What's Up With The Fed?
Located in a dozen cities-with branches in another 25-the Fed's palatial banks suggest permanence and importance. They operate with great independence far from the Fed's power center in Washington, and with $451 billion in assets, are staggeringly wealthy. Yet, last year the Fed processed only 27% of the nation's checks, and the numbers continue to decline, declining over 18% in the last two years.
Where have all those checks gone you ask? Well, they have gone to private sector clearing, which has grown even more than the Fed check volume has declined.
Currently, the National Clearing House Association (NCHA) provides a private clearinghouse alternative in every Federal Reserve Bank District, and clears more than 3 million checks each day.
Since the Fed's implementation of Reg. CC (The Expedited Funds Availability Act), private clearing has barely been able to keep up with the movement from the Fed to NCHA. So why then is the Fed still adding capacity?
One answer is that the Fed is streamlining for an announcement of lowered pricing, that will give NCHA a run for their money.
But the plumbing at the Fed banks seems to be getting rusty, despite their heavy spending. Rapid changes in technology, consolidation in banking and rising competition in some of their basic services threaten to make Fed banks costly relics. While this can be said of much of our governmental structure, the Fed is unique, since it is mandated by law to be a zero-cost organization.
Despite huge shifts in the nation's population and economy, the basic structure of the Fed has changed little since its inception in 1913.
Perhaps the following story will make the point even more clearly. On September 12th, 1996, I presented the United States Check Growth Study, Results of 1996 Research at the Federal Reserve Bank of San Francisco. The speaker from the Federal Reserve speaking just before me, Ms. Lee C. Dwyer, Manager of Check Processing for the Federal Reserve Bank of San Francisco, noted for the audience that since she came to the Fed, check processing had declined 50%, and she had been obliged to reduce her staff 20%.
This statement was made in earnest, without a realization that the staffing decline did not match the work decline, or reflect any savings from the Fed's substantial investment in automation.
While the Fed continues to make capital investments in its future, it is hard to say how the Fed really views their participation in paper check clearing, or the future of checks.
Paul M. Connolly, Retail Payments Product Director for the Federal Reserve, noted in April 1996, "Even if we all get behind electronic payments, change is more likely to come slowly than swiftly. We will have many billions of checks to process each year for a long time."
Without check-clearing, the Minneapolis Fed might not need its costly new building and the hundreds of employees who work three shifts shuffling checks. It could eliminate huge overhead costs and focus on distributing U.S. currency and monitoring the local economy.
But then again, it would have to concede check clearing to the private sector, and that is not likely to happen in my lifetime.
While the Federal Reserve Board announced over 25 years ago that it intended to move towards an electronic system, the number of paper checks has continued to increase instead of decline.
Given that the Fed reported in August of 1983 that, "Between 1987 and 1989, we expect personal check writing to reach its historic plateau for the twentieth century," it can be said that the Fed has been less than accurate about predicting the future of checks.
Again, the Fed's Paul Connolly, speaking at the National Automated Clearing House Association 1996 Payments Conference said, "The more we believe the check will endure as a popular means of payment, the more we should commit to changing the check system for the better, with electronics."
Maybe the current Fed position is simply to stay in the game, as long as there is a game, and figure out the rest whenever that becomes necessary.
