Federal Reserve Banks announce strategy to meet evolving demands of payments system.

The Federal Reserve Banks on June 16, 2004, announced a strategy to accommodate the evolution of the nation's payments system from paper check processing to electronic processing, a development driven by a significant broad-based change in user preference. The Reserve Banks' strategy entails launching new products and services to support the implementation of the Check 21 Act in October 2004, as well as streamlining its check-processing infrastructure by discontinuing check processing at locations to be announced later this year. Even with these changes, the Federal Reserve Banks will continue to provide check-processing services on a national basis.

In this effort, Reserve Banks will provide opportunities through their Check 21 products and services for financial institutions to make use of electronic check services as a means of reducing their overall check operating costs. These steps should also reduce the time during which industry participants and the Reserve Banks must support significant investments in dual processing platforms.

"These steps are part of a forward-looking strategy that acknowledges the financial services industry's ongoing evolution from paper to electronic processing," said Gary Stern, President of the Federal Reserve Bank of Minneapolis and Chairman of the Reserve Banks' Financial Services Policy Committee. "This shift is good for consumers and good for the financial services industry, and the Fed has encouraged this evolution for a number of years. As the payments system moves to accommodate more electronic options, the Fed will embrace a strategy that will respond to the marketplace as necessary."

As part of this strategy, the Reserve Banks will also undertake a thorough annual review of their existing check-processing infrastructure, including potentially discontinuing paper check processing at some locations as the market evolves. Currently, the Reserve Banks are examining their existing check facilities and within the next few months will announce the discontinuation of some additional check-processing facilities through 2005.

The criteria for decisions about infrastructure changes will closely parallel those used in the Reserve Banks' check reengineering initiative announced in 2003, and will rely on an evaluation of volume levels, business retention plans, effects on local markets, and other data. Last year, the Federal Reserve announced a restructuring of its check-processing operations from forty-five to thirty-two sites by year-end 2004.

In 2003, Reserve Banks' check volume declined at about a 5 percent rate. For 2004, check volumes have declined at an accelerated pace compared to the same period last year. A 2001 Federal Reserve study revealed that about 42 billion checks were written that year in the United States, considerably lower than industry estimates. Those volumes are expected to continue to decline in coming years. The Reserve Banks will continue to assist the nation's financial services industry by conducting research related to the nation's payments system. The results of the most recent study will be available later this year.

"The Federal Reserve Banks are committed to their role in providing payments services, and that means responding to the changing demands of the industry," Stern said.

This long-term check-processing strategy will allow the Reserve Banks to better meet the expectations of the 1980 Monetary Control Act. That act requires the Reserve Banks to set prices to recover, over the long run, their total operating costs of providing payment services to depository institutions, as well as the imputed costs they would have incurred and the imputed profits they would have expected to earn had the services been provided by a private business firm.

"To date, the transfer of Fed check-processing activities to other Fed sites has occurred smoothly, with deposit times and availability transitioning as close to existing service levels as possible," Stern said. "We expect a smooth transition for the next round of restructuring."

As before, the Reserve Banks will offer a variety of programs to affected staff. These programs include separation packages, extended medical coverage, and career transition assistance.

"While the changes in payments technology are good for consumers and make the industry more efficient, these changes mean that the Reserve Banks will be losing dedicated management and staff," Stern said. "While regrettable, these job reductions are an outgrowth of change, and the Reserve Banks will do their best to make this transition as smooth as possible for affected employees."