WORK IN PROGRESS: A NOTE ON THE IMPORTANT RELATIONSHIP BETWEEN BANKING AND DATA PROCESSING, WRITTEN AS AN APPLICATION TO BECOME A BANK HOLDING COMPANY ENGAGED IN OPERATION AS A 21ST CENTURY DIGITAL NETWORK ADMINISTRATOR

 

I  Activities Applied For

A. TTS Industries, New York, New York, a sole proprietorship with an application to the Federal Reserve Board   (“Board”) to be a Bank Holding Company within the meaning of the Bank Holding Company Act (“the Act”), applies for the Board's approval under section 4(c)(8) of the act (12 U.S.C. § 1843(c)(8)) and section 225.4(b)(2) of the Board's Regulation Y (12 C.F.R. § 225.4(b)(2)) to engage in the following new activities for a Bank Holding Company:

1.  To engage in the non-banking activity of “Network Administrator” for a “21st Century Digital Network”. Specifically, the non-banking activity which shall be performed as a 21st Century Digital Network Administrator will be the processing, transmitting, and storage of both financial and non-financial data on a consumer driven commercial digital network based on internet technologies as described below and in:
2. USPTO  Patent Application 12/079,235 for a 21st Century Digital Network
3. USPTO Trademark Applications Serial Numbers :  77021219 and 77072392for word marks “Twenty First Century Digital” and “21st Century Digital” respectively .

 Simply and loosely stated for purposes of exposition, a 21st Century Digital Network is defined as a digital internet technology-based network whose operating protocol is defined by specific contractual licensing agreements (Appendix D, USPTO Patent Application #12/079,235 “Drawing of the Invention” diagrams these “TTS CLAs”) between firstly, the network’s Administrator, secondly, the network’s Manufacturer of Hardware, thirdly, the Writer of Network’s Operating System, and fourthly, the network’s Telecommunication Carrier. The purpose of the system and the TTS CLAs is the lawful, efficient, productive, and secure digital transfer of trademarked and copyrighted materials.

1. To engage in non-banking activity as applicant for patent rights to the design structure for a “21st Century Digital Network” (Appendix D) as described in United States Patent and Trademark Office Provisional Patent Application for a “Twenty First Century Digital Network” (Appendix 5). TTS Industries proposes to hold a patent for a “21st Century Digital Network” and to function as Network Administrator for a “21st Century Digital Network” as described in the Provisional Patent Application for a 21st Century Digital Network (Appendix D, E).

 

1. To engage in nonbanking activity in owning and managing the Trademarks “21st Century Digital” (Appendix B) and “Twenty First Century Digital” (Appendix C),  which Trademarks shall define a protocol under which consumer driven commercial digital networks may operate for transmission and processing of both financial and non-financial commercial data. The marks may be used to exclusively denote a defined protocol for digital transfer and processing of nonfinancial data but be owned by a Bank Holding Company or subsidiary.

 

 

1. To engage in nonbanking activities by participating as a 21st Century Digital Network Administrator in the formation of a Self Regulatory Organization which may oversee 21st Century Digital Network regulatory compliance. The SRO will first and foremost monitor the use of the Trademark “21st Century Digital” to the end that commercial transactions which claim to take place on a “21st Century Digital” Network are in compliance with 21st Century Digital protocol with regards to record keeping, security, monetary reporting, etc. In doing so, the SRO will be a first level regulatory mechanism ensuring commercial compliance with extant United States law.

 

B. TTS Industries shall delegate certain operational activities and activities necessary to maintaining and managing the above referenced patent, and/or trademark and/or network administrative capacities referred to above to the following TTS Industries subsidiaries 21st Century Digital, a Sole Proprietorship based in New York, New York, TMTP USA Unlimited, a Sole Proprietorship based in New York New York, and 21st Century Digital Bank (for which there is a current application for membership in the Federal Reserve System). TTS Industries, which shall hold any such patent granted, is The Twenty First Century Digital Telecommunications Network Serving Private Enterprise Industries. TMTP USA Unlimited is the Third Millennium Telecommunications Project USA Unlimited. TMTP USA Unlimited shall manage long term network research and development, anticipated to be conducted in 5, 10, and 20 year stages.  

 

II Introduction and Summary

SUMMARY PART 1- COMPARING AND CONTRASTING FINANCIAL AND NON-FINANCIAL DATA
In the digital economy, three types of data are processed and transmitted which carry actual financial value or have commercial ownership rights. These three types of data are:

1. data representing financial value (money, credit),
2. data which represents something trademarked- (any corporate logo, invoice, receipt, warranty, contract, etc),
3. data representing something copyrighted (copyrighted music, literature, other entertainment, analyses, studies, etc).

The transfer and processing of this data which has value should be afforded the same safeguards afforded to the transfer and processing of financial data. Data processed and transmitted which is representative of Trademarked and Copyrighted materials is as valuable as data representing “money” in the digital economy.
Bank Holding Companies and their subsidiaries are permitted to engage in proposed commercial activities if banks provide services that are operationally or functionally so similar to the proposed services such that banks are particularly well equipped to provide the proposed services.  A Bank Holding Company need not demonstrate a need for a proposed commercial service in order to be granted to provide the proposed service. Rather, the bank should demonstrate that benefits to the public of the proposed activity outweigh reasonably anticipated adverse effects. Also, Bank Holding Companies and their subsidiaries are permitted to engage in commercial activities which are determined to be closely related to banking if it is demonstrated that banks have provided the proposed service.

