Supporting the Nation's Payment System

The Federal Reserve plays a major role in the smooth functioning of the payments system, whose efficiency is critical to our nation's economic growth and financial stability. The markets for goods and services need a reliable mechanism for settling payments, whether for something as simple as a quart of milk from a convenience store or as complicated as a multi-million-dollar trade in the stock market.

Increasingly, traditional payment mechanisms like cash and checks are operating side by side with new, electronic forms, such as debit cards and "smart" cards. The Fed carries out its role in payments by increasing the efficiency of traditional mechanisms while supporting development of the new.

Cash Services

An important job of the Federal Reserve is to function as the "banks' bank," ensuring that institutions have enough currency and coin on hand to meet current demand, which varies with the level of economic activity and with the seasons of the year. As a result, the Federal Reserve Bank of Philadelphia is authorized to issue cash to financial institutions within its District.

The additional currency and coin put into circulation to meet seasonal demand is eventually returned to the institutions by merchants and other business owners. So to reduce the excess currency and coin held in their vaults, depository institutions typically return cash to the Reserve Bank, where it is credited to their accounts. The process is reversed when the institutions need to replenish or increase their supply of currency and coin.

Check Processing

Check payments as a percentage of total noncash payments made in the United States have steadily declined over the last three decades: from 85 percent in 1979, to 58 percent in 2000, and to 33 percent in 2007. Estimates show that about 33 billion paper checks were written in 2007, down from a peak of more than 60 billion in 2000. As the number of paper checks processed declines because of consumer preferences for the convenience offered by ACH transactions, debit cards, and credit cards, and as more banks and processors embrace the cost efficiency of check image processing (Check 21), the number of Federal Reserve check processing sites has decreased from 45 in 2000 to 11 processing sites planned by year-end 2008. In 2009, further reductions will be made, and the Federal Reserve will have four regional full service processing sites. The Federal Reserve Bank of Philadelphia has been designated as one of these four regional sites.

The Federal Reserve Bank of Philadelphia continues to be ranked among the premier payments processing sites within the Federal Reserve System. In 2007, Philadelphia processed over 665 million paper checks and over 799 million check image items (Check 21).

Electronic Payments

Automated Clearinghouse

ACH, developed jointly by the private sector and the Federal Reserve in 1972, is an electronic system for processing payments. A nationwide mechanism, ACH provides an efficient alternative to checks.

Businesses use ACH to make direct-deposit payroll payments, to move funds from one corporate account to another, and to make payments to other businesses. The U.S. government uses ACH for direct deposit of Social Security payments, Veterans Administration benefits, and payments related to U.S. Treasury securities. Consumers use ACH to make payments on insurance premiums, mortgages, loans, and other bills.

Fedwire

ACH is only one Fed service that involves the electronic transfer of funds. The other is Fedwire, which is used to transfer both funds and securities.

Fedwire transactions typically involve large sums. In 2000, the average funds transfer was approximately $3.3 million, and the average securities transaction was approximately $2.9 million.

Most of the transactions over Fedwire are transfers of funds, made on behalf of bank customers. Examples would be corporations paying each other for products or services rendered, corporations paying taxes to state and federal governments, state governments paying lottery proceeds to vendors selling tickets, and mutual funds wiring interest payments to their customers' bank accounts.