Teaming with local community banks, the Federal Reserve Bank of Minneapolis has made the area a leader in the transition to a more computerized way of processing checks.
"The solutions that banks in the upper peninsula have found provide an example for other banks," said Steve Ledford, a senior vice president with the Atlanta-based consulting firm Global Concepts. Modernizing check processing is important not only because it is one of banks' biggest expense lines. It is one of the last traditional bank businesses that banks still dominate.
In that context, the Fed which last year moved nearly a third of the $60 billion checks estimated to have been written has been leading a national effort to make check processing more efficient by convening the paper documents to electronic media.
The fruits of these efforts began to appear in the late 1980s, when regional Fed banks began offering so-called electronic check presentments to commercial banks, thrifts, and credit unions.
This service rehes on data transmissions, rather than the paper items, to expedite the debiting of funds from checking accounts, helping banks stop check kiting while offering more sophisticated cash management services to businesses.
The Minneapolis Fed, which serves some 1,500 financial institutions in the Michigan peninsula and other states in the Upper Midwest, was among the first to automate check presentments and built a big user base faster than other reserve banks.
Joanna H. Frodin, a vice president at the Federal Reserve Bank of Philadelphia and the Fed system's national product manager for check services, praised the Minneapolis Fed for "being a leader during the last five years" in delivering electronic check presentment.
Recently, these services have caught on in other districts, and the Minneapohs Fed's share of electronic presentment volume has declined, even though its volumes have risen and are expected to double this year.
According to Ms. Frodin, the Minneapolis Fed is on pace to handle about 11 go of the half billion checks expected to be cleared by electronic presentment this year.
About a fifth of the banks around the country that get electronic presentments are served by the Minneapolis Fed.
The region most responsible for the Minneapohs Fed' s leadership is the upper peninsula. Half of the Minneapolis bank' s share of electronic presentment volume comes from institutions in the area, of which most have less than $150 million of assets.
The Minneapolis Fed has gained similar dominance with a related check clearing innovation the tomcation of checks at the bank of deposit.
With truncation, banks minimize check shipping and sorting expenses by having a bank in which a check is deposited, or a correspondent bank, or the Fed, hold on to it rather than return it to the check writer's institution Funds are.
Funds are debited by electronic presentment, enabling banks to reduce transportation and check sorting costs. The Fed expects to truncate some 250 million checks this year.
The central bank's ultimate goal is to evolve to a system where electronics take care of everything from deposit to clearance, and all retrievals.
This year the Minneapolis Fed became a leader in this technology by becoming the first reserve bank to deploy a check imaging service, storing copies of truncated checks in computers for automarie retrieval by commercial bank and Fed staffers.
Similar systems are planned for deployment throughout the Fed system overthe next two years. Ms. Frodin said the central bank hopes that imaging will make banks more comfortable with truncation.
The Minneapolis Fed is also the only reserve bank to operate an end-to-end electronic check clearing service.
With this experimental system, which the bank began operating in the upper peninsula last year, checks are mmcated at the banks where they are deposited. And the entire clearing process is electronic approaching the ideal the Fed hopes to realize throughout the COuntry.
Sixteen Michigan community banks, out of 51 depository institutions in the area, are participating in tmncafion, according to Theodore E. Umhoefer, senior vice president in charge of the Minneapohs Fed' s operating services.
Mr. Umhoefer said that while the system works well within a limited group of banks that know and trust each other, "it would be difficult to expand radically" because of technological constraints. But technology is improving, and someday the Minneapolis Fed may be a model forthe entire Fed system.
Mr. Umhoefer said some special characteristics of the remote upper peninsula conspired to make it a check-technology hotbed, though the weather more resembles cold storage.
It is not unusual for towns there to get 300 inches of snow in the winter, which makes altematives to shipping checks by track and plane more attractive, bankers said.
Mr. Umhoefer also credited the banks in the area for being flexible and entrepreneurial, and willing to participate in whatever 'harebrained idea" the Minneapolis reserve bank comes up with.
It also helps that the banking community is close-knit, and participants are wig to accept electronic files for settlement, without seeing the check signatures.
But Ms. Frodin added that Mr. Umhoefer, a 20-year veteran of the Minneapolis Fed and a tireless salesman of the check innovations, is part of the list of success factors.
"Other people have ideas but have not been the mover-shaker force that Ted has," she said.