Title 12 of United States Code Section 228 Paragraph 14 permits Bank Holding Companies to process and transmit financial data. In the 2007 global digital economy, no data is processed and transmitted with more safeguards and security than financial data. Bank Holding Companies’ proprietary networks utilize the most state of the art technology to do so. The research and development which Bank Holding Companies have conducted over the past few decades drives the development of these proprietary networks, which in turn serve as the backbone to the Internet by allowing digital commercial sales and purchases. Bank Holding Companies and their subsidiaries have been providing this service of processing and transmitting data.

The commercial activity of processing and transmitting trademarked and/or copyrighted material is both operationally and functionally so similar to the processing and transmitting of pure financial data that banks are particularly well equipped to provide the proposed service of processing and transmitting non-financial data. There is in fact a need for such service, as problems abound in the safeguarding of Trademarked and Copyrighted materials on the Internet.

Therefore, Bank Holding Companies and their subsidiaries should be permitted to process and transmit data which is not purely financial in nature but which carries financial value in the digital economy. Specifically, Bank Holding Companies and their subsidiaries should be permitted to process and transmit Trademarked and Copyrighted materials for consumers and businesses on proprietary networks.

SUMMARY PART 2- THE PROPOSED ROLE FOR BHCS AND SUBSIDIARIES IN THE PROCESSING, TRANSMITTING, AND STORAGE OF NON-FINANCIAL DATA.

This application is not an indiscriminate request for BHCs and their subsidiaries to process and transmit non-financial data in the manner that 12 CFR 228.14 permits processing and transmission of financial data. Rather, this application requests permission for Bank Holding Companies and subsidiaries to play a limited, specific administrative role in such data processing, on a system which not only comports with permissible activities doctrine, and antitrust standards, but also contributes significant regulatory mechanisms to internet commerce.
To be certain, as indicated above in Summary Part 1, the goal of this application is for non-financial data processing to enjoy the fruits of several decades of BHC research and development devoted to financial data processing, with the effect of increasing the security of non-financial data transfer. Any such new activity must comport with the Banking Industry’s longstanding permissible activities doctrine and anti-tying doctrine. And, to be successful in the marketplace, any such new activity should also promote of competition, innovation, and productivity. Thus, with these goals in mind, this application seeks permission from the Board for Bank Holding Companies to be allowed to engage only in the administrative activities necessary to increase the security of non-financial data processing and transmission, and those administrative activities necessary to promote competition, innovation, and productivity in such processing and transmission.
Thus, this application sets forth the structure of a named system whose design structure purpose is the secure digital processing and transmission of data, and seeks permission from the Federal Reserve Board for Bank Holding Companies and their subsidiaries to engage in Administrative activities on such system. The system stipulates that BHCs and their subsidiaries engaged in such administrative activities maintain contracts with autonomous manufacturers (or owners) of the hardware utilized, autonomous owners of the operating system utilized, and autonomous owners of the telecom carriers utilized to process and transmit this non-financial data.
BHCs cannot be granted permission via this application to manufacture or own hardware used to process non-financial data, nor granted permission to write or own software utilized to process non-financial data. The application below sheds further light on this proposed system. The system is referred to in the application as a “21st Century Digital Network.”  Essentially this application is made to the Board to permit BHCs and subsidiaries to engage in the commercial activity of “Network Administrator” for a “21st Century Digital Network.” This proposal makes the case that permitting BHCs and subsidiaries to function as 21st Century Digital Network Administrators will increase non-financial data transfer security, promote competition, promote innovation, increase commercial productivity and efficiency, and add an effective regulatory mechanism to the digital marketplace. Bank Holding Companies’ unique expertise and adeptness in digital data transfer make these companies particularly well suited to engage in this activity.

 

 

 

 

 

III   Whether “21st Century Digital Network Administrator” Activities are Closely Related to Banking

a.   Section 4(c)(8) of The Bank Holding Company Act permits a bank holding company to engage, directly or through a subsidiary, in activities that the Board has determined by order or regulation to be “so closely related to banking or managing or controlling banks as to be a proper incident thereto.”

b.    The Board’s 1982 Order Approving Citicorp’s Application to engage in Data Processing and Transmission is well suited for consideration in this instant 2007 application for TTS Industries. The 'National Courier' and “Decimus” decisions were there cited as guidelines to determine whether the proposed commercial activity of financial data processing and transmission are closely related to banking.

The National Courier guidelines describe whether a particular activity meets the 'closely related to banking' test. An activity may be found to be closely related to banking if it is demonstrated that banks generally have in fact provided the proposed service; or that banks generally provide services that are operationally or functionally so similar to the proposed services as to equip them particularly well to provide the proposed service; or that banks generally provide services that are so integrally related to the proposed service as to require their provision in a specialized form.  The Decimus guideline indicates that “permissible data processing services may be provided by any technologically feasible method.” The Board's Regulation Y also permits bank holding companies to engage in activities that are incidental to closely related activities. The 'National Courier' court defined incidental activities as those that are necessary to the performance of closely related activities.

c.   In 1982, the Board approved Citicorp’s application to engage in data processing and data transmission activities which were closely related to banking. These activities were added by regulation to 12 CFR 228 Section 14 as follows:

(14) Data processing. 
(i) Providing data processing, data storage and data transmission services, facilities (including data processing, data storage and data transmission hardware, software, documentation, or operating personnel), databases, advice, and access to such services, facilities, or data-bases by any technological means, if:
(A) The data to be processed, stored or furnished are financial, banking or
economic; and
(B) The hardware provided in connection therewith is offered only in conjunction with software designed and marketed for the processing, storage and transmission of financial, banking, or economic data, and where the general purpose hardware does not constitute more than 30 percent of the cost of any packaged offering.
(ii) A company conducting data processing, data storage, and data transmission activities may conduct data processing, data storage, and data transmission activities not described in paragraph (b)(14)(i) of this section if the total annual revenue derived from those activities does not exceed 49 percent of the company's total annual revenues derived from data processing, data storage and data transmission activities. 

d.   The Board’s 1982 Citicorp Order, which effectively enacted 12 CFR 228.14, specifically stated that

[I]t is appropriate that all reasonable efforts should be taken to assure compliance with the Board’s finding that only the processing and transmission of banking, financial, and economic data is permissible. A limitation on the types of data for which processing and transmission services are offered does not appear excessive, since the technology to effect such limitation exists.

