Federal Reserve Update
ICBA National Conference
Las Vegas, Nevada
March 7, 2006
Richard Oliver - Retail Payments Office
Fred Herr - Retail Payments Office
Jack Walton - Board of Governors
Agenda
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Federal Reserve Initiatives
Check 21 Update
Regulatory Changes
Questions
2
Federal Reserve Initiatives
Rich Oliver
Retail Payments Office
Federal Reserve High Level
Strategic Initiatives
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Scale the check infrastructure
downward
Promote the electronification of checks
Offer new ACH products and services
Encourage industry collaboration
Adopt appropriate regulatory changes
4
Check Restructuring
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The Reserve Banks have been consolidating check processing offices in
response to the decline in check use nationwide
Prior to 2003 the Reserve Banks processed checks at 45 offices
The Reserve Banks will have reduced the number of check processing
offices to 21 by early 2007
Further consolidations are expected as check volumes continue to
decline
Implications
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Ever increasing proportion of checks will become local
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Ever increasing proportion of checks will be processed electronically
5
Federal Reserve
Check Processing Territories in 2002
Seattle
Portland
Helena
Minneapolis
Utica
Boston
Windsor Locks
Milwaukee
Detroit
Chicago
Salt Lake City
Des Moines
Omaha
San Francisco
Denver
Kansas City
Philadelphia
Pittsburgh
Peoria
Baltimore
Columbus
Indianapolis
Cincinnati
St. Louis
Louisville
Nashville
Los Angeles
Oklahoma City
East Rutherford
Cleveland
Memphis
Little Rock
Atlanta
Birmingham
Richmond
Charlotte
Columbia
Charleston
Dallas
El Paso
Jacksonville
San Antonio
Houston
New Orleans
Miami
6
Federal Reserve
Check Processing Territories in 2007
Seattle
Helena
Minneapolis
Utica
Windsor Locks
Des Moines
San Francisco
Chicago
Denver
Kansas City
St. Louis
Cleveland
Philadelphia
Baltimore
Cincinnati
Charlotte
Los Angeles
Memphis
Atlanta
Dallas
Jacksonville
7
FedACH Initiatives
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Deploy new IP-based network solutions
Implement enhanced risk management
services
Expand/improve FedACH International
Strategically evolve the technology
platform
8
Check 21 Update
Fred Herr
Retail Payments Office
Check 21:
2005 in Review
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Measured implementation pace to start the
year…
…strong finish at year end
Check 21 volume has grown from 115,000
items per day in January 2005 to over 2.5
million per day in December 2005
Customer testing & implementation process
now aligned with their ‘readiness’
Well-positioned for the future
10
2005 Check 21 Status
2005 ICL Results
Ju
l
A
ug
S
ep
O
ct
N
ov
D
ec
2,500.00
2,000.00
1,500.00
1,000.00
500.00
-
Ja
n
Fe
b
M
ar
A
pr
M
ay
Ju
n
100
80
60
40
20
0
# of ICL Implementations
Avg. Daily ICL Deposits (000s)
11
Check 21 Factoids
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Volume and dollars processed continue to grow each month
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Average daily volume in January was over2.6 million items with a
value of $13 billion
FedForward peak day volume was just under 4.5 million items;
dollars peaked at just over $20.0 billion
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FedReturn volumes are growing slowly
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Most Tuesdays we set a volume record
Average 36,000 items per day
Represents over 7 percent of Federal Reserve return volumes
FedReceipt/Plus implementations are picking up speed
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Average daily volume in December was ~240,000 items per day
with a value of $100 million
12
What is driving FedForward Volume
Growth?
In the first half of 2005, volume originated almost exclusively from
customers interested in float improvement and transportation
reengineering
Since the second half of 2005, we have seen growth primarily from
community bank ‘clear all’ solutions – Image POD or branch capture
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December – Customers
• 438 “Clear All’ ICL Depositors
• 73 “Float Driven” ICL Depositors
• 195 Paper to Image Depositors
• 1,085 Check 21 Cull Customers
December – Volume
• Float Improvement 43 %
• Clear All
57 %
13
What is driving FedForward Volume
Growth?
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50+ vendors support Check 21 customers currently in
production
 Top 10 vendors support ~ 60% of customers
Vendor readiness doesn’t necessarily translate into
customer readiness
 Integration of vendor software may be difficult and
time-consuming
 Some vendors require hardware upgrades to support
ICL functionality
 Customers often have different infrastructures which
requires additional testing and support
 Most vendors can only support a limited number of
parallel implementations
14
Industry Implementation Challenges
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Industry is finding that building a robust, scaleable,
full function infrastructure is extremely difficult
Vendor readiness doesn’t necessarily translate into
customer readiness
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Integration of vendor software may be difficult and timeconsuming
Some vendors require hardware upgrades to support ICL
functionality
Customers often have different infrastructures which
requires additional testing and support
Most vendors can only support a limited number of parallel
implementations
15
Industry Implementation Challenges
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Litigation is having a cooling influence
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Interest in remote capture is picking up
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Uncertainty in the marketplace has created doubt
Emerging state laws regarding payments have added further confusion
New small retail customers
Availability of scanning equipment is limited
Duplicate Substitute checks
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Can occur at many stages of the collection process
File level checking and strong print procedures can greatly decrease, but
not eliminate, duplicates
Item level checking problematic at any point other than the paying
institution
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Probability of false positives is greater if matching is done early in the cycle
Short processing window
Initially impacted largest customers of largest banks
16
Image Exchange
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Image exchange is being pursued but…..
