The Federal Reserve Bank of Cleveland’s many duties as a central bank include providing payment services, supervising banks, and setting monetary policy. Over the past century, our Bank has continued to adapt, evolve, and learn, resulting in changes in how we do our work. While these changes are evident across all areas of our organization, they are most striking in the area of payments.
From paper to electronic, from manual to automated—in many ways, the evolution of payments processing represents the evolution of all of our operating and support roles. In what seems to be a blink of the eye, paper-based services.like check processing became electronic. But what now seems so natural—we check our bank account balances online, we use our debit card instead of a checkbook—was decades in the making. Until fairly recently, check processing, clearing, and settlement were predominantly manual tasks performed by throngs of workers. At its peak, hundreds of workers at the Federal Reserve Bank of Cleveland processed literally 10 million checks per night.
But the work of processing checks is costly and labor intensive. For that reason, the Federal Reserve sought ways to improve the efficiency of its check operations—to modernize its factory, so to speak. In 2003, the Federal Reserve completed its four-year Check Modernization initiative, which overhauled the systems and infrastructure for processing checks. A leader in reducing the Federal Reserve’s check footprint, the Federal Reserve Bank of Cleveland, working in partnership with the Federal Reserve Bank of Atlanta, led the development and implementation of this ambitious project. It standardized check processing at all Reserve Bank offices, adopted a common software for processing and researching check-adjustment cases, created a national check-image archive and retrieval system, and delivered check services to customers on a web-based platform.
The challenge of handling stacks of paper checks remained, however, until we adopted image technology, which helped transform payments from a paper-based, hand-delivered process into an electronic process. This helped establish the basis of what eventually became the Check Clearing for the 21st Century Act. Check 21, as the Act is commonly known, was designed to help banks handle more checks electronically by allowing a check’s image, rather than the physical check itself, to be moved between banks. The Cleveland Fed, working on behalf of the System’s Retail Payments Office, once again took a leadership role by preparing for the requirements of Check 21, designing a new suite of products and services, and overseeing the project’s implementation.
With the passage of Check 21, it became obvious that the Federal Reserve’s infrastructure for processing checks was too big. As a consequence, the Federal Reserve has consolidated its check services, eliminated our extensive air- and ground-transportation network for paper check delivery, and built an infrastructure that moves billions of check images from collecting to paying banks. Check 21 reduced clearing time for consumers, businesses, and banks. It reduced costs for the banking industry. And it improved safety and security. The Federal Reserve Bank of Cleveland became the System’s sole paper check processing site until the end of 2012, when the Federal Reserve Bank of Atlanta began processing the few remaining paper items.
Check processing is only one of the Federal Reserve services that the Cleveland Fed has had a hand in moving from paper to electronic—our support for the US Treasury is also evolving. The Federal Reserve is the Treasury’s fiscal agent, or, in other words, we work on behalf of the Treasury to make payments, collect funds owed to the government, and manage relationships with the government’s creditors.
Historically, the Federal Reserve Bank of Cleveland has supported the Treasury primarily by issuing, redeeming, and servicing savings bonds and marketable securities. As with paper checks, hundreds of employees, in our Pittsburgh Branch in this instance, worked several shifts to process paper bonds. Over time, however, we have evolved into much more than bond processors.
As we moved into the twenty-first century, the Cleveland Fed saw an opportunity to fill a gap. In 2001, the Cleveland Fed took a lead role in developing two new electronic payments initiatives for the Treasury—Pay.gov and Paper Check Conversion. Pay.gov used then-state-of-the art payments technology to authorize and settle government payments over the internet. Paper Check Conversion allowed the Treasury to move checks into the more efficient automated clearinghouse.
This was just the start. The Federal Reserve Bank of Cleveland’s eGovernment Department (eGov) is now solely responsible for two key areas of the Treasury’s revenue collection management. The visible side of collections is still Pay.gov, the Treasury’s online platform for nontax payments to federal agencies, and a key component of the Treasury’s all-electronic initiative. The other side is the Debit Gateway, the Treasury’s system for settling all check and electronic payments to those agencies.
eGov continues to adapt to significant volume increases, expand its expertise, and deliver advanced software. What started out as a payments collection concept has now grown to processing over 250 million transactions valued at over $550 billion annually. With a focus on scalability and quality improvements, eGovernment’s operating platform is being designed to accommodate future growth and new or emerging payment technologies.
The Federal Reserve Bank of Cleveland has supported the evolution of financial services in many ways throughout our existence. Our President and CEO, Sandra Pianalto, in her role as chair of the Financial Services Policy Committee (FSPC), continues this tradition. The FSPC is responsible for the overall direction of financial services and related support functions for the Federal Reserve Banks, as well as for providing Federal Reserve leadership in dealing with the evolving US payments system. In October 2012, the FSPC unveiled its financial services strategic direction, a bold change in direction focused on improving the speed, safety, and efficiency of the payments system.
Historically, the Federal Reserve’s focus when it came to financial services has been on the interbank market, but its strategy today is to place greater emphasis on the entire payments supply chain and end users. To put it simply, our strategy is to focus on payments from end-to-end in order to continue to support transformative payment innovations.
For almost a century, we have adapted to changes in our environment and have learned to take the initiative in responding to them and planning for the future. So while our role in processing traditional payments has declined, our role in helping shape the future of payments continues. We remain actively engaged in adjusting our planning, product development, and resources to capitalize on innovation in the marketplace. And as a greater percentage of our workforce moves from manual operations-focused work into more knowledge-based roles supporting departments like eGov, Research, and Supervision and Regulation, we, as always, continue to adapt, evolve, and learn.