March 24, 2003

In February, the Federal Reserve announced that it would reduce its number of bank check-processing sites from 45 to 32 and the number of check-adjustment sites from 43 to 12. The decision had been made in January after an analysis of the existing check infrastructure by experts from the Federal Reserve and consultants from Accenture. The transition, scheduled to begin later this year, is slated for completion by the end of 2004.

Mindful of the needs of its constituents, the Fed has told bankers that this consolidation would not adversely affect the daily processing schedules. Although checks, on average, will have to travel a longer distance to the nearest Federal Reserve, outgoing cash letters will not have to be prepared or sent earlier in the evening.

But can the consolidated Federal Reserve centers handle the increased processing burden with the same turnaround?

"They're moving somewhere around 1.5 million items per day from Richmond to Baltimore," said Tom Riffe, chief operating officer of Highlands Union Bank, Abingdon, Va. "We want to make sure that we get the electronic presentment of transactions early enough to memo-post them, so that our customers can use them for cash management."

Right now, Highlands Union Bank gets notification of transactions back from the Richmond processing center at about 10:30 am. "If customers get it much later than that, it's useless," said Riffe.

Although the bank doesn't actually promise its corporate customers faster service than that required by check regulations, speedy processing has been a valuable convenience for corporate customers.

However, with improved check processing technology outpacing stagnant check volumes, consolidation in the number of check processing centers has become inevitable.

Furthermore, customers are finding new ways to make a payment without checks, a trend that has been evident among Highland Union Bank customers. "Our proof level over the past year has remained about the same, and yet the bank has grown 50 million dollars or so," said Riffe. "People are starting to use the electronic media."

Also, as banks gain the ability to employ electronic check images through "Check 21" legislation and other industry initiatives, the location of the nearest Federal Reserve will become irrelevant for those transactions. Thus, even if the Fed consolidation results in a processing bottleneck, it's likely to be a temporary one.

In that scenario, the Federal Reserve will simply process the electronic instructions. "That's what their ultimate goal is -- to quit handling the paper," said Riffe.

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