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1998 FEDERAL RESERVE BANK OF PHILADELPHIA ANNUAL REPORT 1 The Switch To Electronic Payments 2 The Switch to Electronic Payments Executive Letters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 The Switch to Electronic Payments Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Automated Clearinghouse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 FedLine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Financial Electronic Data Interchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Electronic Check Presentment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Advisory Councils . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . insert 3 A s I write this, the current economic expansion enters its ninth year. It is already the longest peacetime expansion in our history, and I believe it still has a long run ahead. Each phase of this expansion has brought its own challenges. In 1998, it was responding to international economic weakness, and investors’ growing concern about exposure to risk. The Fed moved decisively to reduce short-term interest rates, restoring confidence to financial markets and helping sustain a healthy pace of economic activity in the U.S. The year ended with the economy turning in a solid performance and good prospects for continued growth. If there is one thing our recent experience has demonstrated, it is how small the world has become. Instantaneous global communication is a reality. Financial market activity flows continuously around the world in what amounts to a 24-hour business day. And the digital technology that 4 makes all of this possible will continue to transform commerce and the worldwide economy in the years ahead. While electronic capabilities are still expanding, and the possibilities are exciting, we are faced with the prospect of adapting to rapid and ongoing change. We at the Fed are very much aware of this in our role as a provider of payments services. While we see more and more money moving electronically, we also know that people still pay for most things in cash or by check. This presents us with a significant challenge: helping the payments system achieve the efficiency and convenience offered by electronics without compromising the confidence and comfort people have with more traditional means of payment. Early in 1998, the Fed reaffirmed its commitment to work with payments providers, large and small, old and new, to move decisively toward electronic payments. As you will see in this report, the Federal Reserve Bank of Philadelphia and the depository institutions in the Third District are actively engaged in bringing about this transition. President Executive Letters A n important part of the Federal Reserve’s mission is to ensure that the nation’s payments system evolves to meet the needs of a dynamic economy. One of the reasons Congress created the Fed back in 1913 was to help establish a coherent national system for clearing checks. Today, our priority is fostering an orderly transition from such paper-based systems to electronic payments. Actually, the movement to electronic payments has been underway for some time. Some electronic services, such as direct deposit of payrolls, 5 have caught on and are quite common. Now it seems that electronic payments are poised for rapid expansion in many more areas. The basic infrastructure is in place and new capabilities are being developed. What we must do now is familiarize people with electronic payments, build people’s confidence in them, and increase their awareness of the possibilities they offer. It is not up to the Fed to choose the particular constellation of payments services that emerges. That will be decided in the marketplace by banks and other service providers, in consultation with consumers and businesses. Our job is to create a positive environment for that process. That is why we at the Federal Reserve Bank of Philadelphia are committed to quality, innovation, and responsiveness in the services we provide for our depository institution customers. We want to help them position themselves to offer the finest and most progressive payments to their customers in the Third District and across the country. First Vice President 6 Since the installation of a new Accounts PPayable ayable system in 1997, the Philadelphia FFed ed has encour encour-aged vendors to convert from check payment to direct deposit. FFifty ifty -two percent switched in the ifty-two program ’s first year Depart-program’s year.. In the Accounting Depart ment, Lisa A. Irwin (right), expense coordinator coordinator,, and Angeliná TT.. Cunningham, Accounts PPayable ayable clerk, compare the work involved. W ith direct With deposit there are no checks to print out or tear off off,, just a letter notifying the vendor of a pay pay-ment. Halving the number of vendors paid by check has reduced the time Cunningham spends preparing outgoing mail from two hours to 30 minutes every other day day.. In addition to vendor invoices, the FFed ed also pays employee payroll taxes by electronic funds transfer transfer.. Introduction T he payments system is changing. There are new ways to exchange money, and they don’t involve the familiar crinkle of cash or checks. The payments system is becoming electronic. A manufacturer with facilities across the state taps a keyboard and her payroll is done. On payday, the funds are waiting in employees’ accounts as soon as banks open... A homeowner looks at the calendar and knows his mortgage payment is on its way, automatically... A traveler about to board a plane calls her bank to pay a last-minute bill... A