Federal Reserve Banks shift away from paper checks

Real Estate Weekly, June 8, 2005

As part of their ongoing effort to respond to the significant shift away from the use of paper checks and toward the much greater use of electronic payments, the Federal Reserve Banks will discontinue check processing at the Federal Reserve Bank of New York's East Rutherford Operations Center. That volume will be processed at the Federal Reserve Bank of Philadelphia.

No firm date for the transition has yet been determined, but it is expected to take place in the second half of 2006. The change is aimed at increasing the efficiency of the Reserve Banks' check-processing operations, while continuing to provide high-quality services to depository institutions throughout the country.

"The step announced today will help the Reserve Banks reduce our check service operating costs in line with the continuing shift in consumer and business preferences for electronic payments," said Gary Stern, chairman of the Reserve Banks' Financial Services Policy Committee and president of the Federal Reserve Bank of Minneapolis.

"Today's announcement marks the third annual review of our check infrastructure, which has resulted in a reduction in the number of locations processing checks. We will continue to evaluate our check processing infrastructure annually to ensure that we are well positioned to meet the needs of the nation's payment system."

Since 2003, the Reserve Banks have reduced the locations where they process checks from 45 to 29 as of today. An additional six locations, previously announced, will no longer process checks by early 2006, further reducing the number to 23. After the step announced today is completed, the Reserve Banks will process checks from 22 locations nationwide.

"The changes that we have implemented over the past three years have been good for the nation's payments system but difficult for our organization as we have been required to reduce our staff," said Stern. To assist affected staff, the Reserve Banks will offer a variety of programs, including separation packages, extended medical coverage and career transition assistance.

As a result of the action, the Reserve Banks will reduce their overall check staff by approximately 80 positions, representing about 2 percent of the Reserve Banks' current check employees. At the East Rutherford location, about 140 positions will be affected. The Reserve Banks estimate that they will add approximately 60 positions in Philadelphia to help process the additional volume.

In 2004, Reserve Banks' check volume declined at about a 12 percent rate. During 2005, check volumes have continued to decline; further decline is anticipated in the coming years.

A 2004 study revealed that about 37 billion checks were paid in the United States in 2003, down from 42 billion in 2001 and 50 billion in 1995. Electronic payments, including those made by credit cards, debit cards, and through the automated clearinghouse system increased from about 30 billion transactions in 2001 to more than 44 billion transactions in 2003.

The Federal Reserve Banks' long-term check processing strategy will allow them to better meet the expectations of the 1980 Monetary Control Act.

That act requires the Federal Reserve to set prices to recover, over the long run, its total operating costs of providing payment services to financial institutions, as well as the imputed costs it would have incurred and the profits it would have expected to earn had the services been provided by a private business firm.