Venable and Devine Talk about Cash Processing, Other Financial Services

Cheryl Venable, Atlanta Fed executive vice president and product manager of the Federal Reserve System's Retail Payments Office, and Jeff Devine, senior vice president of Operations and Administrative Services, will explain what the Federal Reserve is doing during these challenging times to ensure that cash operations and financial services continue to operate.

Transcript

Gloria Guzman: ...the webinar series examining our recent actions and continued response to the COVID-19 pandemic. My name is Gloria Guzman and I'll be your moderator this morning. We are excited to have Cheryl Venable, Atlanta Fed executive vice president and product manager of the Federal Reserve System's Retail Payments Office, and Jeff Devine, senior vice president of Operations and Administrative Services, with us today. They will explain what the Federal Reserve is doing during these challenging times to ensure that our cash operations and financial services continue to operate. They will also answer some of your questions. We will then transition to our Q-and-A segment, where they will answer some questions that were submitted at registration. So with that, I will turn it over to Cheryl. Thank you for joining us today.

Cheryl Venable: Thank you, Gloria. I'd like to share a little bit about what we're doing in financial services while we are in and managing the pandemic. I want to start first by sharing and explaining what is our role that the Fed plays in financial services and payments. We really have three roles: one of operator, one of leader catalyst, and one of fiscal agent for the treasury.

So as an operator, we actually provide financial services to financial institutions for supporting their clearing and settlement of payments. So out of the Federal Reserve Bank of Atlanta, as Gloria mentioned, I have responsibility for what we call our Retail Payments Office, which is responsible for our automated clearing house and check clearing system. We provide that and provide leadership for that business on behalf of the Federal Reserve System. We also, as an operator in the system, support Fedwire Funds transfers and securities processing out of our New York Federal Reserve office, and our colleagues manage those businesses.

That's an example of our role as an operator and a provider of those services. We also do quite a bit in leading the industry and trying to catalyze improvements in payments. You might have heard of our strategies for improving the payments systems that we've been working on over the past few years. We have recently announced that we are building a real time retail payments system called FedNow as a result of a lot of the work associated with that. So the other role that we play is fiscal agent for the Treasury, and in that, we support their distribution of benefits payments, payroll payments, those sorts of payments from the Treasury to the ultimate beneficiary's account. I'm going to talk more about that in a moment as it relates to our Economic Impact Payments, that we supported distribution on their behalf.

As it relates to preparing for COVID, since we run national payments systems, we have to make sure that we have great business continuity processes and procedures in place to ensure that we can continue to manage the clearing and settlement of payments across the country. We've executed on those, as many of you have, as a result of this situation and have the majority of our staff actually working remotely and supporting our payments system since many of them are electronic in nature. We do have some paper processing, so there are still a few checks that we get in their actual paper form and those are being managed by a small team that is presenting themselves onsite to support that payment business. We are managing that to ensure proper social distancing and breaking the team into a couple of different parts so that they are also rotating and managing their health and wellness.

Because the first priority for us at the Fed, I'll just say broadly across the Fed, but also in managing our payments systems, is to ensure the health and wellness of our team, so that they can continue to support not only themselves and their families, but the work that they're doing in supporting the nation's payments system. Thirdly, I'll mention some of the work that we've been doing in supporting the U.S. Treasury. I mentioned that we are fiscal agent for the U.S. Treasury and supporting the distribution of their social security and other forms of benefit payments, and other payments that go out on behalf of the Treasury. We also, as a result of our role, have been supporting the distribution of the Economic Impact Payment that have begun to be distributed about the middle part of April, and we'll be continuing still now.

We'll process them over the weekend as well, through the next several weeks, until all of those are fully distributed. I can say we've distributed over a hundred million electronic payments and those that are being issued by a check are starting to clear the system as well. I know that there is a goal of trying to get as many of those out electronically as possible, and we stand ready to support the remaining distribution of the payments.

But all in all, we are kind of running as business as usual except for the fact that we're doing it from our home offices and ensuring the smooth clearing and settlement of payments for the U S. So, Gloria, with that, I will turn it over to Jeff to talk about what is going on in the cash and administrative areas.

