operations of the Minneapolis Fed to a new processing facility in New Jersey. Eventually the East Rutherford center is expected to take over the clearing operations of all 12 Fed district banks. Its all part of a plan to centralize the Federal Reserve's commercial bank services and management structure. The East Rutherford center already handles nearly all Fed Wire funds transfer applications and accounting systems, jobs the district banks had handled "Reengineering the way ACH items are processed by the Fed has been one of the most complex projects we've ever undertaken," said Paul Connolly, first vice president with the Federal Reserve Bank of Boston and the Fed's product director of retail payments. "We hope to get another (Fed district) converted by the end of this year, and get all 12 converted by the end of the summer next year," he said. The central bank's effort to centralize is largely a response to the banking industry's consolidation and interstate reorganization activities, which have affected the way the Fed delivers its own fee-based services, such as check clearing and automated clearing house processing. The new centralized ACH services will help the Fed compete with the fledgling Private Sector Automated Clearing House Exchange, which is a venture that hopes to loosen the Fed's grip on processing automated clearing house transactions by offering cheaper fees on ACH transactions. Mr. Connolly said the move to central processing will lower the Fed's operating costs. When coupled with volume increases, it will "allow us to lower the prices we charge banks." George F. Thomas, a senior vice president of the New York Clearing House Association, which is one of the three private ACH operators that operate Pax, said, "Its going to make competition a little tougher for us." However, he welcomed the Fed's effort to centralize its processing activity. He said that once the consolidation effort is completed, "I can put in new settlement procedures that will give us better finality (of settlement) and allow us to expand nationwide." The New York Clearing House, the Arizona Clearing House Association, and Visa U.S.A.'s Visanet ACH Services operate Pax, whose volumes stand at about 500,000 a month, mostly through exchanges between Citicorp and Chemical Banking Corp., Mr. Thomas said. Mr. Thomas said that will soon change as other institutions, including Norwest Corp, who joined Pax last April, add considerable ACH volume to the network in the coming months. But the Fed's new ACH system "gives us a new, modern software platform to build on to make the ACH better," Mr. Connolly said. "Our new ACH system provides noticeable improvements that we hope will reach the individual users of ACH payments." The new system uses so-called continuous flow processing, in place of the traditional batch mode for processing. That means corporations can send payment files closer to the actual payment date. Receiving institutions can get the payments within four hours. The ACH's batch processing, value-dated method of settlement meant that corporations must send files to their banks two or three prior to the actual pay date. Many corporations use that "as an excuse," not to offer direct deposit because of insufficient time to calculate for overtime, part time, and hourly wage earners, said George White, president of White Papers Inc., Montclair, N.J., The continuous flow system will likely lead to a growth in the number of direct deposit programs offered, he said, because it gives companies more time to calculate their payrolls. "Most people still get paid by check," agreed Mr. Connolly, adding the range of employees on direct deposit programs seem to be between 20% and 40%. "We hope it removes one of the existing barriers," he said. "It's just too much bother for some businesses to have their files ready that far in advance."

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