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Most industry file standards have optional or conditional
fields that are sometimes used differently by customers
Different exchanges implemented disparate and sometimes
conflicting edits
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No usability standards in place for Image Quality Assurance
Interoperability challenges draw attention
Several banks are depositing image cash letters with
the Fed through the SVPCo network
Endpoint Exchange and Fiserv are also depositing
through a lead bank
17
Strategic Outlook
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Need focus on end-to-end electronics
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Movement to full electronification will continue to evolve
 Rate of change
Efforts need to be directed toward electronifying the check as early
in the collection process as possible.
 As check volume continues to decline, there will be increasing
pressure on all participants to manage costs
 Physical infrastructure, transportation, and equipment
 Branch capture and remote capture solutions are critical
Transition solutions to support the migration from check processing
to electronic payments will be vital
 Enable end-to-end electronics while allowing for paper where
needed
Business case analysis should look forward and not isolate on send
benefits
18
Strategic Outlook
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Industry collaboration is a must
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Exchanging images requires willing
partners
Interoperability between payments
aggregators is also crucial
Despite growth in the number of
electronic receivers, substitute check
printing not likely to peak until 2007
19
Regulatory Update
Jack Walton
Board of Governors of the Federal Reserve
System
Regulatory Changes
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Regulation E
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Electronic Check Conversion
Payroll Cards
Regulation CC – Remotely Created Checks
Check 21 Implementation
Check Restructuring
Large Value Payments Processing
21
Regulation E
Electronic Check Conversion
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Enables “alternative authorization” for check conversion if a
merchant posts signage and provides the consumer with a written
notice
 For example, the check conversion notice that a merchant
provides at the point of sale may now state: “If you submit a
check as payment, we [the merchant] may process the
payment as an EFT or as a check”
 This change facilitates so-called “back-office” conversion of
checks submitted for payment at the point of sale
Extends Regulation E coverage to merchants and other payees, for
the limited purpose of providing notice to obtain consumer
authorization
 Merchant coverage intended to help ensure uniform and
consistent notices
Sunset date: Three years
22
Regulation E
Payroll Cards
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Scope limited to payroll card accounts as opposed to
stored-value cards
Justification for limited coverage
 Greater likelihood that a payroll card account will
serve as a consumer’s primary transaction account,
whereas stored-value card products may be used
only on short-term basis
 Coverage of stored-value products could stifle
development of those products
23
Regulation E
Payroll Cards
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Regulation E typically requires paper periodic statement
from financial institutions. As an alternative to
providing paper periodic statements for payroll card
holders, financial institutions may instead:
1. Make available balance information via telephone;
2. Make available an electronic history of account
transactions; and
3. Make available promptly, upon request, a written
history of account transactions
Board is issuing rule in interim form to solicit comment
on modified requirements
24
Regulation CC
Remotely Created Checks
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Increased fraud associated with the use of demand drafts
Definition of remotely created check: a check that does
not bear the signature of the drawer and that is not
created by the paying bank
Previously, a paying bank was unable to recover from an
upstream bank for an unauthorized remotely created
check once its midnight return deadline passed
Regulation CC was amended to include a new warranty for
such checks, thereby facilitating recovery from the
depositary bank
Effective date: July 1, 2006
25
Check 21 Survey
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Congress mandated a Check 21 study
 Study will assess the effects of Check 21 on the
payments system
 Report due no later than April 2007
The Board is conducting a survey of about 3,000
institutions to gather data from a nationally representative
sample of depository institutions
To view the survey (look for “FR 3080”):
www.federalreserve.gov/boarddocs/reportforms/review.cfm
26
Check 21 and Electronic Check
Conversion - A Comparison
Electronic Check
Conversion
Check 21
Legal framework
Check 21, Regulation CC, UCC
(“check law”)
EFTA, Regulation E, NACHA Rules
(“EFT law”)
Eligible items
All checks drawn on U.S. banks
Consumer checks (per NACHA
Rules)
Authorization
Not required
By notice to consumer that check
may be processed as an EFT or as a
check
Subsequent clearing
Once truncated, may need to
reconvert to paper if drawee does
not accept electronic presentment
Once converted to ACH, does not
again become paper
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Working together to make the payments
system a better place
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Questions
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