Federal Reserve Banks
The Federal Reserve Banks provide payment services to depository and certain other institutions, distribute the nation's currency and coin to depository institutions, and serve as fiscal agents and depositories for the U.S. government and other entities. The Reserve Banks also contribute to setting national monetary policy and supervision of banks and other financial entities operating in the United States (discussed in sections 2 through 4 of this annual report).
Federal Reserve Priced Services
Federal Reserve Banks provide a range of payment and related services to depository and certain other institutions; these "priced services" include collecting checks, operating an automated clearinghouse (ACH) service, transferring funds and securities, and providing a multilateral settlement service.
The Federal Reserve Banks, working with the financial services industry, have made substantial progress in their effort to migrate to a more efficient electronic payment system by expanding the use of ACH payments and by converting from a paper-based check-clearing process to an electronic one. Over the past several years, the Reserve Banks have capitalized on efficiencies gained from increased electronic processing; the Reserve Banks bundle all-electronic payment services and offer information and risk-management services, which help depository institutions manage effectively both their payment operations and associated operational and credit risk.
The Reserve Banks have also been engaged in a number of multiyear technology initiatives that will modernize their priced-services processing platforms. In 2013, the Banks continued efforts to migrate the FedACH, Fedwire Funds, and Fedwire Securities services off a mainframe system and to a distributed computing environment.
In December 2013, the Federal Register published a notice of proposed changes to the Federal Reserve Policy on Payment System Risk (PSR) and conforming amendments to Regulation J (Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers through Fedwire).1 The proposed changes relate to the Board's procedures for posting debit and credit entries to institutions' Federal Reserve accounts for ACH debit and commercial check transactions.
Under the current posting rules for commercial and government ACH transactions established in 1994, ACH debit transactions post at 11:00 a.m. eastern time (ET), and ACH credit transactions post at 8:30 a.m. ET.2 The Board elected to delay the posting of ACH debit transactions to allow receiving institutions time to obtain funds after the opening of the Reserve Banks' Fedwire Funds Service, which at that time opened at 8:30 a.m. Since then, the Fedwire Funds Service opening has been moved earlier, and the service now opens at 9:00 p.m. the previous evening. Therefore, the Board deemed that continuing the practice of delaying the settlement of ACH debit transactions until 11:00 a.m. was no longer necessary and may retard efforts by institutions to expedite funds settlements.3
In addition, the Board's current posting rules for commercial check transactions reflect a presumption that banks generally handle checks in paper form and do not reflect banks' widespread use of electronic check-processing methods. As a consequence, the Board's posting rules align with the processing of less than one-tenth of 1 percent of checks that the Reserve Banks handle.4 The Board believes that settlement practices should reflect the speed of clearing as well as the timing of deposits and presentments, and that its posting rules should be updated to align with today's electronic check-processing environment. In order to reflect today's electronic check-processing environment, the Board proposed to post commercial check transactions--both credits and debits--at 8:30 a.m., 1:00 p.m., and 5:30 p.m., with the specific posting time depending on when the check was deposited with the Reserve Banks (for credits) or presented by the Reserve Banks (for debits).
Call to Improve the Speed and Efficiency of the Payment System
The Federal Reserve Banks released a public consultation paper in 2013 that requested comments on gaps and opportunities in the payment system and potential desired outcomes, strategies, and tactics to shape the future of U.S. payments from end to end.1 The paper also sought input on the Federal Reserve's role in implementing the strategies and tactics.
Themes explored in the consultation paper included the need for a near-real-time payment system, the need for contemporary features and process improvements in legacy payment systems, the cost and convenience of international payments, and the mitigation of threats to payment system security. Responses were due in December 2013, and the Reserve Banks received feedback from a range of interested parties, including individual financial institutions, businesses, payment networks and processors, software vendors, payment innovators, consultants, and consumers, as well as from trade groups.2 The Reserve Banks are analyzing the responses and seeking clarifications as needed.
In concert with this analysis of responses, the Reserve Banks have engaged in a number of additional information-gathering efforts that are designed to inform the Reserve Banks' future plans. These efforts include
- researching end-user demand for specific payment attributes, including payment speed,
- conducting an assessment of alternatives for speeding U.S. retail payments, and
- identifying gaps and opportunities related to payment system security.3
The consultation paper responses and these additional information-gathering efforts will serve as important inputs to the Reserve Banks' collective thinking in regard to future improvement initiatives, which will be communicated in a paper expected to be published in 2014.
1. See Payment System Improvement--Public Consultation Paper, Federal Reserve Financial Services (http://fedpaymentsimprovement.org/wp-content/uploads/2013/09/Payment_System_Improvement-Public_Consultation_Paper.pdf 
). For an overview of the initiative, see In Pursuit of a Better Payment System (http://fedpaymentsimprovement.org/
). Return to text
2. See Consultation Paper Response Summary, Federal Reserve Financial Services (http://fedpaymentsimprovement.org/wp-content/uploads/industry_feedback_summary.pdf
). Return to text
3. See End-User Payment Research Summary, Federal Reserve Financial Services (http://fedpaymentsimprovement.org/wp-content/uploads/enduser_demand_summary.pdf
). Return to text
Recovery of Direct and Indirect Costs
The Monetary Control Act of 1980 requires that the Federal Reserve establish fees for priced services so as to recover, over the long run, all direct and indirect costs actually incurred as well as the imputed costs that would have been incurred--including financing costs, taxes, and certain other expenses--and the return on equity (profit) that would have been earned if a private business firm had provided the services.5 The imputed costs and imputed profit are collectively referred to as the private-sector adjustment factor (PSAF). Over the past 10 years, Reserve Banks have recovered 102.0 percent of their priced services costs, including the PSAF (see table 1).6
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