In 2007 such limitation is counterproductive and stymies innovation in network development. If, by regulation, Bank Holding Companies continue to be permitted to engage in data processing as per 12 CFR 228.14, then Bank Holding Companies must be permitted to engage in processing and transmission of non-financial data. If not, innovation will suffer, extant technologies will go underutilized, value will be lost to owners of Trademarked and Copyrighted materials, and consumers will be underserved.

Conversely, if American Banks were no longer permitted to process financial data, but only non-banking entities could process and transmit both financial and non-financial data, foreign banks would gain an upper hand unless the switch was made rapidly, which seems impossible. Contrarily, if American Banks are permitted to utilize proprietary technologies to administer 21st Century Digital Networks, United States governance will have opportunity to help shape next generation secure consumer driven digital commerce.

e.         A great deal of revenues are associated with 12 CFR 228 section 14. Payment processing activities alone generate revenues of more than 2% of the total dollar amount of all daily electronic commercial transactions.   In processing and transmitting data permitted by 12 CFR 228 section 14, Bank Holding Companies must be assured that that the data represented is accurate to the penny in an enormous quantity of transactions. The systems devoted to this data transmission are the most advanced in the world due to the ability to devote a portion of revenues to research and development. In comparison, the revenues associated with commercial data processing and transmission of all other commercial data pale in comparison. And the systems devoted to all other data transmission and processing suffer likewise, with an Internet riddled by fraud and identity theft and begging for more services which the technology can provide. Most other commercial data processing and transmission is supported by advertising revenues, much in the way that Broadcast Networks (such as television or radio) are supported and have been supported for decades. Internet technology allows for much more than sheer broadcast, yet the ban on expansion of 12 CFR 228.14 has prevented further development to next generation Internet technology across the landscape of commercial data processing and transmission on secure, proprietary digital networks. The Internet itself is a marvel, even a wonder of the world. The author is of the impression that it shall remain so for perpetuity offering great convenience around the globe. However, it is an un-owned network. While capitalism helps research and development of the component parts of the Internet, capitalism provides little drive for R & D of any finished product comprised of the component parts- the Internet remains an amalgam of advanced component parts. Proprietary networks are the next generation digital commercial platform. Proprietary networks cannot self-sustain if financial data processing and non-financial processing cannot be performed by Bank Holding Companies.

 

f. Whereas the proprietary networks which service data processing and transmission permitted by 12 CFR 228.14 embed security in the per se proprietary network (that is, the hardware, software, information carrier, and network administrator of such a network are coordinated and operate on a protocol devised to optimize security), non-financial data in 2007 is not afforded the same luxury.

Presently, non-financial data which carries value, such as Trademarked or Copyrighted material, is transmitted and processed via the Internet, which has a very open protocol and is difficult to regulate and lacks records. There are no proprietary rights associated with the sum of the parts of the Internet-network utilized to transmit and process such data. The separate components of the Internet do have proprietary rights- in the manufacture of hardware, the writing of operating systems, the information carriers. Each proprietary component looks to provide consumers and businesses with a degree of security in valued data processing and transmission. But the “Network” Market is at a logjam- independent component parts to a digital commercial network cannot function as effectively and efficiently as such components in a structured system.
Full-fledged networks have uniquely developed in the financial services sector for data transmission and processing of the data defined in 12 CFR 228.14, given the revenues associated and the high stakes for secure financial data transmission and processing. In the end, the dichotomy which divides what data can be processed by what kind of company- separating the most lucrative data from other data- is adversely effecting commercial network development.
The resolution is to permit Bank Holding Companies to administer non-financial data processing utilizing their proprietary research and development in a regulated system which necessitates contractual participation by the “anchor” enterprises of the Digital Industry- telecom, operating system, and hardware.  No proprietary operating system alone is a network, no hardware alone is a network, no proprietary telecom carrier alone is a network which can meet the demands of all consumers for the digital transfer of trademarked and copyrighted materials and comply with antitrust law. Nor can an open, non-proprietary amalgam of independent manufacturers, carriers, and writers effectively optimize efficient, productive, secure processing and transmission of items of value. Nor could Bank Holding Companies alone offer any such service.
A system such as that described in attachments as a “21st Century Digital Network” may provide a means to effectively optimize a next generation consumer driven digital network. Bank Holding Companies, given the evolution of digital commerce in the 21st Century, are particularly well suited to be permitted to process and transmit data as Network Administrators in coordination with hardware, software, and telecom. If such a business model is attractive to Banks, Hardware Manufacturers, Software Writers, and Telecom Carriers, they will contract. If the services provided via such contracts are attractive to consumers, consumers will utilize the services offered.

 

 

 

 

 

 

 

IV    Balance of Public Benefits Over Possible Adverse Effects

The standard of review for applications to the Board for a Bank Holding Company to engage in an activity other than banking is articulated at section J(2)(A) of the Act:
In connection with a notice under this subsection, the Board shall consider whether performance of the activity by a bank holding company or a subsidiary of such company can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices.