Jeff Devine: Pleasure to be with you today to share how we're managing to provide cash services in these very unusual times. Similar to you, I thought it might be good to provide a quick recap of what our mission actually calls us to do as a cash services provider. As the Federal Reserve, we're called to ensure that we provide currency and coin services to financial institutions and ensure that the money that gets paid into circulation is genuine, in good shape, and fit for use. Now as a profile of our district's cash business, the Federal Reserve Bank, Atlanta, is home to four cash offices located in Atlanta, Jacksonville, Miami, and New Orleans. We're actually the second largest district in terms of providing cash services across the country. We service approximately 900 financial institutions and over 4,500 different endpoints across the Southeast. Also, our Miami office is one of the few Federal Reserve cash offices that services international customers such as central banks.

Let me now just pivot real quickly to how the COVID-19 virus has actually impacted our cash business and our operations. As you would imagine, the Fed takes its mission of ensuring the availability of currency very seriously, not just in normal times, but even more so in times of crisis. History has shown that as we go through these types of contingency or crisis events, the marketplace often reverts to a cash economy and cash is used also as a store of value.

So in such times, we know that we're going to have spikes in currency demands. So we naturally give our operational priority to our paying areas, so that we can make sure that we're able to meet the incremental demand that institutions and consumers have and doing so in a timely basis. Early on, as the virus began spreading, the Fed quickly positioned itself to ensure that we have ample currency inventories on hand, and we worked very closely with the Board of Governors and the Bureau of Printing and Engraving to ramp up our currency inventories across all Federal Reserve cash shops.

Needless to say, we took in additional shipments of currency and it was probably a good thing that we did because we saw a tremendous amount of increase in demand. While there's been a lot of similarities of this crisis event to other contingency events, we've also seen some differences and some prolonged behaviors that have come with the COVID-19 event. Specifically, as the virus continued to spread and as local governments began issuing stay-at-home orders, we saw, as I mentioned, tremendous spikes in demand that really lasted for the entire month of March and crept into early April as well. It's that duration and magnitude of the increased demand that really is defining this event as being a bit unique. In our district alone—which, again, we service the entire Southeast—we paid approximately 70 percent more currency volume in March of this year than we did last, which compares to the approximate 50 percent increase that was seen across the entire U S.

While these are significant upticks, if you look at it more deeply and, specifically, the last two weeks of March, it's really shows the extremity of the bubble demand. During that last two-week period, we saw cash offices across the country experiencing volume increases of payouts from anywhere from 200 to 400 percent over that same period last year.

I would also note that our district experienced increased demand from international banks who order from our Miami office. Central banks and other customers in dollarized countries ensured that they stocked up in preparation for any potential future closure of borders or the anticipated effect of reduced availability of air transportation, which is how international customers receive their currency that they order. I think we've seen, through this elevated demand, that currency continues to remain a very important payment instrument within our economy and within the financial system. Let me just now talk a bit about our staffing issues and safety.

Naturally, in order for us to handle the increased volume mentioned, we had to first take care of our staff and help them stay healthy, as Cheryl mentioned. The highest risk we faced in cash was around really losing our staff to becoming infected by the virus, so we implemented a number of really protective measures to help the staff keep themselves healthy to include, first and foremost, only allowing our mission-critical staff that could only do their job, come into the facilities. Everybody else was sent home to work remotely.

We enforced strict social distancing within our operations. We implemented wellness and temperature checks, requirements for all of our staff coming onsite, as well as provided them and requiring them to use personal protective equipment while they were onsite, specifically masks and face coverings. Operationally, we divided up our staff into several smaller teams and rotated them to minimize their exposure to others, just in case someone in the operation fell victim to the virus. Not only did it help provide greater protection for our staff, but it also expanded our business resiliency posture.

Finally, we implemented wellness and temperature checks with all our armored carriers before allowing them entry into our facilities. If any of the armored carrier personnel were running a temperature, the carrier was turned away—and, unfortunately, we've had to do this.

So where are we now? As we head into the end of April, we see the demand for currency orders stabilizing to relatively normal levels. We have heard that from financial institutions and their customers that they have adequately stocked up with currency and this retail economy has sufficient currency in circulation for the moment. Naturally, we're going to be monitoring for any secondary waves of heightened currency demands, be it from the Economic Impact Payments Cheryl referenced and how that might spur additional use for cash, but also as retail businesses start opening up in earnest.

