Transforming Federal Reserve Services

By Barbara Bennett

The revolutionary changes in computer and telecommunications technology make it possible for financial services firms to operate on a nationwide basis and offer a broad array of new and traditional services. Open networks like the Internet are becoming a widely accepted way for U.S. households and businesses to obtain these and other services. In this high-tech and highly competitive environment, financial services firms increasingly are finding that their customers demand instantaneous and interactive access to customer-specific information.

Although the U.S. financial services industry still is heavily reliant on Ïbrick and mortarÓ and paper-based payments, things are changing, particularly in the Twelfth District. A number of western institutions are leaders in the establishment of a nationwide presence and in the development of online delivery systems that offer customers up-to-the-minute information on the status of their investments and transactions. As in the rest of the country, western depository institutions are also reducing investment in physical processing and delivery infrastructures by consolidating operations wherever possible and centralizing functions such as funds management.

As a major provider of financial and payments services to depository institutions, the Fed is playing a pivotal role in this transition from a paper-based infrastructure to an electronic one. The Rivlin CommitteeÌs fundamental review of the Federal ReserveÌs role in the payments mechanism confirmed that, while Reserve Banks must continue to provide traditional payments services for some time to come, they also must work in partnership with the industry to transform the payments system.

To accomplish this transformation, Reserve Banks are engaged in three broad initiatives: developing a Ïcommon faceÓ to Reserve Bank services nationwide; streamlining back office systems to keep costs down and deliver new products and services quickly and flexibly; and applying new technologies to add value and encourage more efficient payments practices.

Developing a Common Face

The emergence of depository institutions with nationwide branch networks makes it essential that Reserve Banks offer standardized services and provide monitoring tools needed to facilitate management of these entitiesÌ operations on a nationwide basis. Especially significant is the development of a new structure for reserve accounts to enable depository institutions to maintain a single master account for all their Reserve Bank transactions. This new master/sub-account structure became available in January 1998. It facilitates centralized funds management and offers depository institutions tools to monitor transactions by business line, region of the country, and/or type of transaction.

To simplify depository institutionsÌ service relationships with the Federal Reserve, moreover, in 1997 the Reserve Banks developed national operating circulars for every service line, including checks, cash, ACH, securities services, funds transfer, accounting, and credit. A common set of legal agreements and procedures make it easier for institutions that operate in more than one District to standardize their use of Federal Reserve services. In addition, Reserve Banks have implemented a national key account program that assigns to a designated national account manager responsibility for addressing many of these institutions' service needs and resolving issues that may arise in coordinating services provided across Districts. In this District, for example, Los Angeles Branch Vice President Sean Rodriguez has account management responsibilities for the region's two largest customers: Bank of America and Wells Fargo Bank. For these two prominent interstate organizations, he manages longer-term service initiatives and other matters on a Systemwide basis, ensuring that the Federal Reserve's services are consistent with the strategic priorities and needs of these organizations.

Another important aspect of the effort to develop a common face for the Federal Reserve is the introduction of national products in service lines that traditionally have accommodated wide variations in product offerings across Districts, including checks, cash, and net settlement. In checks, Reserve Banks introduced an attractively-priced nationwide City Sort deposit in 1997 that generally improves funds availability on City items by allowing customers to deposit at their local Fed office items drawn on City endpoints anywhere in the country.

In cash services, in early 1998 uniform service levels and access standards are being implemented that are modeled after the approach implemented in the Twelfth District. Our District is also pioneering a service that allows depository institutions to coordinate currency ordering for their ATM networks on a nationwide basis. Also, in late 1998 an enhanced national net settlement service will be available to depository institutions participating in private clearing arrangements. Designed to provide a file-based, automated mechanism for handling settlements, including those that involve participants located in multiple Federal Reserve Districts, this new service will improve finality and offer better risk management tools through source authentication, automated linkages to the Federal ReserveÌs Account Balance Monitoring System (ABMS), and timely information on the status of settlement transactions.

Streamlining the Back Office

Many of these new services would not be possible without the strides Reserve Banks have made in streamlining back office operations, including consolidating computer processing and centralizing major applications software for such systems as accounting, funds transfer, and ACH. These efforts are crucial in the Federal ReserveÌs drive to provide the most efficient services possible and to develop and deliver new services in the shortened time frames that the current and future financial services environments require.

The recent centralization of ACH processing, for example, reduced by nearly half the cost of inter-District transactions and made possible the introduction of flow processing and flexible delivery times, all of which make ACH more attractive as an alternative to check payments for certain types of transactions. Likewise, centralization of the funds transfer software reduced costs and permitted price reductions totaling 20 percent since 1996. Current efforts to establish a common check processing platform for Reserve Banks and to implement an Ïenterprise-wideÓ automated adjustments system are expected to yield comparable benefits in terms of operating efficiencies and enhanced check services.

Applying New Technologies, Transforming the Payments System

The application of information technology to existing processes is central to Reserve BanksÌ ability to streamline back office operations. But far greater benefits from these technologies lie in their ability to deliver vast amounts of information more quickly and in more useful and flexible forms than possible in a paper-based environment.

When used to create new information services and delivery channels, these technologies have the potential to redefine the very nature of the payments mechanism. The Reserve Banks began to tap this potential some years ago with the introduction of electronic check presentment services, which enable recipients to begin ÏcheckÓ processing well before they actually receive the physical items, if they still receive the items at all. With the introduction more recently of digital image capture and retrieval services and the forthcoming provision of national archive services, there is even greater opportunity to speed the conversion of the check collection system from a paper-based process to an electronic one.

Depository institutions and their customers are beginning to see digital images as superior to the physical items in many respects. With the Reserve BanksÌ ability to deliver CD-ROMs containing digital images of checks drawn on a specific account number, depository institutions are able to meet corporate cash managersÌ demand for faster, more convenient, and more useful access to information on their paid items. In addition, depository institutions are using Reserve BanksÌ digital image services to reengineer their back offices, replacing microfilm technology and implementing retrieval systems that improve customer service and research capabilities by providing online access to copies of items.

Reserve Banks are using digital technology to improve cash services, as well. The Twelfth District developed an application that enables depository institutions to train their staffs in the authentication of the new series $50 and $100 notes. This interactive software is currently available on CD-ROM and will be available on the Federal ReserveÌs World Wide Web site.

Transactional applications are also being developed to tap the online delivery capabilities of digital technology. In early 1998 the Twelfth District is piloting two important web applications: cash services and check image retrieval. The cash services module will enable depository institutions to access Reserve BanksÌ cash ordering and deposit notification systems using web technology. This will greatly enhance depository institutionsÌ ability to manage ATM supply operations on a nationwide basis.

The image retrieval application will enable depository institutions to interactively query the Federal ReserveÌs archive for checks that meet criteria the institution specifies, including account number, processing date, dollar amount range, etc. The system will then search the archive and return a list of checks that meet those criteria. By clicking on the specific check it would like to view, the depository institution will be able to examine the front and back of the image and zoom in on endorsements and other fields of interest. The images can be sent to a printer or saved on the institutionÌs desktop. This path-breaking application clearly has the potential to change the way depository institutions offer checking account services by providing instantaneous and interactive delivery of customer-specific information.

The evolution toward an electronic payments mechanism that is more convenient, efficient, secure, and reliable than the current paper-based system is a challenge that requires the combined energies and cooperation of many parties, including financial services firms, software developers, businesses, and the Federal Reserve. The initiatives in which the San Francisco Fed Û and all the Reserve Banks Û are engaged represent a significant step forward in this transformation.