One of the early decisions by the Board in the history of Bank Holding Company data processing was the matter of Decimus Corporation in 1980, a subsidiary of BankAmerica Corporation. In granting Decimus permission to engage in new activities, the Board stated

In the absence of evidence to the contrary, the Board views de novo entry as pro-competitive and a positive public benefit since such entry provides an additional source of competition in a market… [e]ntry of Decimus into the application area would add a well-equipped and well-financed competitor ready, willing and able to provide an optimum data processing service to the banking industry…
BankAmerica Corp.' (Decimus Corp.), 66 Fed. Res. Bull. 511, 513 (1980)
This precedent is in line with the current application. TTS Industries enters the non-financial data processing market de novo, as would other BHC Network Administrators. The move is pro-competitive, having the great potential to add ‘well equipped and well-financed competitors ready, willing and able to provide optimum data processing services’ throughout the economy.
With regards to ‘Concentration of Resources,’ the Boards’ reasoning in Decimus again is apropos to review in this related application. There, the Board stated that
With respect to a potential undue concentration of resources resulting from a proposal under section 4(c)(8), the Board notes that it has generally found this kind of adverse effect in connection with a proposal by a large banking organization to acquire a going concern of substantial size. In the Board's view, the de novo geographic expansion of services, as in the current proposal, involves no gain of economic resources and no acquisition of any established market position or any customers. As the Board has often stated, when entry is on 'a de novo basis, the proposed transaction would neither eliminate existing or potential competition nor cause an increase in the concentration of resources in any relevant area.'
In addition, the Board notes that relevant statutes provide it with a wide variety of supervisory tools to restrain violations of law, unsound banking practices, conflicts of interest or other adverse effects that might result after a bank holding company has received approval to engage in nonbanking activities.
BankAmerica Corp.' (Decimus Corp.), 66 Fed. Res. Bull. 511, 513 (1980)

Given the 2007 digital marketplace, this same reasoning holds true for the current application. Firstly, the relevant statutes continue to provide supervisory tools to restrain violations of law. This is an extremely important consideration, because, essentially, it adds an additional deserved regulatory mechanism to Internet Commerce.
Furthermore, here, Bank Holding Companies would not be acquiring established market positions or resources and customer bases. Rather, the Bank Holding Companies’ resources and market positions have already been established. The relevant marketplace has been unable to develop the advanced secure systems to process non-financial data, whereas Bank Holding Companies and subsidiaries have established such systems financial data processing. Clearly the BHC systems can be utilized effectively and efficiently to provide secure data processing services in the relevant markets on a de novo basis. The relevant marketplaces are riddled with problems as to how data can be securely processed without being plagued by piracy and fraud. Whereas the owners of monetary value in the digital age rest assured that the money they hold is secure in digital commerce, the owners of rights associated with non-financial data do not rest assured that their property is as secure as before the age of electronic commerce. This is because the network systems used for financial data processing, transmission, and storage are far superior.

 

 

 

 

 

 

 

V    Absence of Cross-subsidization or predatory pricing

The Board’s 1982 Citicorp Order, cited above, is again appropriate for review when considering this factor. In 1982, public comment Protestants in the matter alleged potential cross subsidization and predatory pricing. The Board remarked:

Indeed, the most controversial example of pricing below prevailing market rates cited by Protestants resulted because Citibank used a mainframe computer substantially more efficient than the computers used by most of its competitors. There is no record evidence that Citicorp has engaged in cross-subsidization in the past or is likely to do so in the future. This conclusion is based in part on the competitive nature of the data processing industry, which makes it unlikely that any one competitor could recoup the substantial costs of cross-subsidization. To minimize the possibility of cross-subsidization or other unfair practices, Citicorp has committed that Citishare will maintain separate books and financial statements, and will provide to customers only Citishare's financial statements, not the statements of Citicorp, unless requested.

 

21st Century Digital Network Administrators shall so also keep separate books and financial statements. The nature of the proposed competition is further considered below in Section V, “Antitrust Matters.”

 

 

 

 

 

 

VI   Antitrust Matters

1. De Novo Entry; Antitrust Safeguards Built Into Permissible Activity

 

TTS Industries enters the market de novo. Maintenance of any patent which may or may not be granted to TTS Industries while engaged in activity of Network Administrator should not be of antitrust concern when  considering that TTS will compete in the market with such competitors as VISA, Mastercard, American Express, and the like. Perhaps a concern might be pondered in the instance that TTS Industries were to be acquired by an entity such as one of the extant payment processors or banks. This concern is alleviated by several factors built in to the permission sought by TTS Industries to engage in the activities applied for hereby. 1) The permissions sought hereby are sought in a manner which should be stipulated as inclusive and non-separable. Thus, TTS Industries’ right to be a Bank Holding Company holding a patent is subject to the condition that a percentage of the patent royalties are devoted to maintenance of an SRO whose board is comprised of representatives of the marketplace, public, and government according to a formula that takes into consideration the number of extant “21st Century Digital Networks.”

Thus, for example, if VISA acquired TTS, Mastercard and American Express would be guaranteed equal SRO representation on the SRO, as would be the case if VISA, DISCOVER, and Mastercard acquired equal shares of TTS but American Express did not. Microsoft, Apple, Motorola, etc would also be so represented on the SRO, as would writers of 21st Century Digital operating systems, manufacturers of hardware, and telecommunications carriers.

Additionally, to qualify as a provider of 21st Century Digital services certain criteria would need be met, which criteria would be writ into the SRO governance. The Board’s grant permitting Bank Holding Companies to engage in the activity of 21st Century Digital Network Administrator would be contingent upon TTS Industries’ compliance with maintenance of any  Patent and SRO. Following the renewable grant for TTS to function as a network administrator along with holder of patent funding the SRO (or, without any such patent), TTS would no longer be permitted to function as network administrator. Thus, if TTS were acquired by Mastercard, while the other network administrators would need pay royalties to Mastercard for the patent, any competitive advantage which TTS had due to these added revenues would be nullified by the necessity of TTS to administrate the SRO, and eventually TTS would need to divest itself of any Network Administrator businesses after a period, at which time no network administrator will receive royalties nor stand at the helm of the SRO. Rather, all network administrators will pay dues to the SRO which will set and regulate standards for network development through representatives of the networks in accordance with US law.                     

