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HERNDON, Va. – The Federal Reserve released its 90th Annual Report to Congress and the findings concerning the nationwide payments systems were not surprising: the number of checks processed by the Federal Reserve declined for the fourth consecutive year in 2003. The Fed reported that it processed 15.81 billion in checks last year – that’s a 4.7% decline from 2002 and the steepest decrease in the past four years, more than doubling the 2002 rate of decline of 1.9%. In addition, the unit cost to the Fed to process a check in 2003 increased by 13.3% – from 4.5 cents in 2002 to 5.1 cents in 2003. In comparison, the Fed’s unit cost to process an ACH payment decreased by 15.4% – from 1.3 cents in 2002 to 1.1 cents in 2003. In contrast to check volume, the Fed’s commercial ACH volume increased by 12.5% in 2003 to 5.59 billion payments. That includes direct deposit of payroll, direct payment of consumer bills, business-to-business payments, and e-check payments such as online bill payments and accounts receivable check conversion. In 1995, the Fed’s unit costs for checks and ACH payments were almost identical, but now the unit cost for a check is almost five times that of an ACH payment. As a result in the decline in the number of checks processed by the agency, the Fed’s net income for 2003 was minus $65.3 million – the Fed’s operating expenses and imputed costs for the Reserve Banks’ commercial check collection service was $803.2 million, but revenue was $742.2 million and other income was -$4.3 million. In 2002, operating expenses and imputed costs totaled $751.2 million, revenue was $759.2 million and other income was $1.7 million, resulting in a net income of $9.7 million. The agency attributes the decline in check service revenue in 2003 to the “declining volume and customers’ moving to lower-margin products.” In response to the continuing decline in check volumes, the Reserve Banks took steps in 2003 to reduce check service operating costs by implementing a business and operational strategy the Fed says “will position the service to achieve its financial and payment system objectives over the long term.” The strategy, the Fed wrote, “will reduce operating costs through a combination of measures: streamline management structures; reducing staff, decreasing the number of check-processing locations, and increasing processing capacity at some locations.” According to the report, while the Reserve Banks will continue to provide check services nationwide, by the end of 2004 the number of sites where checks are processed will be reduced from 45 to 32. Of the 13 offices that will discontinue processing checks, the five regional sites dedicated exclusively to processing checks will close. In addition, the number of locations where check adjustments are made will be reduced from 43 to 12. William Nelson, EVP of NACHA – The Electronic Payments Association, said the decline in the number of checks being processed by the Fed “is representative of the changes taking place in the U.S. payments system. Consumers and companies are turning from checks to electronic payments.” -

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