college student, late for class, leaves his dorm room without money, but easily purchases coffee with his student identification card. 7 These increasingly familiar examples demonstrate Improving technology is only one part of the story. just how plugged in payments have become. Direct E-payments might have remained invisible to the general deposit has made paychecks a thing of the past for many public except for one thing: Uncle Sam decided to bank of us. A growing number of us pay bills without writing electronically. In 1996, Congress enacted legislation checks or licking stamps. More of us make purchases requiring most federal payments to be made electronically, with the swipe of a card. including things such as Social Security, federal pensions, Will paper money disappear completely? Probably not. But electronic transactions are gaining, and veterans benefits. For the federal government, cost is a primary mostly because of the speed and convenience they offer. incentive. Each e-payment saves 41 cents compared The Federal Reserve — particularly the Federal Reserve with issuing a check. Because of the volume of pay- Bank of Philadelphia — is doing several things to smooth ments made by the federal government, use of the transition from paper to electronic payments. e-payments is expected to save $500 million over five Electronic transfers actually have been around for quite a while. The Federal Reserve has been moving large-dollar transactions for banks and the government years, and that benefits not only the government but everyone who pays taxes. Electronic payments offer other, more immediate over its Fedwire network since the 1920s. What is new is advantages to the rest of us. They reduce fraud, since the viability of electronic transfers on a broad scale, for they are less vulnerable to theft, forgery, and counterfeit- everyday transactions. New computing and telecommu- ing. Besides being safer, transferring funds electronically is nications technologies are making moving information also more convenient. E-payments are not subject to — and money — easier and cheaper all the time. delays associated with mailing and collection time. Recipients can direct e-payments to one or more accounts laid out the Fed strategy for smoothing the switch to an as they avoid bank lines, and they can access their electronic economy. deposits earlier, all of which enables them to manage their money more efficiently. Foremost among the committee’s recommendations was that the Fed continue to improve the efficiency, Even with these clear advantages, there are several challenges to winning wide acceptance for effectiveness, and convenience of both its check clearing and automated clearinghouse services, and ensure access electronic payments. Initially, people need to be made aware of what they are. They need to be informed of the benefits. And they must become used to handling finances electronically. Perhaps the most significant challenge, however, is the inclusion in the electronic economy to these services for all EFT99: UNCLE SAM GOES ELECTRONIC What: In 1996 Congress formally endorsed the federal government’s usage of electronic payments with the passage of the Debt Collection Improvement Act, commonly known as EFT99 (for electronic fund transfers by 1999). The law requires that whenever possible, federal departments and agencies make payments electronically. Why: Electronic payments are safer, more convenient, and less expensive than checks. E-payments also greatly reduce the opportunity for theft, forgery, and counterfeiting — problems that cost the government $65 million in an average year. of some 10 million 8 Americans who do not have bank accounts. All of these issues must be addressed if electronic money is to achieve the same accessibility and integrity as existing forms of currency. This is where the depository institutions. Equally important, the committee emphasized that the Fed should work actively with payments providers and users to move the payments system forward, from creating greater public awareness, to providing education and training for bankers, to Who: Almost everyone who receives a payment from the federal government is affected. EFT99 has meant a quick introduction to direct deposit for millions of Social Security recipients, federal retirees, veterans, and vendors who do business with the federal government. How: Though the federal government has scaled back its original goal for EFT99 — that 100 percent of payments be made electronically by 1999 — much progress has been made. By the end of 1998, 75 percent of the one billion payments made by the federal government annually were being made electronically. encouraging creative partnerships between banks and businesses. Essentially, the Rivlin Committee directed the Fed to help move the payments system toward electronics through a two-pronged approach: Federal Reserve becomes by continuing to adopt involved in the transition new technologies to electronic payments. Part of our mission is to ensure that internally and by working with those who provide and use the nation’s payment system is efficient, reliable, secure, and payments services. accessible. The Fed itself processes 25 percent of all checks written in the U.S. and 80 percent of all e-payments. In 1997, a committee headed by Fed Vice- At the Federal Reserve, the transition to electronic payments involves four services: Automated Clearinghouse; FedLine; Financial Electronic Data Interchange; Chairman Alice Rivlin thoroughly reassessed our role as a and Electronic Check Presentment. At the Federal Reserve payment processor. After consulting a broad