Emphasis is here appropriate with regards to the fact that this application is made to codify by statute at 12 CFR 228 section 15 for Bank holding Companies and subsidiaries to be permitted to engage in Network Administrator functions. This, whilst the holder of the patent for a 21st Century Digital Network shall only be permitted to engage in such commercial activity for 15 years following enactment. Thereafter, barring extension for good cause, by the same statute enabling the holding of the patent by a BHC and permission for BHCs to function as Network Administrators, any Bank Holding Company which holds any share of the patent shall be disallowed from competing as a Network Administrator, unless codified otherwise. This, as the SRO may in the end determine that the SRO governance, comprised of Industry Competitors, should hold shares of any patent. Similarly, it is feasible that shares of the patent will be sold to the public. The SRO shall decide during the 15 year period whether the patent may continue to be held by other 21st Century Digital competitors (hardware, software, telecom or non- BHC administrators) if so desired.

 

            Furthermore, regarding antitrust concerns, it should be noted what is not being applied for here. TTS Industries is not applying for permission for BHCs to be able to run commercial consumer driven digital networks. Application is not being made for BHCs to be able to manufacture nor sell hardware, nor write or sell software, nor to sell or provide telecommunications services.

Likewise, manufacturers of hardware will not be able to offer banking services.  Similarly, attention to the structure of the design patent for a 21st Century Digital network should here be noted. No TTS CLA (TTS Contractual Licensing Agreement) is an exclusive contract. All TTS CLAs will be subject to the Antitrust Statutes, and BHC CLAs will be subject to Section 106. Thus, if Mastercard contracts in voluntary accordance with 21st Century Digital standards as network administrator with AT&T as telecom provider and Apple manufacturer of hardware and writer of software, a consumer may opt to utilize said 21st Century Digital Network. However, VISA or Discover may have identical contracts in place with the same hardware, software and telecom carrier, which the consumer may opt to utilize for data transmission and processing in accordance with 21st Century Digital standards. Conversely, the consumer may opt for a similarly structured network which utilizes Verizon, not AT&T for telecom services. All the varied companies will be represented on the SRO, and all will compete for consumers’ business. All BHCs and subsidiaries may compete only in accordance with the grant by the Board of permission to engage in the activity. Thus, the services will have an embedded regulatory mechanism. Over time, network technological advances will be had, and implemented.

 The recent Supreme Court Decision Illinois Tool Works, discussed below in endnote 11, may have implications for this Antitrust Section. Also, Judge Richard A. Posner’s, Antitrust Law, An Economic Perspective, The University of Chicago Press (1976) and its progeny should also be contemplated in this section.

 

 

 

 

 

 

 

 

1. REGARDING TYING AND SECTION 106.

1.  Tying and Financial Data Processing Part 1

The Board’s 1982 Order allowing Citicorp to process financial data, 68 Fed. Res. Bull. 505 states:

 Section 106 of the act prohibits a bank from requiring its customers to purchase from it an additional service, such as data processing services, in order to obtain credit from the bank. The Board's Regulation Y applies this prohibition to a bank holding company engaged in a permissible nonbanking activity, such as data processing. Thus, section 106 prohibits Citicorp from engaging in any explicit or implicit conduct that would condition obtaining credit on the purchase of Citicorp's data processing activities.

 In today’s international marketplace, it is common, accepted practice that banks may offer credit which can only be utilized if and only if the financial data processing network on which the credit is offered for use is utilized. Thus, a $5000 line of credit on a Citibank Mastercard can only be utilized if the credit is utilized via the Mastercard Network, which network will realize 2% of $5000 in revenues at a minimum for purchases made which are authorized by the Mastercard network. Similarly, if a deposit account is opened at Citibank, and a debit card issued bearing either a Mastercard or VISA logo, the monies in the deposit account can only be spent electronically utilizing the data processing and transmission services of the network affiliated with the debit card. The Mastercard and VISA networks are not available for use unless a customer has a deposit account or line of credit with a bank holding company.

This practice will not end in the 21st Century Digital network environment. However, if consumers prefer, the “card”- previously traditionally a “credit card” or “debit card” may hence forward be a “network access card.”  Non-financial services in addition to banking services can be made available through and with the card’s account number, magnetic strip, chip, etc as added security. Digital data processing and transmission of trademarked material, copyrighted material, contracts, invoices, receipts, and the like will have the capability of transfer on networks as secure and with records as secure as the networks on which finances are transmitted and processed.

The transmission  of such data is an identical process to the processes and transmissions in which Bank Holding Companies are engaged today, only the data is distinct. To be certain, the data is as valuable as money itself. The processes and transmissions utilize the self same processes and transmissions that BHCs are engaged in today. If BHCs in America were prohibited from “tying” proprietary networks such as Mastercard and VISA with bank deposit or credit accounts, international banks would gain the upper hand, unless a substitute working model were rapidly transferred to. This does not seem feasible overnight.  

 

 

 

 

 

 

 

2. Tying and Data Processing Part 2 –
Legislative History of “Traditional Product” Exception.

It will be necessary to cite and remark in greater detail here on both the Board’s Proposed Interpretation and the Public Comment remarking thereupon concerning relationship managing.  This part is now concerned with relationship managing in banking and the legislative history as to why the traditional banking practices of trusts, deposits, loans, and discounts were legislated exceptions to the tying statutes.

