Banks Prepare for Fed Service Cuts

In February, the Federal Reserve announced changes to improve the efficiency of its check processing operations, including streamlining Federal Reserve check processing locations from 45 to 32 sites, and restructuring the number of check adjustment sites from 43 locations to 12. Because the Federal Reserve processes 42 percent of the nation's checks, these changes carry ramifications for community banks.

In particular, community bank officials are worried about the impact on transportation costs and processing schedules. While acknowledging the economic realities behind the Federal Reserve's decision to downsize, they believe the Fed has an obligation to do whatever it can to lessen the impact on community banks.

"The Federal Reserve Banks need to make sure that community banks do not incur additional transportation costs as a result of the downsizing," said Viveca Ware, director of payment systems, Independent Community Bankers of America.

The Federal Reserve has told the Independent Community Bankers Association that it will set up drop-off points in cities where checks will no longer be processed and take responsibility for transporting cash letters from the drop-off points to the merged processing locations. In addition, it has confirmed that it will continue to accept cash letters with the same sorted endpoints as deposited today in the affected locations.

The move by the Federal Reserve had been anticipated by the Independent Community Bankers Association and other industry groups. The ICBA's Technology Committee is dedicated to staying abreast of payment developments, and has been monitoring the decline in check volumes.

"In fact, we have been expecting this announcement for the past year," Ware said. "However, it took some community banks by surprise because this is the first time Federal Reserve Banks ever had a downsizing."

The Federal Reserve has stated that service levels will be kept as close to current levels as possible. If the Reserve Banks were to suddenly change the drop off deadline, community banks would be forced to close out their books earlier each day.

"The Federal Reserve Banks also need to keep their current pickup and delivery time frame as close to the existing time frame as possible so the banks won't have to modify their internal processing time frame," Ware said.

The Reserve Banks should work out the details of the downsizing as soon as possible, she said. "In addition, the Federal Reserve needs to communicate those details to the community banks as expeditiously as possible. What we don't want to happen is the downsizing announcement resulting in a lot of confusion in the marketplace."

According to the Independent Community Bankers Association, the Reserve Banks have promised to keep customers informed over the next three months as specific information relating to individual markets becomes available. In affected markets, customers will be notified at least 120 days before the transition to the merged location so that they have sufficient time to modify their internal procedures, if necessary.

The more information is provided to community banks, the less likely they are to rush to a private sector bank or a third party processor. Although numerous community banks use other processors, community banks know that the Federal Reserve is a constant in the marketplace, and that it will have a product offering available to them.

Most importantly, Ware said, the Federal Reserve Banks need to maintain stable pricing. As fewer and fewer paper checks are processed, the potential exists for paper check pricing to increase.