array of Bank of Philadelphia, we are working with Third District financial institutions, businesses, consumer groups, trade depository institutions and others to expand the use of associations, and payments experts, the Rivlin Committee these services. Automated Clearinghouse L ike checks, electronic payments must be settled. Automated Clearinghouse (ACH) is the mechanism through which elec- tronic payments are debited and credited. ACH, established in 1972 through the joint effort of the Fed and the private sector, specializes in low-dollar transactions, the kind for which many people still write checks. And, though people still write 65 billion checks a year, electronic payments are growing — currently they number about five billion a year. At present, most ACH salary or retirement benefits is their first contact with electronic payments. Employers find direct deposit to be a less payments involve businesses: the real potential for expensive, more secure way of handling payroll, particu- growth lies with consumers. If individuals’ mortgage, larly for employees who are geographically dispersed. In utility, insurance, and other recurring payments were 1997, 725,000 employers gave workers the option of made electronically, ACH usage would skyrocket. having their pay deposited directly. The National Automated Clearinghouse Association indicates that Direct Deposit Is Best Known Most ACH transactions can be categorized as about half of payroll payments in the United States are made electronically. Thanks to the impetus of federal direct deposits or direct payments. Direct deposit, by far legislation, 95 percent of federal government workers were the better known, refers to the automatic deposit of funds paid by direct deposit by mid-1997. into bank accounts. For most people, the direct deposit of Tom LLombardo ombardo and Steve Hart, managers in the Philadelphia FFed’s ed’s Retail PPayments ayments and Business Development departments, criss criss-crossed the Third District during 1998 to discuss automated clear clear-inghouse services with bankers. Last fall, Hart (left) and LLombardo ombardo (second from left) were invited to talk about A CH operations and ACH marketing at Delaware National Bank in Georgetown, DE DE,, where management was preparing to institute direct deposit and other ACH services. 9 FYI • Half of all payroll payments are now made by direct deposit. (NACHA) Direct Payment Has Most Potential • Six out of 10 households receive at least one payment through direct deposit. Three out of 10 households make at least one direct payment a month. (Federal Reserve Bank of St. Louis) account holder or by a creditor the account holder authorizes. For example, a • Ninety-nine percent of consumers say they understand direct deposit well. (Federal Reserve Bank of St. Louis survey) Direct payment is the flip side of direct deposit. Here, bank customers pay bills through electronic account withdrawals. These can be initiated by the homeowner can authorize his mortgage company to initiate direct payments on a designated day each month. The homeowner receives a statement, but does not have to take any action to pay the bill. When direct payments are initiated by customers, however, the customer receives a statement of the amount due and then has to release the funds by telephone or computer. Growth of direct payment has been slow compared with direct deposit, in part because of consumers’ reluctance to allow creditors to dip into • The ACH Customer Service Unit, (215) 574-3798, can trace items, remake files, research balance problems, and provide technical assistance. It operates from Sunday, 5:30 p.m. through Friday, 11 p.m. their accounts. That reluctance has led companies to refine direct payment, • Processing a loan payment made by check or coupon costs a bank 35 cents, while a loan payment 10 made by ACH direct payment costs 3 cents. (NACHA) fund transfers for other purposes, such as saving and investment. For busi- enabling customers to question bills before payment takes place, to delay or stop direct payments, and to make partial payments if they wish. Direct payment offers many advantages. Consumers are assured of paying right on time without checks or stamps. They can also use automatic nesses, receiving direct payments improves cash flow, reduces delinquencies, and represents a convenience that can attract and retain customers. Businesses that pay their own bills through direct payment take advantage of the One-on-one visits permitted more personalized discussion. Delaware National already had a FedLine connection and was receiving ACH items from the Fed, but wanted to originate ACH payments to enhance corporate services. There, Steve Hart and Tom Lombardo talked about testing, selecting a client for a pilot program, risk issues, and legal questions. same convenience and cost savings individuals enjoy. The Federal Reserve Bank of Philadelphia now pays most of its suppliers electronically. In 1997, consumers paid 283 million bills electronically, an increase of 150 percent from 1996. In all, about a billion direct payments are made each year, and the National Automated Clearinghouse Association estimates that the potential could be as many as 20 billion. Jim Thorpe School District employ employ-ees may live 30 miles from their schools, making direct deposit a real convenience in bad weather and during the summer months. From right, PPeter eter R oberts, execuRoberts, tive vice president and chief executive officer officer,, Jim Thorpe National Bank; Sally Smith, debit process process-ing manager manager,, Jim Thorpe National; William McElmoyle, business manager ager,, Jim