The next thing that we're going to be monitoring and planning for based on what we've learned from past crisis events is really the eventual return of all the increased currency that we paid out in March and early April. Traditionally, that all then comes back in waves, and if it comes back in a concentrated period of time, needless to say, that'll put additional strain on our staffing and our physical facilities.

Let me just say in closing, we've really learned a lot from this and, like most of you in your organizations, this pandemic has really presented a number of unique challenges and experiences, and really has challenged us to think differently and be more flexible, and has put a premium on protecting our staff and our operations resiliency so we can be in the best position possible to deliver our mission and cash. Finally, it's also reminded us really just of the resiliency of the human spirit and our folks' commitment here at the Federal Reserve to just getting things done. We're really proud of our teams and how they stepped up and delivered. So, Gloria, let me stop there and turn it back to you to address what questions folks have.

Guzman: Thanks. Thank you very much, Jeff and Cheryl. This is a very interesting. Before I ask the first question, I want to remind everyone that Cheryl and Jeff will be answering questions that were submitted at registration.

So, Cheryl, my first question is for you, and it reads, how will an overall decline in electronic transaction volume during this pandemic likely impact the financial industry, including the fintech industry? And it has a second part that says, what risks do you believe exist that we in the financial industry should prioritize to mitigate?

Venable: All right, thank you, Gloria. So as the question implies, we have seen a decline in payment volume as a result of the economic downturn that has accompanied the pandemic. I do believe that we are going to see that level of volume decline for some time until the economic situation rebounds and businesses begin to open and people start spending again.

People are just making many fewer payments. There are people that obviously have been furloughed from their jobs, and so the payroll payments that they once received are no longer occurring and we definitely are seeing a decline in volumes quite significantly. I do think that from a financial industry perspective, clearly this is going to be impactful because it impacts revenues for those services that are provided by financial institutions as well as fintechs, and could also impact capital investments that are being made to continually enhance services as well as launch new fintechs in the businesses that they were focusing on prior to the pandemic. I do think, though, through the [inaudible] situation, there's also some opportunities to think about, and that is in this sort of situation, we are very much focused on economic resiliency and both as a consumer as well as businesses and what sort of financial services can financial institutions and/or fintechs bring to the table or continue to provide based upon what they do today to help individuals manage their monies in the best way possible given the situation that is occurring right now.

So many fintechs I know focus on budgeting or spending habits or those sorts of things. I think that there's an opportunity to kind of double down on those sorts of tools to help individuals and businesses to best manage their finances. I think from a risk perspective, as we look forward, as we are managing this situation, I think there are probably two particular risks that I think about. One is resiliency and availability of our services, and how can we continue to ensure the smooth clearing and settlement of payments and the smooth provision of financial services to businesses and consumers that need access to those right now. Then I think the second one of heightened risk is there's always bad actors looking for an opportunity to strike when there are other things that are distracting us.

So definitely focusing on security and fraud prevention and how to protect our customers against those bad actors, which really does make me want to highlight the fact that one of our priorities in the Atlanta district over the past year and a half or so has been a focus on fostering safer payment innovation. These are exactly the sorts of risks that we want to continue to look at and how can we continue to evolve the payments system and the capabilities that are provisioned within the payments system but still do it in a responsible way. Focusing on things like resiliency and risk.

So, Gloria, I'll turn it back to you.

Guzman: Thank you so much, Cheryl, for such a comprehensive response to that question. So the second question says, have there been common customer services issues coming into the support center? And if so, could you give us some example?

Jeff, would you like to get a shot to that question?

Devine: Sure. Surprisingly, our cash services support staff really have not seen any unusual inquiries or uptick in calls. To date, our calls have actually been pretty routine in general questions around normal cash operations and business type questions with the occasional call requesting information about when individuals may be receiving their Economic Impact Payments. But again, similar to Cheryl's introductory remarks, we've just been kind of plugging along with operations and that seems to be the case out of the financial community, at least from a cash service perspective. They're just managing operations and seeing it as a normal course of business. I don't know if Cheryl has anything else to add from a Retail Payments Office perspective.

