be required for loans to countries with the top credit ratings, such as AAA or AA-minus, he said. Credits to countries with A- plus or A-minus ratings could carry a 20% risk weighting, he said. That means the bank would hold 20% of the standard 8% capital charge, or 1.6% of the loan, as a reserve. Countries with very low credit ratings could be subject to a 150% risk weighting, which translates into a 12% capital charge, he said.

International regulators also are considering a 150% risk weighting for loans to "highly leveraged institutions not subject to regulation," Schemering said during a workshop at the Independent Bankers Association of America convention. That is how regulators typically describe hedge funds.

The 150% risk weighting also would apply to "impaired" loans, though he provided little detail on what it would take for a credit to be considered impaired.

Schemering cautioned that the proposal is a draft and significant changes could be made before its expected release next month. Yet this would be the first time international regulators ever set capital requirements above 8%.

The capital proposal also would change the treatment of loans to other banks and securities firms, Schemering said. The reserve requirement would be one risk bucket higher than the capital charge for loans to the borrowing bank’s home country government, he said.

That means a loan to a U.S. bank would be subject to a 20% risk weighting. Mortgage loans would continue to fall into the 50% risk bucket, he said. Regulators plan to continue to require the full 8% reserve on all corporate loans, though Schemering said there is some talk of discounting the required reserve for loans to AAA-rated companies.