Thorpe School District; Tom LLombardo; ombardo; and Steve Hart. Fed Encourages Adoption of ACH Recognizing the efficiency of electronic payments and their market potential, the Federal Reserve actively supports the adoption of electronic payments by financial institutions and their corporate and individual customers. To 11 facilitate the adoption of ACH in the Third District, the Philadelphia Fed provides information, technical assistance, and training. Beginning in 1997, the bank presented a series of interactive workshops on ACH throughout the Third District. More than 300 bankers attended the workshops, conducted by Retail Payments Manager Thomas Lombardo and Business Development talked one-on-one with people ranging from chief Manager Stephen G. Hart, who outlined the require- executive officers to the staff who would implement ACH, ments for an ACH operation and offered suggestions for answering their questions and addressing their concerns. marketing it to customers. Hart and Lombardo’s Combined with the federal government’s presentations employed a flexible, informal approach in initiative, the Philadelphia Fed’s activities to build interest which content was driven by participants’ concerns, so have boosted the growth of ACH in the Third District. In that the bankers got exactly the information they wanted. 1998, ACH originations here increased 20 percent, The workshops continued into 1998 and compared with a 16 percent rise in 1997, making ACH generated enough interest to warrant a series of follow- the fastest growing method of payment in the District, as up visits to individual institutions. Lombardo and Hart it is across the nation. FedLine F edLine is the connection for Automated Clearinghouse (ACH) and all other electronic transactions between the Fed- eral Reserve and depository institutions. Since the mid-1980s, FedLine’s personal computer-based software has linked banks directly to Fed computers, and services have expanded rapidly. Doing Fed Business Electronically Initially, FedLine was a conduit for the electronic transfer of funds and securities among Federal Reserve Districts, the U.S. Treasury, and financial institutions. This 12 Fed to check processing errors, and request adjustments. Many businesses submit federal withholding tax payments by FedLine as well. FedLine is an optional service; institutions gain continues to be one of its primary functions. ACH access by paying a monthly connection cost of $75, an transactions also travel over FedLine, as do U.S. Savings amount that is quickly made up in savings on transaction Bond orders. FedLine is also a channel of communica- fees. Besides being an economical alternative, FedLine tion between the Fed and its customers: banks order is flexible and secure. Institutions select just the services currency, send notification of incoming deposits, alert the they need, and all transmissions are protected by Tawana Smith and Albert A. Primus assist callers to the FedLine Help Desk. The desk averages 30 to 40 calls daily, a figure that can double during peak periods. The Help Desk operates Monday through Friday, 8 a.m. to 5:30 p.m., and can be reached at (215) 574-6262. encrypted language and a password system. Currently, more than 300 financial institutions in the Third District maintain a total of 425 FedLine connections. Of those, 44 institutions also have a computer interface connection to the Philadelphia Fed, a higher-speed link to The FedLine and Electronic Access Support management team includes (from left): Supervisor Berthienna E. Ogden; Manager Dawn Karlyn; Coordinator Sal Giafaglione; Vice President Jay Bowman; and Supervisor Jennifer I. Wellington. handle larger transaction volumes. FedLine, who help experienced customers solve problems and expand their skills, and who respond to technical Efficient, Economical, and Secure FedLine is a source of valuable statements and challenges and emerging issues, such as preparations for the year 2000. reports for banks, which they can use to verify transactions, reconcile accounts, update records, and more efficiently manage Fed business. For example, when institutions transmit currency orders and deposit notices over FedLine, they receive printed acknowledgements within seconds of transmission, providing instant confirmation. Other reports are available overnight, avoiding the delays to which physical deliveries are subject. These include the Reserve Account Statement, a daily record of an institution’s Fed accounts, and the Monthly Billing Statement, used to track service fees. The Account Balance Monitoring Service, an on-line inquiry function, helps banks avoid overdrafts on Fed accounts. Support Services Make FedLine User-Friendly Accessibility has been key to FedLine’s success, and that is the responsibility of FedLine Support, a 12member staff led by Dawn Karlyn. These are the people who help new users get connected and learn how to use FedLine user training is provided in many formats and locations. New users and those who want to learn more about FedLine applications can attend full- and half-day sessions conducted by trainers like Margarette C. Taylor (left). Periodic conferences help FedLine customers stay current on pertinent issues. 13 Financial Electronic Data Interchange E ncryption keeps electronic transactions secure — so secure that even recipients may not be certain what payments rep- resent. Though funds transfers usually are accompanied by documentation, it is written in a standardized coded language known as financial electronic data interchange (EDI), which scrambles information so well that when payments reach their intended destination, bankers and their customers may not be able to decipher the explanatory messages. 