What is the Fed: Payment Services

Introduction

The Fed plays a central role in the nation’s payment systems. Reserve Banks 1) keep enough currency and coins in circulation to meet public demand; 2) provide check collection services to banks and other institutions that hold deposits; 3) operate two electronic payment systems; and 4) provide financial services to the U.S. government.

Currency and Coins

The Fed is responsible for distributing currency and coins to banks and other depository institutions.

The Fed is responsible for distributing currency and coins to banks and other depository institutions, and for ensuring that enough currency and coins are in circulation to meet public demand. Federal Reserve notes are printed by the U.S. Bureau of Engraving and Printing in Washington, D.C. and Fort Worth, Texas. Coins are produced at U.S. Mints in Philadelphia and Denver. New currency and coins are shipped to Reserve Banks and branches across the country. When people need additional cash, such as during the holidays or at times of natural disaster or crisis, a depository institution may order more currency and coins from its Reserve Bank or branch. Institutions pay for these orders by drawing down their Federal Reserve account balances.

Depository institutions may return excess cash to their local Reserve Bank for credit to their reserve accounts. Reserve Banks sort and verify the deposits. They store coins and reusable paper notes in their vaults. Soiled and worn-out notes are destroyed. Suspect counterfeit notes are sent to the Secret Service. Bags of coins are weighed to verify amounts. Reserve Banks do not check coins for wear and tear.

Checks

The number of checks written has been declining for the last 25 years as the use of electronic payments has grown.

Reserve Banks also provide check collection services to depository institutions. The Fed processes approximately 40 percent of the paper items that ultimately clear as checks in the United States. Commercial banks also may clear checks directly with each other through clearinghouse associations or through agreements with other banks. The Check Clearing for the 21st Century Act, or “Check 21,” enacted in 2004, allows an electronic image of a check to be used for clearing. Today, virtually all checks are processed as images. Nationwide, the number of checks written has been declining for the last 25 years as the use of electronic payments has grown. Since 2003, Reserve Banks have reduced the number of locations where checks are processed from 45 offices to a single site in Atlanta.

Electronic Payments

The Reserve Banks are the largest ACH operator in the country.

Automated Clearinghouse (ACH)

While the Fed’s volume of check processing has been declining, its volume of electronic payments has been rising. The Fed’s Automated Clearinghouse (ACH) payment system provides an electronic means to exchange debit and credit entries between banks and other depository institutions, in order to settle customer transactions. The Reserve Banks are the largest ACH operator in the country. Electronic Payments Network, a private organization, is the country’s other ACH operator. Common ACH credit transfers include direct deposits of payroll, Social Security benefits, and tax refunds. ACH debit transfers commonly include recurring payments for mortgages, insurance premiums, utility bills, and the like. Converted paper check payments and one-time payments made over the Internet or by telephone are other examples.

Fedwire

For larger transactions, debits and credits are transferred electronically through Fedwire, a highly sophisticated, computerized communication system that transfers funds almost instantly from one depository institution to another anywhere in the United States. Fedwire, which is operated by the Reserve Banks, includes the Fedwire Funds Service and Fedwire Securities Service. The Funds Service allows depository institutions and certain other financial institutions to make large payments to each other in real time. The Fedwire Securities Service is a transaction settlement system that enables depository institutions and certain other government and financial institutions to hold, maintain, and transfer securities. These include securities issued by the U.S. Treasury, other federal agencies, government-sponsored enterprises, and certain international organizations, such as the World Bank.

Government Payments

Federal Reserve Banks process a wide range of electronic payments for the government, including Social Security and payroll checks.

The Fed also acts as the U.S. government’s banker. Reserve Banks maintain the Treasury Department’s checking account and clear U.S. Treasury checks. They also process a wide range of electronic payments for the government, including Social Security and payroll checks. Reserve Banks also support the issuance, transfer, and redemption of U.S. Treasury securities, manage Treasury securities auctions, and process U.S. savings bonds. Reserve Banks handle a variety of other operations for government units, including processing food coupons and postal money orders.

Sources:

Federal Reserve Board of Governors: Automated Clearinghouse Services, January 6, 2020.

Federal Reserve Board of Governors: Check Services, June 16, 2016.

Federal Reserve Board of Governors: Fedwire Funds Services, February 19, 2014.

Federal Reserve Board of Governors: Fedwire Securities Services, July 31, 2014.

Federal Reserve Board of Governors: Fiscal Agency Services, July 5, 2018.

The Federal Reserve System Purposes & Functions, Federal Reserve Board of Governors, Tenth Edition, October 2016.

San Francisco Fed Key Facts 2019, Federal Reserve Bank of San Francisco.

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