The Fed provides payment services to promote an accessible, safe, and efficient U.S. payment system. 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.
It’s the U.S. Bureau of Engraving and Printing—in Washington, D.C. and Fort Worth, Texas—that prints currency (Federal Reserve notes) and the U.S. Mint—in Philadelphia, Pennsylvania and Denver, Colorado—that produces coins. New currency and coins are shipped to Reserve Banks and their branches across the country. Depository institutions order currency and coins from Reserve Banks and pay for them by drawing down their Fed reserve account balances.
When people need additional cash for spending, 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. During the COVID-19 pandemic, the Fed shipped more cash to depository institutions in response to people’s increased demand for currency. This highlights the relief that cash offers in times of uncertainty and to its role as a contingency payment method (as noted in this report from the Fed’s Cash Product Office, focused on the pandemic).
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.
As outlined in the graphic below, the total value of U.S. currency in circulation has been steadily increasing over the last 20 years. As of year-end 2019, the world held nearly $1.8 trillion. Most of the value is in $100s, the largest denomination, and $20s, dispensed by most ATMs. The Fed routinely surveys U.S. consumers about their payment preferences and prepares reports highlighting these trends (the 2020 report is available here).
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.
Automated Clearinghouse (ACH)
The Reserve Banks are the largest ACH operator in the country.
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 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.
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 the Fedwire Securities Service. The Fedwire 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.
The graphic below demonstrates the size differences between the ACH and Fedwire. The ACH handles, on average, about 70 million transactions every day, at about $2,000 per transaction. In contrast, the Fedwire Funds Service processes only about 670,000 transactions per day, less than one percent of the ACH volume. But, the average value of each Fedwire payment, $4 million, is much larger than for the ACH.
In its first new payment offering in more than 40 years, the Fed is also developing a real-time payment service called the FedNow Service. FedNow will allow financial institutions of every size, and in every community in the U.S., to provide safe and efficient instant payment services to their customers. With FedNow, people will be able to send and receive payments any time, any day, and from anywhere, and have full access to those funds within seconds. The FedNow Service is expected to launch in 2023 or 2024 and operate along with similar services provided by the private sector.
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.
Automated Clearinghouse Services, Federal Reserve Board of Governors, January 6, 2020.
Check Services, Federal Reserve Board of Governors, June 16, 2016.
Consumer Payments and the COVID-19 Pandemic: A Supplement to the 2020 Findings from the Diary of Consumer Payment Choice, by Laura Kim, Raynil Kumar, and Shaun O’Brien, Federal Reserve Bank of San Francisco, July 31, 2020.
Currency and Coin Services, Federal Reserve Board of Governors, February 3, 2017.
Federal Reserve Press Release: Federal Reserve announces details of new 24x7x365 interbank settlement service with clearing functionality to support instant payments in the United States, August 6, 2020.
The Federal Reserve System Purposes & Functions, Federal Reserve Board of Governors, Tenth Edition, October 2016.
Fedwire Funds Services, Federal Reserve Board of Governors, February 19, 2014.
Fedwire Securities Services, Federal Reserve Board of Governors, July 31, 2014.
Fiscal Agency Services, Federal Reserve Board of Governors, July 5, 2018.
How Currency Denomination and the ATM Affect the Way We Pay, by Oz Shy, Federal Reserve Bank of Atlanta, Working Paper 2019-02b, February 2019 (revised March 2020).
San Francisco Fed Key Facts, Federal Reserve Bank of San Francisco.
2020 Findings from the Diary of Consumer Payment Choice, by Laura Kim, Raynil Kumar, and Shaun O’Brien, Federal Reserve Bank of San Francisco, July 31, 2020.
What is the FedNow Service?, Federal Reserve Bank Services.