The Fed said Wednesday that its sites in San Francisco, Helena, Mont., and Kansas City, Mo., would close by early 2008. The Fed has announced four check-center consolidation plans since 2003.
The San Francisco check-processing work would shift to Los Angeles, the Kansas City work to St. Louis, and the Helena work to Denver.
Bert Ely, an independent banking industry analyst in Alexandria, Va., said the closings would likely lead to earlier check-processing deadlines for banks in those areas, because many financial companies will have to transport checks farther to reach the replacement sites.
Some companies will transmit check images instead, he said. "This will accelerate the move to check imaging. If you can't put a check in the payment system until a day later and interest rates go up, it's going to cost you money."
Falling check volume is driving up the costs of check processing, because the Fed must spread its fixed costs over fewer items, Mr. Ely said.
"The cost of handling paper is going up simply because of volume," as well as the rising price of fuel, he said.
Jerry Milano, a senior vice president at The Clearing House Payments Co. LLC of New York, said the Fed is clearly trying to move the industry toward image exchange.
"The incentives in the Fed products are all on the side of electronic collections. They make no bones about it," Mr. Milano said.
The shutdown in San Francisco especially could represent a business opportunity for The Clearing House, which took over the local check exchange from the Western Payment Alliance at the end of 2003, he said. The Clearing House set up a courier service last year in Detroit after the Fed closed a check center there.
But such an opportunity would be only short-term, Mr. Milano said, because The Clearing House, like the Fed, wants to move banks to image exchange. "Our interest is in helping our financial institutions transition to electronics."
Fed officials have warned for years that they would have to reduce the check-processing infrastructure, because Americans are writing fewer checks. In its most recent study, the Fed said 37 billion checks were written in the United States in 2003, down from 42 billion in 2001 and 50 billion in 1995.
The Fed had 45 check processing centers in 2003 but has been paring them back. Once the San Francisco, Kansas City, and Helena sites are closed, it would have 18.
Under the Monetary Control Act of 1980, the Fed is required to set prices that cover its costs in providing services, as well as the costs it would have incurred and the profits it would have expected to earn had the services been provided by a private firm.
Also Wednesday, the Fed said that last year its revenue from check processing exceeded its target for the first time in several years, as a result of earlier closings and other efforts, though it did not say by how much.
Last week at the Bank Administration Institute's annual TransPay conference in Las Vegas, Jack K. Walton 2d, an associate director in the division of reserve bank operations and payment systems of the Fed's Board of Governors, estimated that the Federal Reserve Banks would earn a return this year of 106% to 109%, "a higher rate than had been targeted."
The banks earned a 98% return in 2002 and 2003, Mr. Walton said.
