Three Initiatives In Payments
This evening I would like to share some information with you about three important Federal Reserve initiatives in the payments system. All of them advance the goal of a more electronic retail payments system for the country. And the Federal Reserve Bank of Boston has an active role with all of them.
These three initiatives are: the growth of Check 21, for electronic collection of checks; a new service to help banks to manage their risks with Automated Clearing House, or ACH payments; and the rapid growth in the use of stored value cards by the U.S. military, supported by your Boston Reserve Bank.
Earlier this year we consolidated our check operations for all of New England into one large operation, in Windsor Locks, Connecticut. Thank you for your patience with us as we worked through that transition. It was a big project for us, and it affected our customers as we took some time to train new people, straighten out transportation, and adjust to very tight nightly deadlines.
We have been in steady state for awhile now. However, steady state now is different from the old steady state. It takes longer for some of our customers to get their checks to us in Windsor Locks, and it takes longer for us to present checks back to them.
This same pattern of fewer Federal Reserve check offices and longer distances is appearing across the country. It reflects the declining use of checks in the United States, and banking consolidation as well.
At the beginning of 2003, the Federal Reserve had 45 check processing locations nationally. Now, we have 22. The number will continue to decline as check volumes decline. This change is hard for us to manage, but we are managing it. Moreover, we favor it, because a more electronic, less paper-bound payments system is beneficial for the public.
For some years to come, though, your banks, and the Federal Reserve, will have checks to collect. The job will get more challenging, and more expensive, as volumes diminish and geographic distances between processing locations increase.
The solution is Check 21, or electronic collection of checks using image technology. This solution really has caught on since the federal law enabling Check 21 went into effect in October, 2004.
Currently 98 banks depositing checks for collection with us in Windsor Locks are giving us electronic images instead of paper checks. Another 86 institutions are giving us their paper and asking us to convert their checks into images for electronic collection. On an average night Windsor Locks receives 240 thousand checks in image form, or about 18 percent of our collection volume. All of this has developed in less than two years.
The receipt of images from the Federal Reserve, on what we call the presentment side, has grown more slowly, since banks have more internal changes to make before they can take in and process images in place of paper. However, it is growing. Right now we are presenting 142 thousand items in image form, or about 7 percent of our daily average local presentment volume.
Nationally, the Reserve Banks are receiving about 17 percent of checks for collection in image form, and presenting about 6 percent in image form. Both numbers are growing rapidly now.
For institutions in Massachusetts, there is some good news. The state has changed the law, so that effective November 28, a bank no longer will be required to return cancelled checks to its customers. The law in Massachusetts has been an impediment to electronic check collection, but it no longer will be.
The new law includes strong protections for customers, including a requirement that the bank provide up to 25 copies of checks annually upon request, at no charge. Overall, the law will serve consumers well and help Massachusetts banks to move ahead with a more efficient payments system.
Several of your banks already use Check 21. I hope all of you will make plans to do so. All of the changes to come in check collection will make Check 21 the right direction for you.
While the paper check is in decline, the electronic ACH continues to grow. It supports direct deposit of pay, and direct bill payment from bank accounts, and has become the essential infrastructure for many home banking and electronic bill payment services.
With strong growth in transaction and dollar volumes comes some increased risk. Often banks allow their business customers, including third-party payment processors, to originate ACH payments in the name of the bank. When a bank does so, the bank is liable for the payments, even if the bank never saw the payments.
To help banks to manage these risks, the Federal Reserve introduced this year a new Risk Origination Monitoring Service. This service enables a bank to select which originators of ACH payments it wants to monitor; to set debit and credit "caps" on those originators based on expected payments activity; to receive notification, by e-mail, whenever a pending batch of payments would exceed a cap; and then to choose whether to release or reject that batch of payments.
At the Boston Reserve Bank we are interested in helping your banks to learn more about this service, not to be selling you something, but to help you to assess for yourselves what we believe is a valuable tool to mitigate risk.
My third and final topic is one in which our Bank takes great pride. Our people are playing an important role in the introduction of an electronic replacement for cash and checks: a stored value card system, which the U.S. armed forces are deploying, as part of a program led by the U.S. Treasury, and managed and supported by the Boston Reserve Bank.
When the military began to deploy stored value cards in Iraq and Kuwait this summer, they were the ninth and tenth foreign countries with U.S. bases to begin to use them. Three people from our Bank went to Kuwait and Iraq to help with the introduction of the cards. I am happy to tell you they are safely home now.
Stored value cards also are used to pay all trainees at eight Army, Air Force, and Marine basic training forts in the U.S. During the past year about 180 thousand trainees were paid with stored value cards. Another 26 thousand soldiers were using the cards at their overseas bases, and that number is growing.
We expect the growth to continue, because the stored value cards save money for the military and the Treasury, and have proven convenient for the men and women who use them. They can pay for purchases at the PX, and at local merchants, with the card.
A soldier also can use one of those kiosks to transfer value from his card to his bank account in the U.S., or to download value from his account.
From Boston we provide the software and technical support for the stored value card program, and we manage it on behalf of the Treasury. The Treasury entrusted this responsibility to us as a result of a successful partnership with them over many years to bring important improvements to the government's payment processes, and even to the broader commercial payments system. In fact, the Boston Reserve Bank conducted seminal research and development on check image technology, on behalf of all Reserve Banks, and with the Treasury as our partner, beginning more than 20 years ago. That work helped to make today's Check 21 possible. And that successful collaboration contributed to today's collaboration on stored value cards.
As I hope you can tell, we are excited about this stored value card program, as we are about the ACH risk management service and Check 21. I hope all of these initiatives are of interest to you, too. Thank you.