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The Switch
To Electronic Payments


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



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


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


Executive Letters


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,

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


Since the installation of a new Accounts PPayable
system in 1997, the Philadelphia FFed
ed has encour
encour-aged vendors to convert from check payment to
direct deposit. FFifty
-two percent switched in the
’s first year
year.. In the Accounting Depart
ment, Lisa A. Irwin (right), expense coordinator
and Angeliná TT.. Cunningham, Accounts PPayable
clerk, compare the work involved. W
ith direct
deposit there are no checks to print out or tear
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



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.

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

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

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


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
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
(second from left) were invited to
talk about A
CH operations and
marketing at Delaware National
Bank in Georgetown, DE
DE,, where
management was preparing to
institute direct deposit and other
ACH services.


• Half of all payroll payments are
now made by direct deposit.

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


facilitate the adoption of ACH in the Third
District, the Philadelphia Fed provides
information, technical assistance, and
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.



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


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.


Financial Electronic Data Interchange


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.


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


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.


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-


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



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


Sterling Bank has used electronic check presentment since August 1995 and added imaging in June


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.

• 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
• Consistently clear images

763 million checks
being cleared through
the Philadelphia Fed
were presented electronically — 11 percent
of checks handled.

Imaging Shrinks Paper
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,
’s electronic check presentment service with Janet Rizzo,
discusses enhancements to the bank
Philadelphia FFed
ed senior account manager
anderslice says that he expects paper checks
manager.. V
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
longer receive cancelled checks with their statements.

an identification
number for easy


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


system without eliminating paper, it could
also forestall the conversion to completely


electronic funds transfers. The Fed is


monitoring how ECP is used and may adapt


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


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.


• Transmission received at start of business,
rather than in mid-afternoon
• Current balances available sooner for
• No need for a second shift to process
• No delays due to delivery problems, such
as bad weather or heavy traffic


• The Philadelphia Fed has offered ECP
since 1996 and currently has 17
• Imaging has been available from the
Philadelphia Fed since 1997. At present,
two Third District banks use this service.



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


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


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.


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.


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.



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.


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
W illiam H
H.. Stone, Jr
First Vice President
Donald FF.. Doros
Executive Vice President
W illiam A. Bonifield, Jr
Senior Vice President and Manager
Cash/Fiscal Product Office
Michael EE.. Collins
Senior Vice President
and Lending Officer

Richard W
W.. LLang
Senior Vice President and
Director of Research
B.. LLankford
Ronald B
Senior Vice President
D. Blake PPrichard
Senior Vice President
Milissa M. TTadeo
Senior Vice President
J. W
arren Bowman, 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
Vice President

Joanna H
H.. FFrodin
Vice President

Shirley L. Coker
Assistant Vice President and Counsel

Jeanette PPaladino
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
Budget Officer

Patrick M. R
Assistant Vice President and
Information Security Officer

Jerry K
Vice President
Henry TT.. K
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
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
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

Linda K
K.. Kirson
Treasury Services Officer

Sharon N
N.. TTomlinson
Assistant Vice President and
Planning Officer and
Assistant Secretary

Thomas P. LLambinus
Assistant Vice President

Richard A. V
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
Assistant Vice President
Anthony JJ.. White
Financial Services Officer
Michael PP.. Zamulinsky
Assistant Vice President

Advisory Councils
Community Bank Council
Ronald LL.. Hankey
President & CEO
Adams County National Bank
Gettysburg, PA

Thomas FF.. R
President & CEO
Malvern Federal Savings
Paoli, PA

Jay M. FFord
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


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
President & CEO
East Stroudsburg Savings
Stroudsburg, PA
Robert C. Wheeler
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
Francis R. Muto
Manager & CEO
Peoples First Credit Union
Allentown, PA
William JJ.. LLavage
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
Louviers FCU
Newark, DE
Mary Jane Griffith
Vice President/CFO
So. Jersey Federal Credit Union
Deptford, NJ
Anthony R. Hinds
DPL Federal Credit Union
Newark, DE
John P. K
Choice One FCU
Wilkes-Barre, PA

David G
G.. K
Cornerstone FCU
Carlisle, PA
David FF.. LLaSala
Executive Vice President
Benchmark Federal Credit
West Chester, PA
Ignacio I. Morales
Borinquen Federal Credit
Philadelphia, PA
Gary H
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
Art Daube
Vice President & General
Wilkes-Barre, PA
Rodney LL.. Metzler
Pleasantview Farms
Martinsburg, PA
Cary SS.. Borish
Marathon Grill
Philadelphia, PA
Peter Bylone
Vineland Produce Auction
Vineland, NJ

Della LL.. Clark
West Philadelphia Enterprise
Philadelphia, PA
Dennis EE.. Duffy
President, Duffy, Dolcy &
Absecon, NJ
Robert JJ.. Edmunds
Edmunds & Associates, Inc.
Northfield, NJ
Joan R. Henderson
J.R. Henderson & Associates
Lancaster, PA

Philip B
B.. Mitman
Bixler’s Jewelers, Inc.
Easton, PA
David R. Rice
Rice Fruit Company
Gardners, PA
Steven JJ.. Shotz
Quantum Group
Wilmington, DE
W. Gregory W
Hocher Manufacturing
Company, Inc.
Rehoboth Beach, DE

Thomas K
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


Operating Statistics


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.


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.

Dollar V


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

$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

Wire Transfer of Funds
7.9 million transfers
Check processing:
U.S. Government
All other

212 loans

Electronic book-entry
1.5 million transfers
Food coupons

91.6 million coupons

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102