14 Taking the Paper Out of Paperwork That’s why electronic transactions have required any accompanying documentation, including invoices, shipping data, billing records, and purchase orders. a paper trail of documentation. Last fall, however, the Banks can use financial EDI to provide additional Federal Reserve helped banks crack the code on-line. information to customers who receive or make payments Specialized software to translate financial EDI was made through Automated Clearinghouse, FedLine, or any available by the Fed, so that the people at either end of electronic medium. electronic transactions understand what’s going on as well as the computers do. With financial EDI software, files received over Financial EDI software is available at no additional charge to all banks that have an electronic connection to the Federal Reserve. Training and software any electronic connection to the Fed can be translated updates are included in institutions’ monthly electronic and copied to paper, disk, or another electronic file, access fee. enabling recipients to see not only payment amounts, but Electronic Check Presentment E lectronic Check Presentment (ECP) bridges the gap between paper and electronic transactions. With ECP, a payment initiated by paper check moves ahead electronically. The check, having served its purpose, can follow the electronic information, be sent to storage, or be disposed of altogether. The check writer receives more timely account balance information from his or her bank. The bank achieves lower processing costs, accelerates validation and correction of rejected items, and reduces exposure to fraud. When the Fed sorts incoming checks, it routinely electronically to the bank on which the check is drawn. captures the information encoded at the bottom: the Transmission of check information, which constitutes bank identification number, customer account number, legal presentment, takes place by nine in the morning and the dollar amount. With ECP, this data is forwarded after the check is received by the Fed. This allows paying Imaging saves Mary C. Martin (left), operations specialist at Sterling Bank, Mount Laurel, NJ, two to three hours a day. Martin is responsible for researching unposted items, a task made much easier when she refers to computer images of checks instead of the checks themselves. Here, she reviews a list of unposted items with Deborah P. Williams, Sterling operations manager, and Raymond J. Lieb of Legato Software, who developed the software that allows the bank’s computer system to work with information from the Fed. 15 banks to begin processing earlier than physical presentment would permit — how much earlier depends on a presentment, usually later the same day. In addition to being faster, ECP is more accurate bank’s location, but it can be as much as five hours than manual check clearance. The encoded line at the sooner for institutions located at the edges of the Third bottom of checks is read automatically, avoiding re- District. keying errors. Because data is sent electronically, there Earlier posting enables paying banks to provide are no delays due to misdirection or transportation more accurate account information to customers, so that problems. ECP also reduces paper handling for paying they can better manage their funds. Fraudulent and banks, frees up personnel and equipment, and lowers insufficient-funds items are identified earlier, providing processing costs. In 1997, about 14 percent of the extra loss protection throughout the payment system. checks processed by the Federal Reserve were presented Checks are returned to paying banks after electronic electronically. ECP CUSTOMER PROFILE STERLING BANK Description: Sterling Bank, a community bank with $100 million in assets, is located in Mount Laurel, NJ, about 15 miles from Philadelphia. Fed Service: Electronic Check Presentment with Imaging Experience: Sterling Bank has used electronic check presentment since August 1995 and added imaging in June 1998. 16 Before they used imaging, the staff at the bank had to manually search through the 2,000 cancelled checks received daily from the Philadelphia Fed for those that were not posted because of unreadable account numbers or other problems. Locating, inspecting, and resolving unposted checks took two to three hours every day. With imaging, each batch of checks returned by the Fed is accompanied by a CD-ROM containing clear, digital images of every check. Images of unposted checks can be accessed easily from the CDROM and manipulated on screen: they can be enlarged, reversed, turned on their ends to inspect endorsements. The process now takes minutes, rather than hours. When the CD-ROM and checks arrive at Sterling, custom-designed software compares the electronic presentment file (sent the previous day and used to charge customer accounts) with the CD file, to determine if any charged items are missing. As missing and unposted items are resolved, customer accounts are adjusted to reflect current balances. Benefits: • Faster resolution of unposted items • Earlier awareness of missing items • Check copies available in 5 minutes from CD-ROM, compared with 24 to 48 hours for microfilm copies • Consistently clear images Approximately 763 million checks being cleared through the Philadelphia Fed were presented electronically — 11 percent of checks handled. Imaging Shrinks Paper Handling Imaging, an enhancement of ECP, has the potential to make cancelled checks disappear. A digitized picture of each check is produced and assigned Robert JJ.. V