The Federal Reserve banks are planning a major overhaul of their check processing systems to prepare for both the growing demand for image processing now and an eventual dropoff that is widely expected.
Though most financial companies that undertake technology projects with an eye on the future look for systems that are expandable, the Fed's contradictory needs have prompted it to look for a system that can be scaled upward in the next few years but then downward, or "repurposed," as its requirements change.
The information technology company Unisys Corp. said Wednesday that it would develop a centralized electronic check and image processing system for the Federal Reserve Bank of Cleveland, to handle the evolving payments needs of all 12 district Fed banks.
David Luther, the vice president of solutions management in Unisys' global financial services unit, said the system would be able to expand, or contract, as needed. "It can scale down as people write less and less checks," he said, "or you could repurpose it, because it is a general payment hub, to process ACH transactions, for instance, or other types of transactions."
Mr. Luther said the Fed contract, signed this month, will be the first time his company's Open Payments Platform will be used primarily for check processing.
Colin Kerr, an analyst at TowerGroup, an independent research group owned by MasterCard Inc., said that a growing number of financial companies are interested in such flexible systems, which can handle both multiple types of payments and variable volume. Processors have long bought "large, monolithic processing systems," he wrote in an e-mail. "However, the trend now is to create flexible payment architectures that can adapt more easily to changing market conditions."
He said that the Fed is "buying a payments solution (rather than a single system) consisting of multiple discrete services that will interact together and also with existing legacy applications. As future change occurs, individual processing services can be replaced rather than the entire check clearing system."
Patrick K. Barron, the first vice president of the Federal Reserve Bank of Atlanta and the director of the Federal Reserve System's retail payments office, said that the Unisys system, unlike the Fed's existing one, treats check payments much like automated clearing house transactions, with "electronic sorting, using a more ACH-like database and processing system."
He said in an interview Wednesday that the central bank's existing image-processing system was built on top of a paper-processing infrastructure it had developed over decades. However, "the current system, while it has met our needs, was never designed to be a 40 to 50 million item-a-day product offering."
Other financial companies are also using multipurpose payments systems.
ABN Amro Holding NV, for example, began developing a payment hub in 2003 at its LaSalle Bank Corp. in Chicago, with an eye toward centralizing some functions - such as record keeping or information reporting - while enabling the processing of domestic and international wires, and ACH transactions to be handled by specialized processing systems. Others, including CheckFree Corp., have promoted the development of "all-items files" to enable banking companies to keep better tabs on payments that change formats, such as checks that become ACH transactions.
Image exchange volume growth has outstripped observers' early expectations. Fed officials said in February that the regional banks were processing more than 25% of their forward check presentments as images, and this proportion was expected to reach 50% by yearend and 75% by the end of 2008.
But the growth in image volume is tied to greater use of the technology on an ever-shrinking pool of paper checks; eventually, check image volume will peak as the industry closes in on a 100% truncation rate for converting checks to images.
The Fed expects to test the system by the fourth quarter of 2008, and roll it out in 2009. Neither the Fed nor Unisys, a Blue Bell, Pa., provider, would discuss its cost, which includes software, hardware, and consulting services.
Susan Long, a senior vice president at the Clearing House Payments Co. LLC in New York and the head of its SVPCO Electronic Clearing Services unit, said that image exchange got off to a slow start, but "has far exceeded what was projected by the consultants."
