Already Speedy Transition to Imaging Gets Fed Push

SAN DIEGO — The shift to imaging is happening faster than most payments executives anticipated, and with most paper checks now being presented electronically, the Federal Reserve banks are trying to hasten the transition.

Fed officials said this week that they plan to improve the process for delivering electronically return items — the last major piece of the settlement process — and are starting to dismantle the transportation network currently used to deliver paper checks.

Fred Herr, a senior vice president at the Federal Reserve Bank of Atlanta, said the end of the road is in sight.

"We've been talking about the last mile. I think we may be down to the last yard now," Mr. Herr said during the Fed Town Hall session at the Bank Administration Institute's annual TransPay conference here, the same forum where the Fed first announced its FedForward, FedReceipt, and FedReturn imaging services in 2004.

The Fed expects to be delivering roughly 91% of checks to paying banks electronically by yearend, and is now focusing on the last major element in its suite of image services, FedReceipt for Returns, which lets banks accept returns electronically. Less than 20% of the central bank's return volume is delivered through this service, but it expects that figure to reach 70% by yearend.

Mr. Herr said imaging will become more important to banks as the Fed pares down its delivery system. "We will begin to aggressively dismantle transportation this year," he said.

Until now the Fed's cuts have focused on long-distance, air transportation. The next round of cutbacks, to focus on intraterritory transfers by truck, should be 50% complete by yearend, Mr. Herr said.

Brian Egan, a vice president with the Atlanta Fed, said those cuts and the consolidation of multiple truck routes into fewer, longer routes in the meantime likely will pose operational burdens for banks. "You're going to start getting that paper later and later in the day," Mr. Egan said.

The Fed is also consolidating its processing operations from 11 local territories into a national clearing zone, covered by local clearing rules that call for two day settlement deadlines rather than the longer deadlines that currently apply for interterritory clearing.

To promote FedReceipt for Returns, which has been available for years, the Fed is emphasizing a "plus" version, which images all items for electronic presentment rather than delivering paper checks and electronic files.

Officials expect prices to rise for paper processing and fall for electronic services. As long as some checks are "flowing through the industry, the cost for everybody rises," Mr. Egan said.

The Fed is looking at some innovative alternatives to images, such as transmitting items to image laggards over the FedLine network as portable document format files. Terry Roth, a vice president at the Cleveland Fed, said the Fed is pilot testing PDF returns now with six financial companies in Montana.

Mr. Herr said the method would not be appropriate for every bank. "This is a very low-volume solution," he said.

Several officials said the acceleration of the image transition, which began slowly in late 2004, had taken them by surprise. "I don't think anybody in their wildest dreams thought then that we would be here five years later," Mr. Egan said.

Mr. Roth said he had expected a relatively smooth, 10-year transition but that it has gained speed.

Two years ago, the Fed's item processing centers in Philadelphia, Cleveland, and Atlanta typically handled 5 million checks a day, Mr. Roth said; one day last month the entire network processed 1.39 million checks. "Before the end of the month, we may drop below 1 million items a day," he said. "This happened a lot faster than I ever anticipated, than anybody did."

For reprint and licensing requests for this article, click here.
Bank technology
MORE FROM AMERICAN BANKER