Functions Related to Depository Banking, NEC

SIC 6099

Companies in this industry

Industry report:

This category includes establishments primarily engaged in performing functions related to depository banking, not elsewhere classified.

This industry comprises several types of functions related to depository banking including the transmittal of financial information between institutions and electronic payment services. Some of the primary functions that constitute this category are automated clearinghouses, check cashing agencies, check clearinghouse associations, deposit brokers, electronic funds transfer networks, escrow institutions other than real estate, fiduciary agencies other than real estate or trust, foreign currency exchanges, money order issuers, smart card issuers, representative offices of foreign banks, safe deposit companies, tax certificate sale and redemption agencies, and traveler's check issuers. Each of these functions is organized and operates differently.

In the 2000s, this diverse industry sector was significantly affected by the increasing use of electronic means for payment, both in the commercial and consumer spheres. In 2003 the Federal Reserve announced that electronic payment volume exceeded paper check volume for the first time, when the number of paid checks totaled 36.7 billion and electronic payment transactions totaled 44.5 billion. In 2004, the Check Clearing for the 21st Century Act (Check 21) allowed banks to exchange check images electronically rather than by paper. By the early 2010s, paying by electronic means far outweighed use of paper checks in both volume and dollar value. In addition, online transactions had become a popular method of banking among Americans. According to the American Bankers Association, in 2009 36 percent of consumers of all ages preferred Internet banking, whereas 25 percent preferred to visit their local branch and 15 percent preferred to use ATMs. Smaller markets included banking by mail (8 percent), telephone (6 percent), and mobile device, such as a cell phone (3 percent). Mobile banking was expected to see the fastest growth into the 2010s.

Automated Clearinghouses.
An automated clearinghouse (ACH) processes and delivers electronic debit and credit payments among participating institutions, usually commercial and savings banks, savings and loan associations, and credit unions. The electronic debits include preauthorized mortgage payments and insurance premiums that are deducted from a customer's account. The electronic credits include preauthorized direct payment of paychecks and dividends that are added to a customer's account. Automated clearinghouses are similar to check clearinghouses, in that all of the obligations are sorted and payment instructions are recorded electronically. The expanding use of debit cards, which increased by 23.5 percent between 2000 and 2003, drove the consumer electronic payment sector. Over the same period, check transactions declined by 4.3 percent.

There are typically five steps in an ACH transaction. First, the customer authorizes an electronic entry to his account. Second, the company introduces the electronic payment data through its bank. Third, the originating institution receives electronic payment data from the company. Fourth, the automated clearinghouse receives the electronic entry from the originating institution, processes it, and delivers the electronic payment to the appropriate institution. Fifth, the receiving institution posts the electronic entry to the customer's account.

According to NACHA, in 2006, nearly 16 billion ACH payments were made in the United States, up by almost 15 percent from the previous year. This growth continued into the decade, and by 2009, there were 18.76 billion ACH transactions in the United States. The Federal Reserve operates the largest ACH system in the United States. This system facilitates efficient clearing of accounts and reduced costs for participating institutions. Along with increased debit card use, growth was also driven in the 2000s by the rapid increase of accounts receivable check conversion, which increased by six-fold during 2004 to 1.25 billion transactions. Direct deposit represented the largest share of ACH transactions: NACHA estimated that over 70 percent of all private-sector employees received salary payments via direct deposit in 2004. By 2009, there were 4.54 billion direct deposit transactions. The introduction of back office conversion (BOC) in early 2007, which allowed point-of-sale businesses to convert checks to ACH, also significantly contributed to growth. In 2009, BOC transactions more than doubled from 2008, increasing 104.56 percent to 160.5 million transactions.

Check Cashing Agencies.
Check cashing agencies are small organizations that cash checks for a fixed fee. They do not require that a customer have an account to cash a check. In 2009, there were 8,090 check cashing agencies that brought in almost $2 billion in sales, according to Dun & Bradstreet (D&B).

Clearinghouse Associations.
A clearinghouse association is a voluntary group of banks located in the same city and having a mutual agreement to facilitate the daily exchange of checks, drafts, and notes among themselves.

Electronic Funds Transfer Networks.
Electronic funds transfers (EFT) describe any transfer of funds not initiated by a written instrument that originates through an electronic terminal, telephone, computer, or magnetic storage device and authorizes a financial institution to debit an account. Examples include point-of-sale transfers, automated teller transactions, direct-deposit of funds, debt cards, and transfers initiated by telephone pursuant to a pre-arranged plan.

EFT transactions can be divided into two broad categories: commercial transactions and consumer transactions. The former arise when an originating institution uses an automated clearinghouse to collect payments from or make payments to consumers and corporate entities. The latter encompass all retail banking services, such as deposits, withdrawals, and queries. These retail transactions are facilitated by point-of-sale systems and automated teller machines, or ATMs. As with ACH transactions, during the 2000s, the number of EFT transactions grew significantly. Nearly 8 billion consumer bills, which include Internet and telephone payments, converted checks, and preauthorized debits, were collected via the ACH method in 2006. By 2009, that figure had topped 9 billion. The Financial Management Service of the U.S. Department of the Treasury reported in 2010 that it cost the U.S. government $1.03 to issue a check payment but only 10.5 cents to issue an EFT payment. Such substantial savings caused many large organizations to shift away from traditional paper checks to EFT transactions.