anderslice, president and chief operating officer of PPennsville ennsville National Bank, Vanderslice, ’s electronic check presentment service with Janet Rizzo, bank’s discusses enhancements to the bank Philadelphia FFed ed senior account manager anderslice says that he expects paper checks manager.. V Vanderslice to virtually disappear during his career career,, and at his institution, at least, that expectation may -fetched: two -thirds of PPennsville’s ennsville’s consumer checking account customers no not be so far far-fetched: two-thirds longer receive cancelled checks with their statements. an identification number for easy 17 reference. Images, which are just as clear as originals, retrieval much more efficient, and speeds account adjust- can be provided to banks in their choice of formats, with ments. In addition, imaging eliminates the time and CD-ROM being the most common. The complete image expense of creating a microfilm reference file, an operation — including the front and back of the original check — that required checks to be sent out of the bank for a day can be viewed on-screen and can also be enlarged and or more. Though Sterling only uses imaging internally at rotated for a closer look at endorsements, the encoded this point, it could extend the service to customers, strip, or any other part of the check. substituting pages of check images in account statements Sterling Bank in Mount Laurel, NJ, is one of the for cancelled checks. Philadelphia Fed’s imaging customers. Each morning, the Fed sends Sterling an average of 2,000 checks drawn on Sterling accounts and a CD-ROM containing Truncation Eliminates Paper If ECP strips information from checks, and the corresponding images. Sterling has already charged imaging transforms them into digitized pictures acces- the checks to customer accounts the previous day, when sible by computer, is the paper check necessary at all? the Fed presented them electronically. The images are Perhaps not, which makes truncation the next step in the used to resolve unposted items. One by one, the items evolution from paper to electronic payments. are inspected on-screen, a process that takes two or three hours less than manual retrieval would have. For Sterling Bank, imaging reduces paper handling and processing, makes check archiving and Truncation, another ECP enhancement, has been available at the Philadelphia Fed since 1989 but has not been widely used, at least not yet. If you were a customer of a bank that truncated checks at the Fed, you would not see your check after you put it in the mail, and percent of consumer account holders have opted not to your bank would not see it at all. When checks flow into receive cancelled checks. The documents are held at the the Fed and are truncated, the only thing that flows out is bank for the required 90 days, but all inquiries are the information recorded on them. From that point, the handled using microfilm images, which are retained by transaction is strictly electronic: settlement takes place, the bank for years. In contrast to what might be ex- and check images are made and sent to the paying pected, Pennsville customers don’t miss receiving bank, where they are stored for the next seven years. cancelled checks — they appreciate not having to store The paper documents are held at the Fed for 90 days stacks of paper. and then destroyed. Some institutions, however, use truncation ECP Shapes the Payments Future internally, offering customers the option of receiving Without a doubt, Electronic Check Presentment account statements without checks. At Pennsville makes check processing more efficient by short-circuiting National Bank in Pennsville, NJ, for example, 65 to 70 the role of paper. Combined with imaging and truncation, ECP can ease the transition to payments that are completely electronic. However, because ECP improves the check ECP CUSTOMER PROFILE system without eliminating paper, it could also forestall the conversion to completely 18 electronic funds transfers. The Fed is PENNSVILLE NA TIONAL BANK NATIONAL monitoring how ECP is used and may adapt Description: its product offerings if necessary, to ensure Pennsville National Bank, a community bank with $126.5 million in deposits, is located in Pennsville, NJ, approximately 60 miles from Philadelphia. that this technology serves as a bridge, not as a barrier, to the evolution of the payments Fed Service: Electronic Check Presentment Experience: Pennsville Bank was one of the first institutions in the Third District to use electronic check presentment (ECP), beginning in June 1995. ECP enables the bank to receive check clearance information by 9 a.m. — three to five hours earlier than with physical presentment. As a result, account updates and other necessary work are easily completed within a regular business day, preventing the need for a night shift. Benefits: • Transmission received at start of business, rather than in mid-afternoon • Current balances available sooner for customers • No need for a second shift to process information • No delays due to delivery problems, such as bad weather or heavy traffic system. FYI • The Philadelphia Fed has offered ECP since 1996 and currently has 17 customers. • Imaging has been available from the Philadelphia Fed since 1997. At present, two Third District banks use this service. Conclusion N ew technologies are making global communication and commerce continuous and instantaneous. This process will undoubtedly affect the payments system. For banks, businesses, and individuals alike, electronic payments provide greater speed, convenience, and reliability in transferring funds. They