Changes to increase efficiency in Federal Reserve Bank check services. (Announcements).

The Federal Reserve Banks, collectively the nation's largest processor of checks, announced on February 6, 2003, changes to their back office check-processing operations intended to improve operating efficiency while maintaining high-quality check services to depository institutions nationwide.

Reflecting the ongoing shift in consumer and business preferences from checks to electronic payments, the Reserve Banks will reduce their check service operating costs through a combination of streamlining their check-management structure, reducing staff, decreasing the number of check-processing locations, and increasing processing capacity in other locations.

"The Federal Reserve Banks are committed to remaining a leader in providing payment services, including check processing. Adjusting our operations to respond to changes in the marketplace will position the Banks to continue to fulfill this role," said Cathy Minehan, President and Chief Executive Officer of the Federal Reserve Bank of Boston and Chair of the Reserve Banks' Financial Services Policy Committee.

Even though check payments remain the most popular form of noncash retail payment, they make up only 60 percent of all noncash retail payments today compared with 85 percent in 1979. Recent Federal Reserve studies suggest that roughly 40 billion checks were written in the United States in 2002, down from about 50 billion in 1995. The Reserve Banks handle about 17 billion of these checks annually, and this volume is expected to decline as well.

The changes reflect the changing market environment and will enable the Reserve Banks to continue to meet the requirements of the Monetary Control Act of 1980. That act requires the Reserve Banks to set prices to recover, over the long run, their total costs of providing payment services to depository institutions, including the imputed costs they would have incurred and imputed profits they would have expected to earn had the services been provided by a private business firm.

The changes, approved by the Reserve Banks' Conference of Presidents, are expected to reduce operating costs for check services about $60 million in 2005 and about $300 million over the next five years. The changes also are consistent with a decision reached after a 1998 Federal Reserve study of the payments system that the Reserve Banks would remain a provider of check services.

"Nationwide, consumers and businesses have made a significant shift in how they make payments, substituting electronic payments for checks. This development is good news for the nation's payments system, and the Federal Reserve has strongly supported this shift," Minehan said. "But declining check volumes are requiring the Reserve Banks to make changes in their check operations to address the challenges posed by the changing market. The changes we are announcing today will help us meet these challenges."

Reserve Banks will continue to provide check services on a nationwide basis and are working to maintain deposit times and availability as close to current service levels as possible for depository institutions in the affected markets. In addition, new check-imaging and check-adjustments technology should enable the Reserve Banks to provide new services and help maintain the high quality of Reserve Bank check services offered to the nation's depository institutions.

With the changes, Reserve Bank check processing will be performed at 32 sites, down from 45. Additionally, the Reserve Banks will streamline their check-adjustment functions, now being handled in 43 locations, to 12 of their current locations nationwide. (The term "check adjustments" refers to the part of the check-processing operation in which check-processing errors are resolved.) Of the 13 offices that will no longer process checks (see table 1), the 5 regional sites that process only checks will close. The volume from these 13 offices will be handled by 9 offices (see table 2).

1. Offices that will no longer process checks

Pittsburgh, Pa.
Richmond, Va.
Charleston, W.Va. (1)
Columbia, S.C. (1)
Miami, Fla.
Indianapolis, Ind. (1)
Milwaukee, Wis. (1)
Peoria, Ill. (1)
Little Rock, Ark.
Louisville, Ky.
Omaha, Nebr.
El Paso, Tex.
San Antonio, Tex.

(1.) These offices will close.

2. Offices that will expand check-processing capacity

Cleveland, Ohio
Cincinnati, Ohio
Baltimore, Md.
Charlotte, N.C.
Jacksonville, Fla.
Chicago, Ill.
Des Moines, Iowa
Memphis, Tenn.
Dallas, Tex.

As a result of these changes, the Reserve Banks will reduce their overall check staff by slightly more than 400 positions, representing about 8 percent of their current check service positions. In the offices where check processing will be eliminated, almost 1,300 positions will be affected. At this time, however, the number of involuntary separations is unclear. Some staff reductions will occur through attrition, and there will be some opportunities for reassignment. In addition, the Reserve Banks estimate that they will add about 900 positions at the offices that will continue processing checks.

The Reserve Banks will offer a variety of programs to assist affected staff. These programs include separation packages, enhanced pension benefits for some longer-service staff nearing retirement, extended medical coverage, and career transition assistance. The changes are projected to begin in some offices in the second half of this year and to continue through 2004, with an expected completion at all offices by the end of that year.

According to Minehan,

One of the missions of the Federal Reserve System is to foster the efficiency, accessibility, and integrity of the nation's payments system. We believe that the changes we are announcing are essential because they will provide the Reserve Banks greater flexibility to manage check operations in an environment of declining volumes. We regret that this decision will affect a portion of the Fed's check-processing management and staff, but we have a range of programs in place to help ease the transition for affected staff members.

From 1992 to 2001, the Reserve Banks earned an average annual after-tax return on equity for all priced payment services of 12.2 percent. In 2002, however, mainly because of declining check volumes, the Reserve Banks' after-tax return on equity for all priced payment services declined, to 4.2 percent. In 2003, the Reserve Banks expect to post an after-tax loss reflecting the up-front costs associated with the changes. The Reserve Banks project that these changes will position check services to return to full cost recovery by 2005.

For more information on the affected banks, see the announcement at http://www.federalreserve.gov/ boarddocs/press/other/2003/20030206/default.htm.