In considering relationship managing by a Bank Holding Company given Section 106 of the Bank Holding Company Act Amendments of 1970 (the Anti-Tying Statute, 12 USC 1972), a close look at the legislative history of the statute is appropriate. When enacting Section 106 (which was enacted in 1970 as Section 104), Congress recognized that relationship management was not only beneficial to both consumer and bank, but also part and parcel of banking in general. Loans, discounts, trusts, and deposits are permanently excepted from bank tying restrictions as a result of this recognition by Congress. As Congress deliberated successful banking relationships and the proposed tying legislation, Congress recognized that there need be exception to the tying restrictions.

 Congress further recognized that amongst the myriad exceptions which would be determined by the Federal Reserve Board as necessary, certain exceptions were so obvious and evident that they should be legislated as permanent or else the Board would be inundated in deliberating and excepting acceptable banking practices from the new antitrust legislation. Thus, the permanent exceptions were carved out and codified during Congressional debate as an amendment to previously proposed legislation specifically with the intention that many more exceptions exist and that some exceptions merit codification.  Excerpts from the relevant Congressional discussion by Senator Bennett on this matter are cited in the matter of NESGLO, INC., v. The CHASE MANHATTAN BANK (Most importantly, there were no exceptions codified in the original Anti-tying bill before Congress. In proposing the traditional banking practices exception amendment to the bill, Senator Bennett made these remarks on behalf of the Committee): 

 

This amendment, which is based on the committee report, is designed to eliminate from the restrictions of Section 104 traditional banking practices competitive effects and which in many cases are vital to the conduct of sound banking. Under the bill, the Federal Reserve Board would be authorized to grant specific exemptions for those traditional banking practices, since they have no serious anticompetitive effects. However, it seems much better legislative procedure for the Congress not to forbid practices which it wishes to permit, expecting the Federal Reserve Board to take the time, use the energy, and incur the expense of examining everyone of these, and grant exemptions for desirable practices.

The Federal Reserve Board stated in the letter I shall insert that it believes it is better to include exemptions in the statute rather than to place them under administrative discretion. They state, ‘Accordingly, we recommend adoption of the amendment.'

Instead, where we are satisfied that a practice is not anticompetitive and should be continued, let us say so in the law, and leave the Board only the task of exempting further activities of the same sort which it may determine to be desirable in the best interest of sound banking practices. Where the bill might prohibit a bank from extending credit or furnishing a service, or varying the consideration therefore, on condition that the customer obtain some other credit or service from the bank, this amendment would except a loan, discount, deposit, or trust service. This will, among other things, enable the customer to continue to negotiate his costs and fees with the bank on the basis of his entire relationship with the bank, as the committee report points out at page 17. Clearly, neither a bank nor its customer should be attacked under section 104 for taking advantage of the economies and efficiencies of full-service banking.

Where the bill might prohibit a bank from extending credit or furnishing any service, or varying the consideration therefor, on condition that the customer provide some additional credit or service to the bank, this amendment would exempt services related to and usually provided in connection with a loan, discount, deposit, or trust service. This provision will, among other things, make it clear that section 104 is not intended to affect additional correspondent bank relationships, compensating balances, and similar *263 practices. If a country bank wishes to obtain investment advice, proof and transit work, or other services from a city bank, and should use its balance at the city bank to pay for these services, there should be no objection to this arrangement, and section 104 should not prohibit this practice.

Where the bill might prohibit a bank from extending credit or furnishing a service, or varying the consideration therefor, on condition that the customer shall not obtain some other credit or service from a competitor, this amendment would exempt such conditions or requirements as the bank shall reasonably impose in a credit transaction to assure the soundness of a credit. Bank loans are usually made on the basis of a careful analysis of the would-be borrower's financial position, including his assets, liabilities, income, expenses, cash flow, etcetera. It is customary, particularly, where a customer is borrowing up to the limit of his ability to pay, to require that during the term of the loan he should not borrow or pledge his assets elsewhere. Such an arrangement is clearly required as a matter of sound banking.

Nesglo, Inc. v. The Chase Manhattan Bank N.A. 506 F.Supp. 254 at 262-264 (D. Puerto Rico, 1980) citing Senator Bennett, a chief architect of the Amendment, as transcribed in 116 Cong.Rec. 32125 (1970). Interesting anecdote: this preceded the 1982 Citicorp data processing holding, and, took place in Puerto Rico, where today the matter of Banco Popular takes up the matter of Ticket Sales through an ATM.

 

 Thus, following Congressional intent in enacting Section 106 as writ, the Nesglo court held that certain exclusive dealing arrangements, conditions, and requirements were sanctioned by Congress when it came to banking:

Paragraph 6 of the Complaint states that Chase required Nesglo to refrain from doing business with other banks and that it handle its deposits with Chase. However, as we have seen, the legislative history behind Section 1972 shows that it is normal and traditional banking practice for a prospective borrower to keep with the lending bank its business deposits and for the bank to protect its investment by imposing restrictions on borrowing by debtor from other concerns a legislatively sanctioned form of exclusive dealing which of necessity translates itself into not doing business with other banking or financing entities. Averments that Nesglo refrain from doing business with other banks, when read in conjunction with the multiple loan transactions between Nesglo and Chase, especially as they appear set forth in paragraphs 8, 16 and 17 of the Complaint merely indicate traditional banking conditions or requirements evidencing concern for protection of the soundness of the credit extended. These conditions or requirements are not only legal but customary [FN17] in the banking industry. In this connection we have seen that Congress felt obliged to pretermit expansive statutory construction by explicitly excepting them from the reach of Section 1972 and hence from the jurisdictional grant of Section 1975.

