The Federal Reserve is about to launch a service meant to help financial institutions streamline the clearing of checks in far-flung Fed districts.
By using the "nationwide city sort service," banks could give certain check-sorting functions to the Fed.
Plans are to begin offering the service May 6 through all 46 reserve bank check processing offices.
The Fed is facing more competition than ever in the check-clearing market, and opinions are mixed on whether the new service will help.
Though it may benefit many institutions, bankers pointed out that it doesn't guarantee savings.
Using the new service, institutions once required to compile and send a different cash letter for each Fed district in which they clear checks would bundle their so-called city items into a single cash letter to be handled by the nearest Fed office. ("City item" is the term for a check whose collection endpoint the Fed credits much earlier in the day than so- called country items, which travel farther within the Fed's check transportation network.)
When a Fed office receives one of the consolidated cash letters, it will sort and route checks to the appropriate Fed office on behalf of the bank sending the cash letter.
The new service "will provide a cost-effective, simplified clearing alternative for institutions that collect city checks in multiple Federal Reserve territories," said Sarah G. Green, senior vice president at the Federal Reserve Bank of Boston.
Fed officials said the service would help the central bank reduce internal costs while also reducing fees that banks pay to clear checks. Banks that use the new service will pay $4 per cash letter. An additional per-item charge ranges from 2.2 cents to 3.2 cents.
"The check-clearing market is increasingly national in nature," said Ms. Green, who announced the service at last week's Bank Administration Institute Transaction Processing Conference in San Antonio.
Christine S. Nautiyal, a senior vice president at NationsBank Corp., Charlotte, N.C., said bankers must do cost-benefit analyses in order to determine whether their institutions would benefit.
The service may not suit smaller banks that lack enough city item volume to warrant incurring the $4 fee.
Such banks will likely continue sending items in mixed cash letters or through correspondent arrangements.
"The product itself is ho-hum, but the (Fed's) strategic direction may be worth something more," said Ms. Nautiyal.
"It may be a big deal if the Fed is really interested in helping banks" and it prices its services competitively with nonbanks, said Ms. Nautiyal.