also bring more efficient money management, easier and more timely bill payment, and less time spent on the repetitive tasks of cashing checks, preparing bills, and updating records. No matter how useful technological change is, it must wait for people to catch up. For this reason, the circumstances keep them out of the financial mainstream. switch to electronic payments will be evolutionary, rather 19 Clearly, payments system providers will operate than revolutionary. Eventually, we will all become both paper and electronic systems for the foreseeable comfortable with the workings of direct deposit and future. payment. And the shift will accelerate as young people The Federal Reserve intends to facilitate the who have grown up with computers, ATMs, and the switch to electronic payments through education, Internet move into the economic mainstream. The technical assistance, and consultation with other pay- process is inevitable, but the pace will be gradual. ments system providers, financial institutions, and the Other challenges lie ahead. Privacy concerns public. At the same time, the Fed is committed to and questions about the security of electronic transac- improving the effectiveness of existing forms of payment tions have yet to be fully addressed. Access to electronic and to ensuring the integrity and accessibility of all transactions must somehow be extended to those whose methods of payment, old and new. Board of Directors Chairman Joan Carter (left), President & Chief Operating Officer, UM Holdings Ltd., Haddonfield, N.J., and Deputy Chairman Charisse R. Lillie, Partner, Ballard Spahr Andrews & Ingersoll, Philadelphia, Pa. 20 David B. Lee (left), President & Chief Executive Officer, Omega Bank, National Association, State College, Pa., and Robert D. Burris, President & Chief Executive Officer, Burris Foods, Inc., Milford, Del. Albert B. Murry (left), President and Chief Executive Officer, Lebanon Valley Farmers Bank, Lebanon, Pa., with J. Richard Jones (center), President & Chief Executive Officer, Insignia/ESG Jackson-Cross, Philadelphia, Pa., & Howard E. Cosgrove, Chairman & Chief Executive Officer, Conectiv, Wilmington, Del. 21 Glenn A. Schaeffer (left), President, Pennsylvania Building and Construction Trades Council, Harrisburg, Pa., and Harry Elwell, III, President and Chief Executive Officer, First National Bank of Absecon, Absecon, N.J. Officers I In 1998, numerous promotions and administrative changes took place among the official staff. William A. Bonifield, Jr., was appointed Senior Vice President and Manager of the Cash/ Fiscal Product Office. In the Legal Department, Jeanette Paladino became Assistant Vice President and Counsel and Stephen J. Smith was appointed Assistant Counsel. Mary DeHaven (Dede) Myers joined the Bank as Vice President and Community Affairs Officer in the Community and Consumer Affairs Department. In the Supervision, Regulation, and Credit Department, John J. 22 Deibel was promoted to Vice President, Elisabeth C. VideiraDzeng was appointed International Examinations Officer, and William L. Gaunt joined the Bank as Assistant Vice President. Edward G. Boehne President W illiam H H.. Stone, Jr Jr.. First Vice President Donald FF.. Doros Executive Vice President W illiam A. Bonifield, Jr Jr.. Senior Vice President and Manager Cash/Fiscal Product Office Michael EE.. Collins Senior Vice President and Lending Officer Richard W ang W.. LLang Senior Vice President and Director of Research ankford B.. LLankford Ronald B Senior Vice President D. Blake PPrichard richard Senior Vice President Milissa M. TTadeo adeo Senior Vice President J. W arren Bowman, Jr Warren Jr.. Vice President Robert JJ.. Bucco Vice President Gerard A. Callanan Vice President and Discount Officer Theodore M. Crone Vice President and Economist John JJ.. Deibel Vice President Patrick LL.. Donahue Vice President William Evans, Jr Jr.. Vice President Joanna H rodin H.. FFrodin Vice President Shirley L. Coker Assistant Vice President and Counsel Jeanette PPaladino aladino Assistant Vice President and Counsel Arun K K.. Jain Vice President Dean Croushore Assistant Vice President and Economist A. Reed Raymond, III Assistant Vice President and Examination Review Officer Donna LL.. FFranco ranco Budget Officer Patrick M. R egan Regan Assistant Vice President and Information Security Officer Jerry K atz Katz Vice President Henry TT.. K ern Kern Vice President Edward M. Mahon Vice President and General Counsel Loretta JJ.. Mester Vice President and Economist Stephen A. Meyer Vice President and Associate Director of Research Mary DeHaven Myers Vice President and Community Affairs Officer Louis N N.. Sanfelice Vice President John B B.. Shaffer Vice President and General Auditor Herbert EE.. TTaylor aylor Vice President and Secretary William LL.. Gaunt Assistant Vice President John V V.. Heelan International Examinations Officer Mary Ann Hood Assistant Vice President Howard M. James, Jr Jr.. Support Services Officer Alan LL.. Kiel Assistant Vice President Richard A. Sheaffer Assistant Vice President Ronald R. Sheldon Assistant Vice President Stephen JJ.. Smith Assistant Counsel Marie Tkaczyk Assistant Vice President 23 Linda K K.. Kirson Treasury Services Officer Sharon N omlinson N.. TTomlinson Assistant Vice President and Planning Officer and Assistant Secretary Thomas P. LLambinus ambinus Assistant Vice President Richard A. V alente Valente Assistant General Auditor Joseph LL.. McCann Administrative Services Officer and Security Officer Elisabeth C. Videira-Dzeng International Examinations Officer Vish PP.. Viswanathan Vice President and Cash/Fiscal Product Officer Alice JJ.. Menzano