The Federal Reserve's new funds availability rules for interbank check clearings are being credited with cutting into its check-clearing business, though less than initially expected.
The so-called, same-day settlement rules, which took effect Jan. 3, had been expected to move check-clearing volume from the Fed to commercial banks by making private systems more competitive.
Data from Fed
And some movement appears to be occurring. Fed officials said the volume of presorted checks handled by the 12 district Federal Reserve banks declined by one-fifth in the first quarter, compared to the same period last year. The most recent quarterly total was 1 billion items.
The number of unsorted checks handled by the Fed banks declined 3.5%, to 3.3 billion items, and total check presentment volumes declined 8%, to 4.3 billion items.
Florence Young, assistant director of bank operations and payment systems for the Fed in Washington, said the first-quarter decline was less than expected, although she declined to say by how much.
But Ms. Young added that the Fed is assuming the decline will accelerate as banks get more comfortable with private check-clearing operations.
"I think the banks are taking this slowly and trying to test the cost-effectiveness to them," she said.
In October, the Fed predicted that its total check presentment volumes would decline by 10% in 1994. This estimate included projected declines of one-third in presorted checks and 2.3% in unsorted checks.
The decline was expected to reduce the Fed's revenues from check presentment and sorting services to $593.5 million for the year, from $598.8 million in 1993.
The Federal Reserve last year handled 19 billion items, out of an estimated 60 billion checks that were written in this country.
One advantage the Fed has in check processing is that it can provide funds for interbank check clearing the same day the checks are presented, without an additional presentment fee.
Until the rule change this year, banks were allowed to charge presentment fees for same-day funds availability on checks presented by other commercial banks.
Yielding an Edge
This gave the Fed a powerful advantage, which the same-day settlement rules lessened by requiring banks to fund all checks received before 8 a.m. within a day, without charging any extra fee.
The decline in the Fed's check volume was expected to be concentrated in presorted checks because it's easier to move them from the Fed to private systems.
Bankers agreed with Ms. Young's assessment that the migration of volume from the Fed is proceeding more slowly than expected.
"It is a great deal slower than expectations, giving us time to adjust," said Bruce Brett, a vice president in Vienna, Va., for Signet Banking Corp., Richmond, Va.
Growth of Clearing Houses
One sign that the migration could accelerate is that many check clearing houses are growing.
Clearing houses offer a central meeting point where banks can exchange checks, and they often operate transportation utilities, making private check clearing more efficient.
"We've gone from seven to 19 members in the last three months," said Gerard F. Milano, director of the California Bankers Clearing House, San Bruno.
He explained that the clearing house is delivering checks to 200 nonmember banks for same-day settlement and that the service is saving member banks $3.2 million a year in Fed fees.
Presentment Business Up
"We've added approximately 130 banks that we're presenting to," said Robert Fitzgerald, president of the Chicago Clearing House Association. "We expect to add another 30 to 40 banks in the next two to three months."
Fred Redeker, president of the Clearing House Association of the Southwest in Dallas, said his organization has added nearly 10 members since Jan. 1. "Our membership has requested that we crank up recruitment activities," he said.
Hank Farrar, senior vice president of the New York Clearing House Association, said that his group has added no members because of the new rules but 60 banks have designated the association as a presentment site for same-day settlement.