Providing Financial Services
When Congress established the Federal Reserve, it charged the Fed with the critical task of providing a safe and efficient method of transferring funds throughout the banking system. Reserve banks and their branches carry out this mission, offering financial services to all financial institutions in the United States, regardless of size or location. Hand in hand with that mission is the obligation to improve the payments system by encouraging the use of efficient procedures and technology.
Essentially, a Reserve bank serves as a bankers’ bank, offering a wide variety of financial services. It distributes currency and coin, processes checks and offers electronic forms of payment. The Fed competes with the private sector in its financial services to foster competition in the marketplace and promote innovation and efficiency in the payments system. The Fed does not seek to make a profit from its participation; it sets prices only to recover costs.
TRADITIONAL FORMS OF PAYMENT
Regional Reserve banks are responsible for meeting public demand for currency and coin within their districts. The Reserve banks’ primary responsibility in providing this service is to ensure that fluctuations in the demand for currency and coin do not disrupt the banking industry. Reserve banks process and store currency and coins for financial institutions.
Besides providing currency and coin, Reserve banks process commercial checks. Over the past decade, the Fed has led the industry’s push to replace paper forms of payment, like checks, with electronic forms of payment, which offer lower risk and higher efficiency to the payments system. In keeping with this goal, the Fed pursued several electronic initiatives in check processing that take advantage of image technology, which scans checks as they pass through high-speed sorting equipment and captures their images in electronic form for processing.
In 2004, Federal legislation expanded the use of this technology, as well as the use of electronic deposit and presentment products, by making it possible for financial institutions to exchange electronic images of checks for settlement purposes. The result of this legislation streamlined settlement and transportation of paper checks across the country, making check processing faster and more efficient.
Today, the Fed processes approximately 8.5 billion to 9.5 billion check transactions annually. In the near future, the Fed anticipates that at least 95 percent of these will be electronic transactions.
ELECTRONIC FORMS OF PAYMENT
Every day, billions of dollars are transferred electronically among U.S. financial institutions. In fact, in 2003, the volume of electronic payments exceeded paper checks for the first time as a percentage of U.S. non-cash payments. The Reserve banks provide two electronic payment services: funds transfer and the automated clearing house, or ACH.
The funds transfer service provides a communications link among financial institutions and government agencies. Funds transfers are usually for high dollar amounts—they can average several million dollars or more. Funds transfers are originated and received through a sophisticated telecommunications network known as Fedwire,® which links all Reserve banks electronically. Institutions can move their balances at the Fed or send funds to another institution through this network. Most of the transactions sent over Fedwire are bank-to-bank transfers of funds, made on behalf of bank customers.
The ACH provides a nationwide network to exchange paperless payments among financial institutions and government agencies. The ACH accommodates a wide range of recurring corporate and consumer transactions, such as payroll deposit, electronic bill payment, insurance payments and Social Security disbursements.
Meanwhile, other forms of electronic payment—like smart cards, debit cards and Internet payment—are quickly becoming consumer staples. While the Fed does not directly provide these services, it is involved in the research and development of universal standards to ensure safety, convenience and accessibility.
THE FED AS FISCAL AGENT
In addition to serving as the bankers’ bank, the Federal Reserve System acts as banker for the U.S. government. Federal Reserve banks maintain accounts for the U.S. Treasury; process government checks, postal money orders and U.S. savings bonds; and collect federal tax deposits. Certain Reserve banks also sell new Treasury securities, service outstanding issues and redeem maturing issues. When the Treasury offers new issues of marketable securities to the public, certain Reserve banks disseminate information about the issues, process orders from customers, collect payments, credit the Treasury’s account for the proceeds and deliver the securities.
The Fed and the U.S. Treasury process and deliver many of these services electronically.
®Fedwire is a registered trademark of the Federal Reserve banks.