Assistant Vice President and Cash/Fiscal Product Officer Eileen P. Adezio Assistant Vice President Edward Morrison Operations Officer John G G.. Bell Assistant Vice President Camille M. Ochman Assistant Vice President Bernard M. W ennemer Wennemer Assistant Vice President Anthony JJ.. White Financial Services Officer Michael PP.. Zamulinsky Assistant Vice President Advisory Councils Community Bank Council CHAIR Ronald LL.. Hankey President & CEO Adams County National Bank Gettysburg, PA Thomas FF.. R obinson Robinson President & CEO Malvern Federal Savings Bank Paoli, PA DEPUTY CHAIR Jay M. FFord ord President & CEO Crest Savings Bank, SLA Wildwood Crest, NJ Rolf A A.. Stensrud President & CEO First Republic Bank Philadelphia, PA Gary N N.. Gieringer Chairman & CEO Patriot Bank Pottstown, PA 24 Thomas LL.. Gray President & CEO Carnegie Bank N.A. Princeton, NJ Barbara C. Jarvis President & CEO The Felton Bank Felton, DE Gerald A A.. Nau President & CEO Great Valley Savings Bank Reading, PA John R. Stranford President & CEO Third Federal Savings Bank Newtown, PA Earl FF.. Sutton President & CEO Shore Community Bank Toms River, NJ W. Jack W allie Wallie President & CEO East Stroudsburg Savings Association Stroudsburg, PA Robert C. Wheeler Chairman Grange National Bank Tunkhannock, PA Community Bank Council members (from left): Jay M. Ford, Gerald A. Nau, Ronald L. Hankey, and Robert C. Wheeler Credit Union Council CHAIR Francis R. Muto Manager & CEO Peoples First Credit Union Allentown, PA DEPUTY CHAIR William JJ.. LLavage avage President & CEO Service First FCU Danville, PA Credit Union Advisory Council members (from left): Steven D. Schlundt, John D. Buchinski, David F. LaSala, John P. Kebles, Francis R. Muto, Gary H. Penrose, William J. Lavage, Ignacio I. Morales John D D.. Buchinski President & CEO Wheatland FCU Lancaster, PA James EE.. Everhart, Jr Jr.. Manager Louviers FCU Newark, DE Mary Jane Griffith Vice President/CFO So. Jersey Federal Credit Union Deptford, NJ Anthony R. Hinds CEO DPL Federal Credit Union Newark, DE John P. K ebles Kebles CEO Choice One FCU Wilkes-Barre, PA David G effer G.. K Keffer CEO/Manager Cornerstone FCU Carlisle, PA aSala David FF.. LLaSala Executive Vice President Benchmark Federal Credit Union West Chester, PA Ignacio I. Morales Manager Borinquen Federal Credit Union Philadelphia, PA Gary H enrose H.. PPenrose President & CEO Mercer County Teachers Federal Credit Union Hamilton, NJ Steven D D.. Schlundt President & CEO Atlantic City Firemen’s FCU Northfield, NJ Small Business & Agriculture Council CHAIR Art Daube Vice President & General Manager WBRE-TV Wilkes-Barre, PA DEPUTY CHAIR Rodney LL.. Metzler Owner Pleasantview Farms Martinsburg, PA Cary SS.. Borish Co-President Marathon Grill Philadelphia, PA Peter Bylone Manager Vineland Produce Auction Vineland, NJ Della LL.. Clark Director West Philadelphia Enterprise Center Philadelphia, PA Dennis EE.. Duffy President, Duffy, Dolcy & McManus Absecon, NJ Robert JJ.. Edmunds President Edmunds & Associates, Inc. Northfield, NJ Joan R. Henderson President J.R. Henderson & Associates Lancaster, PA Philip B B.. Mitman Owner Bixler’s Jewelers, Inc. Easton, PA David R. Rice President Rice Fruit Company Gardners, PA Steven JJ.. Shotz President Quantum Group Wilmington, DE W. Gregory W ood Wood President Hocher Manufacturing Company, Inc. Rehoboth Beach, DE Thomas K eidy K.. LLeidy President & Chairman Leidy’s, Inc. Souderton, PA Small Business & Agriculture Council members (from left): Dennis E. Duffy, Steven J. Shotz, Joan R. Henderson, Peter Bylone, Rodney L. Metzler, Art Daube, Thomas K. Leidy, Cary S. Borish, Della L. Clark, Philip B. Mitman, W. Gregory Wood 25 Operating Statistics T he pace and pattern of Bank operations in 1998 reflected the trend toward electronic payments and other shifts in payments processing. The volume of ACH transactions processed increased dramatically in 1998, as it has in each of the past three years. Meanwhile, the volume of food stamps processed declined as the Agriculture Department’s assistance program has moved into electronics. Commercial check processing volumes rose as ongoing consolidation in the District banking industry shifted processing demands, at least temporarily. The Bank’s government check processing volumes also rose as the result of consolidation of operations within the Fed system. 26 Greater reliance on armored carriers to redistribute coins in circulation both increased the efficiency of the distribution network and reduced the volume of coins processed at the Bank. 1998 Volume 1998 alue Value Dollar V 1997 Volume 1997 alue Value Dollar V $23.2 trillion 7.2 million transfers $19.8 trillion 220.2 million items 136.4 million items $269.7 billion $391.1 billion 161.7 million items 126.5 million items $215.8 billion $331.0 billion 37.3 million checks 909.5 million checks $38.2 billion $1,338.4 billion 23.1 million checks 831.3 million checks $23.8 billion $1,181.2 billion Cash operations: Currency processed 1,360.4 million notes Coin processed 55.1 thousand bags $21.4 billion $6.5 million 1,110.6 million notes 143.2 thousand bags $17.9 billion $69.3 million Loans to depository institutions $314 million 326 loans $766 million $19.9 trillion 1.6 million transfers $21.3 trillion $484.3 million 139.1 million coupons $718.6 million SERVICES TTO O DEPOSIT OR Y INSTITUTIONS DEPOSITOR ORY Wire Transfer of Funds 7.9 million transfers ACH: Government Commercial Check processing: U.S. Government All other 212 loans SERVICES TTO OU .S Y U.S .S.. TREASUR TREASURY Electronic book-entry transfers 1.5 million transfers Food coupons processed 91.6 million coupons