Nesglo, Inc. v. The Chase Manhattan Bank N.A. 506 F.Supp. 254 at 264 (D. Puerto Rico, 1980)

 

In 1970, data processing and transfer were not even contemplated as commercially feasible let alone imaginable in the market’s 2007 manifestation.

Today, in 2007, the traditional practices of credit card companies insofar as how credit card and bank networks are marketed and operated for the transfer and processing of financial data will as a matter of efficiency and productivity extend to the same companies’ administration of 21st Century Digital Networks for the transfer and processing of nonfinancial data of value, presumably trademarked and copyrighted material.

 

 

 

 

3. Further Consideration of Competition and Relationship Management in the Financial or non-Financial Data Processing and Related Activities Network Market

Where Mastercard, VISA, Discover, and American Express have terminals in virtually every business in the United States and most around the globe, and Banks have ATM terminals in branches and in consumer friendly locations, there are not such terminals available to process and transfer trademarked and copyrighted materials. Where bank related digital business requires physical cards with 16 digit numbers and magnetic strips, with expiration dates and security codes, no such security mechanisms are available to the consumer or to businesses for purposes of taking advantage of what technology has to offer in the way of digital transfer and processing of non-financial data which is of value to the business or consumer.

Companies like FEDEX and UPS or USPS continue to process and transfer hard copy contracts and invoices bearing trademarks, movies, music, magazines, literature bearing copyrights. It is not a stretch of the imagination that it would be in a small business’ interest to be able to utilize the service of a FEDEX or UPS-like company to securely digitally transfer documents from point A to B with tracking information and guaranteed delivery. Or, for content providers to rest assured that digitally delivered copyrighted content (be it music, literature, annotated case-law, or otherwise) will reach its destination and not be pirated, copied, and delivered elsewhere.

The financial networks are structured so that, notwithstanding billions of transactions and billions of locations, the dollar amount in digital transfer and processing is strictly monitored with strict accountability. This is neither software alone, nor hardware alone, nor information carrier alone, nor their amorphous, happenstance relationship to one another as on the “Internet”. This is by virtue of a proprietary, contractual relationship between hardware, software, information carrier, and network administrator. Secure terminals are part and parcel of the system, albeit remote access to the secure system is available, and growing. Enhanced technologies, such as smart cards, tokens, speed passes and the like further enhance the productivity and efficiency of the system. But no such system exists to transfer and process Trademarked or Copyrighted materials.

Competition amongst Financial Networks such as American Express, Mastercard, VISA, and Discover comes down essentially to marketing, customer service, pricing, and relationship managing. The function of Network Administrators for 21st Century Digital Networks will be similar to the manner these Financial Networks operate.

That is, hypothetically, VISA as a 21st Century Digital Network Administrator will need to market the networks it administrates. For argument’s sake, consider that a fictional entity “VISA21” is a subsidiary of a Bank Holding Company permitted to engage in permissible activity as a Network Administrator for 21st Century Digital Networks. VISA21, in order to compete with other 21st Century Digital Networks that do not use VISA21 as Administrator (and it will also compete with other Networks using VISA21) will need to market the Networks is Administrates.

This will involve promoting the sale of network components. It will involve promoting incentives for using the networks it administrates- much in the way that VISA promotes the financial network it operates by offering air-miles or balance transfer incentives, and by sponsorship of sporting events, etc. VISA21 will need to provide customer support for the networks it administrates. The Network Administrator will need to coordinate amongst the providers of network goods and services. Thus, customers will have contact with technology support centers which are administrated by the Network Administrator when there are customer questions about how to best utilize the Network the consumer uses for a given transaction or service. Otherwise, the customer would need to contact a manufacturer of hardware for a question which need be considered insofar as how the software, hardware, and information carrier function together for the network service, defeating a primary purpose of having a Network Administrator.

 

Thus, Bank Holding Companies which are permitted to process and transfer non-financial data as 21st Century Digital Network Administrators need also be given permission to engage in these ancillary activities. The only way that the 21st Century Digital Networks are formed are through the TTS CLAs (21st Century Digital Network Contractual Licensing Agreements, which must be in compliance with United States law- which obviously includes the Antitrust Statutes, Trademark and Copyright law, and so on). Thus the Industry will be highly regulated.

Hardware manufacturers, Software writers, Information Carriers will not enter into such contracts with Network Administrators unless the model was mutually advantageous considering these business’ current business models. And, permission is not sought nor encouraged for neither Bank Holding Companies nor subsidiaries to be able to manufacture hardware or write software or provide telecommunications services for the digital transfer or processing of non-financial data. The administrator may market and coordinate hardware/software/carrier sales and marketing, and may process the sales.  

But they will only be able to do so if and only if they do so in accordance with governmentally ratified licensing agreements which comport with 21st Century Digital Network Criteria which form a 21st Century Digital Network for the purpose of the digital transfer and processing of data for consumers. Consumers and businesses alike will only pay for such services if the data transmission and processing is of value to the business or consumer.

 Alternatively, consumers will always have the option to process and transfer data via the internet by gaining access to the internet through an Internet Service Provider and using software and hardware as available on the market and without a network administrator. By definition, transactions on a 21st Century Digital Network shall have verifiable records in four locations- with the network administrator, via the software utilized, via the hardware utilized, and via the information carrier utilized. Each record will be available to the consumer as defined by the Network the consumer or business utilizes.