Escrow Institutions, Other Than Real Estate.
Escrow institutions hold written agreements entered into among three parties and deposited for safekeeping with the third party as custodian. It can be delivered to the receiving party only on the performance or fulfillment of some prearranged condition. The escrow institution is legally obligated to adhere to the terms of the agreement with respect to the involved parties. In 2009 there were 499 of these institutions $154.1 million in annual sales, according to (D&B).

Fiduciary Agencies, Other Than Real Estate.
A fiduciary agency is an organization entrusted with certain property of a principal for a specified purpose. The fiduciary agency is required to act in the best interests of the principal in achieving the goals outlined in the trust instrument. Based on figures from D&B, there were 122 of these in the United States in 2009, bringing in about $42 million in revenues.

Foreign Currency Exchanges.
Foreign currency exchanges convert one type of currency into another at a given exchange rate. That rate is determined by the supply and demand of the desired currency plus processing fees and/or commissions charged by the retail institution. Commissions are either fixed or a percentage of the total amount of currency purchased. Many of these agencies are affiliated with banks or travel agencies and are usually located in areas frequented by tourists. In 2009, 737 of these firms generated $1.9 billion in sales.

Money Order Issuance.
Money orders are a type of credit instrument that allow the payment of money to the named payee through a safe means without the use of a checking account. Money orders can typically be issued by commercial and savings banks, as well as other institution such as the U.S. Postal Service and American Express Company. In the 2000s numerous other locations of convenience also began to offer money orders, including the nation's top retailer, Wal-Mart. By 2009, 721 establishments claimed money order issuance as its primary business. Annual revenues totaled $760.5 million.

Regional Clearinghouse Associations.
Automated clearinghouses are assembled in regional networks to facilitate the clearing of accounts within and between regions. All automated clearinghouses participate in an interregional network that enables them to exchange electronic payments with others throughout the United States. The Automated Clearing House (ACH) Network is a nationwide batch-oriented electronic funds transfer system governed by the NACHA operating rules. The rules provide for the interbank clearing of electronic payments for participating depository financial institutions. For example, in 2005, more than 2,000 Midwestern financial institutions were serviced by the MidAmerican Payment Exchange, based in Kansas City, Missouri. Western Payment Alliance, located in San Francisco, California, served numerous Western states and was one of the nation's largest clearinghouse organizations. Most clearinghouse associations function as nonprofit organizations. The Electronic Payments Network, which services the New York and New Jersey area, is an exception; it is the nation's only private sector ACH processor.

Representative Offices of Foreign Banks.
A representative office is a facility set up with an agent or officer of the foreign bank who is empowered to act on behalf of the bank. A representative office typically handles only a limited amount of business, serves to maintain contacts and look for new business opportunities. They generally do not process financial transactions or perform similar activities handled by branches or at the main office. As of 2009, there were 64 representative offices of foreign banks in the United States, down from 181 in 2000 and 231 in 1995. The majority of offices are located in New York; other locations include Chicago, Miami, Washington, Los Angeles, and San Francisco.

Safe Deposit Companies.
Safe deposit companies are institutions organized to provide facilities for the systematic safekeeping of securities, contracts, wills, insurance policies, jewelry, and any other valuable documents and property. These organizations exist alone or as a part of a larger institution such as a bank or trust company. A customer leases a box for a fixed period, usually on an annual basis. The customer is then assigned a box that can only be unlocked when two keys are used. One of these keys is given to the individual, and the other is retained by the company. The institution becomes responsible for the safety of the stored goods. The box is kept in a large vault, entry is strictly controlled, and positive identification is required. Safe deposit companies are state-chartered, similar to state banks. Because banks routinely offer safe deposit box rental, freestanding safe deposit companies are not numerous. For example, the State of New York Banking Department supervised just four safe deposit companies in June 2005. In 2009, there were 34 safe deposit companies, generating $54 million in sales, according to D&B.

Travelers' Check Issuance.
Travelers' checks are international checks that are not drawn on any specific bank, but are payable at virtually all banks worldwide. These checks are guaranteed by well-known institutions, such as international credit card companies like American Express or Visa. These instruments offer a convenient and safe form of currency and can be purchased from most banks for a 1 to 4 percent fee. If travelers' checks are lost or stolen, no loss is likely to be incurred since only the payee could cash them and the counter signature has to be written in the presence of the person cashing them. The owners of travelers' checks are typically reimbursed for their loss, as long as the second signature was not written. The travelers' check industry continued to face challenges in the 2000s because of the increasing global availability of ATMs, which provide travelers with instant cash. In response, in 2005 American Express began offering a prepaid Traveler Cheque Card that could be reloaded with additional funds. The card can be used at any merchant or ATM that accepts American Express. Because the card is not linked to a bank account, the risk of monetary theft and identity are reduced.

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