In response to the continuing decline in paper check volume, the Federal Reserve banks plan to shut down another check processing center.
And with imaging expected to further reduce the number of checks moving through the Fed's processing system, an analyst said additional closings are likely next year.
On Wednesday the Federal Reserve announced that it plans to close its East Rutherford, N.J., center in the second half of next year.
This is the third consecutive year in which the Fed has said it would close centers. Closing the East Rutherford center would leave the Fed with 22 item processing centers.
There were 45 in 2003, but that year the Fed announced that it would close 13 centers around the country; they have all since closed. Last year it announced that it would close nine more, three of which have been shut down.
The work from the closed centers is transferred to others in the region; the East Rutherford center's work will be shifted to Philadelphia.
David Fettig, a spokesman for the Fed's Financial Services Policy Committee in Minneapolis, said the decision to close the center resulted from an annual review of check processing volume. The number of checks the Fed processed fell by about 12% last year, and this year's decline is expected to be even steeper.
About 37 billion checks were paid in the United States in 2003, he said; the Fed typically processes about 35% to 40% of all checks.
"Consumers and businesses are writing fewer checks, and the financial services industry is processing checks differently," Mr. Fettig said.
People are making more of their purchases with credit and debit cards and paying bills through online banking sites, he noted. In addition, many large billers have started converting paper checks into electronic payments; doing so removed more than a billion checks from the nation's processing systems last year.
A potentially more significant change in check processing habits is looming, he said - the Check Processing for the 21st Century Act is widely expected to prompt a large-scale shift by banks to processing paper checks as digital images. The law took effect in October, and many banks are testing image exchange networks, though the number of items settling electronically remains low.
Once banks begin to convert more of their checks into images, the number of checks moving through the Fed will drop even farther, Mr. Fettig said.
"We have not yet seen the full ramifications of Check 21," he said. "The broader implementation of Check 21 won't be realized until 2006 or 2007."
Though he said the Fed would conduct another review of its item processing next year, he would not predict whether that review would result in more closings.
However, Burt Ely, an independent banking analyst in Alexandria, Va., said that it is all but certain that the Fed will announce more closings next year.
"I would say there are another four or five sites that they can probably close" east of the Mississippi River, he said. "There will have to be more consolidation at some point."
He agreed that the shift to imaging will have a large effect on check volume, and that the decline would be an important factor in future decisions by the Fed about whether to close more centers. "Everybody I talk to says that imaging is really going to take off next year and will pick up speed in 2007."
However, he warned that as the Fed reduces its processing capabilities, gaps may develop in areas where the nearest center is too far away to send checks easily or economically. This may already be happening in the Middle Atlantic, where the Richmond, Va., center closed last year, he said.
"I think it's going to be hard for them to go below 15 or 16 centers before they start to create holes in the fabric," he said.
As the Fed has consolidated its operations, it has been using more airplanes to deliver checks to the processing centers, he said. As a result, its transportation budget increased 10% last year. The consolidation has also required it to impose earlier cutoff times in many cases, because the checks often have farther to go to reach a processing center.
In contrast, transmitting images electronically is almost instantaneous, so banks using images can have later cutoff times, Mr. Ely said. "At some point in time paper processing will start to become uncompetitive when compared to image, and I think we are moving to that point very quickly."