VII CONCLUDING REMARKS

Data processing in the 21st Century is closely related to banking and the BHCs have been substantially involved in the activity which the application proposes for over a quarter of a century.
It is posited to the Federal Reserve Board that the services described above cannot be offered successfully in the economy by companies or an Industry which is not in the business of also processing and transmitting data which is financial in nature. A review of the proprietary network landscape in 2007 will glean light on this proposition. Thus, if BHCs are not permitted to process non-financial data, the services described, and the additional services which shall be innovated and developed in such a new industry will go stymied. Or, non-BHCs will need to enter into the financial data processing and transmitting marketplace. Unfortunately, it a non-BHC de novo entrant into the marketplace attempting to compete with Mastercard, VISA, Discover, and American Express would have a tough time developing a network which could compete with these entities. Thus, the services which a 21st Century Digital Network might otherwise provide would invariably go stymied.
To be certain, the data which Bank Holding Companies process and transmit is of the most valuable, if not the most valuable, of data which is electronically transmitted today. The revenues associated with such activities have enabled Bank Holding Companies to engage in and invest in Research and Development for data processing and transmission goods and services.

In today’s digital commerce landscape, the most prevalent transactional based revenues generating activity are the data transmission and data processing activities that bank holding companies are permitted to engage in. Otherwise, Internet commerce which generates revenues for businesses does so almost exclusively either through adding advertising revenues, or by opening markets or adding efficiencies to order processing. Digital technology is quite valuable to such businesses, however, not valuable enough that such commercial activity allows for investment, research, and development in network technology the way that Bank Holding Companies have the ability to invest in plant, hardware, and software. If Bank Holding Companies were permitted to administer digital commercial networks (“21st Century Digital Networks,” as described below), Internet commerce would become more secure and offer more services. This, given the fact that Bank Holding Companies have become ever more adept and cost efficient in reliable, secure data processing and data transmission.

Given permission to engage in non-financial data processing and transmission, BHCs must also be permitted to manage relationships to take advantage of the extant cost efficiencies associated with BHC systems devoted to financial data processing. Otherwise BHCs will lose money on this regulation, and would have been better off if their networks were not permitted to engage in these new activities. Thus, a BHC 21st Century Digital Network Administrator shall seek a Section 106 exception including secure data processing as a traditional and permissible activity. In the end, traditionally for time in memoriam, banks have been in the business of safeguarding and processing data. The legislative history of Section 106 is wholly consistent with such an interpretation.
 TTS Industries is firmly of the conviction that the Permissible Activities Statute is a required fundamental pillar to promote and maintain competition in the marketplace. It serves to maintain Banking as a driving force in the rest of the economy by incenting investment in new products and markets. Banking and purely non-banking commercial services need be kept separate. Here, the services to be provided are the functional equivalent of services which banks are providing. Banks will not invest in systems equivalent to their own to provide equivalent services whose return is less than the return that such systems provide to the banks themselves. To do so would be a losing investment. Banks can, however, increase the services they provide with systems they already own, operate, and administer by providing the same services to other industries for revenues additional to those revenues which they are already in receipt of.

 An important, relevant, current matter being deliberated in US Federal Court  which merits consideration on this topic is the case of Ticket Center, Inc. v. Banco Popular de Puerto Rico, 399 F.Supp.2d 79, (D.Puerto Rico, 2005). The processing and transfer of the data associated with the ticketing process is the same as the processing and transfer of financial data. ATMs are secure enough to dispense cash. Thus, they are certainly secure enough to dispense tickets.
Significantly, a Bank’s ATM network is particularly well suited for the purchase and distribution of tickets. These networks are secure, functional, and already providing services which pay for their maintenance.  Ticket Center argued that Banco Popular conditioned availability of banking and marketing products to the use of its proprietary ticket sales subsidiary, Ticketpop as the provider of ticketing services at events such as an Expos baseball series, certain promoters’ events, a movie theater chain, and a coliseum's ticket booth. Ticket Center alleged that Banco Popular was using Ticketpop to offer below cost ticket prices, with a $2.00 discount and reduced service fee if the customer paid via a Banco Popular ATM.
It is inconceivable that a ticketing company could invest in creating a network of machines which were not the same ATM machine network which has developed internationally. It would be difficult to argue that delivering tickets through ATMs is less efficient and productive than not doing so. Thus, it is no wonder that the cost for Banco Popular to process and transmit ticket data would be less than the cost to do so for Ticket Center.
The issue in Banco Popular is quite relevant to the instant application. The matter of this application proposes a solution to that issue, and future similar issues likely to present themselves. Ticketing does not neatly fit in the 228.14 permitted data processing. Yet, to disallow BHCs from engaging in such activity is a losing proposition for both businesses and consumers.
Presently, financial services providers such as American Express and Mastercard are permitted to aggressively market their brands and offer incentives for purposes of incenting customers to use their products to pay for items, including but not limited to tickets to events. It would be cheaper for consumers if these companies could process the ticketing itself. Furthermore, the customer would in the end gain additional benefits following incentive programs offered by the processing companies as such companies compete for patronage. Companies such as American Express and Mastercard regularly enter into exclusive marketing relationships with venues, stadiums, events, teams, etc., offering benefits to businesses and consumers for utilizing financial data processing and transfer services. These bank holding companies and subsidiaries or affiliates should be permitted to offer the same for processing and transmitting other data on their proprietary networks, not limited to financial data. Not permitting such activity stymies competition and innovation, whilst underutilizing extant technologies and physical plant and compromising the security associated with such transactions.

Data processing in the 21st Century is closely related to banking and the BHCs have been substantially involved in the activity which the application proposes for over a quarter of a century. By expanding 225.28 to allow for a section 15 permitting BHCs to process non-financial data as 21st Century Digital Network Administrators, a wealth of productivity, efficiency, and competition, all to the benefit of the public and businesses alike will be unleashed.

 

 

 VII ENDNOTES