Venable: Yes. I would add just one point. So I would say the calls have not, but the major calls, I would say, that we've been receiving with regard to managing the situation is where customers have been calling to report actually slowdowns in internet service providers in their area. That has impacted their ability to save, upload and download files in a timely way. It's been very isolated in different parts of the country and has definitely not been something that's been fully consistent, but beyond that, as Jeff said, we've had a few calls about the Economic Impact Payments, questions with regard to how those are coming, what those are going to look like, that sort of thing. But other than that, that's been the majority of the types of calls that we're getting and we've been able to work around those and help the customers when they've had those sorts of issues.

Guzman: Wonderful. Thank you both for that reply. I have a third question and we have about 10 minutes left, so we have plenty of time, so take your time to provide the answer. What do you think will be the long-term effects of the virus on payment volumes and services?

Venable: Yeah, so I'll start and share kind of my perspective on that. I mentioned in the response to the earlier question that we are seeing some fairly sizable declines in payment volume as a result of the economic downturn associated with the pandemic. I'll just speak from the two services that we run, both on the check and the automated clearing house. We're seeing it in both. We're seeing a more dramatic decline in the check business than we are on the ACH business. And that's probably not surprising given the sorts of payments that are made with checks today. A lot of them are business to business and still consumer to business, and those are the types of payments that we're seeing less of as a result of the economic downturn.

I do believe once we get through the pandemic and the economy starts opening up and people are going back to work and businesses are starting to do what they do and running their businesses, that we're going to see a bounce back as it relates to the payment volumes that we're seeing a decline of right now. I would say that, anecdotally, we're starting to hear some from financial institutions and some from corporate that it's likely that this might be an opportunity to convert those check payments that have fallen off to electronic payments once they start again, so that we might see a dramatic kind of downturn in the volumes that still remained, which would be a good thing.

We at the Fed had been trying over a number of years to continue to work with the industry to electronify paper payments. If those came back as electronic payments in whatever form that they would take, that would definitely be something that we would be supportive of and wanting to make sure that we assist the industry in making that transition. So, I do think that we'll see that. I would say the other thing that I think we'll see is advancement in services and capabilities that tie to continually taking out friction in the marketplace. I think we've learned a lot by working at home and sheltering in place and have really relied upon electronic services, delivery services, things that have made our lives easier. I think we're going to continue to see that in the financial services space is to push more capability into the hands of either the business or the consumer so that they can manage their lives in a more seamless way.

Devine: Yeah. I would add to what Cheryl said and just say that from a cash perspective, you heard from my remarks, at this juncture, cash volumes have actually spiked and that would be what we would expect short run. Long term, however, it's really too early to say definitively, but I would agree with Cheryl that the use of electronics and contactless payment methods may actually increase going forward when compared to cash as a share of overall payment transactions. I think it's going to be directly in line with what she mentioned, that as folks become more comfortable with using online ordering and remote payment capabilities—and let's face it, we're all learning to do things differently and that is true for consumers as well—we could see some long term-shifts there, but again, it's early to tell.

That said, I will tell you that people have continued to demonstrate a fascination and a real attraction to cash and that's particularly evident in times of crisis and contingency situations. That desire to have cash as a store of value always comes through very prominently. And the other thing that we continue to see in the various payments studies that we do in the cash diary, is we continue to see the value of currency in circulation continue to grow. So it really is hard to project the long term-changes of what COVID-19 is going to do to the people's use of cash.

Guzman: Thank you so much. If I could have, in 30 seconds, one lesson from each of you that we have learned or that you have learned from the pandemic, what would you tell us?

Venable: I would highlight the importance of establishing relationships so that in a time of crisis, you have effective relationships to manage the situation at hand. That's been very valuable as we've been working with the Treasury, the other private sector operator of the ACH, and the financial institutions in distributing the EIP payments seamlessly.

Devine: So I would echo that, and that's very much true in the cash business with our dependency with the armored carrier, as well as financial institutions. But I would also add one other thing, and that's the need for having predefined and well-tested business resiliency plans. That's really critical for these types of events. I would also say that even though you have plans, it's equally critical that you remain flexible. I think we've seen with this particular pandemic that we've had to make adjustments to our plans very quickly to adapt to the ever-changing and uncertain environment, and the various stages of the pandemic and what it has brought forward as well as just the marketplace's reaction and how that relates to the demands for financial services both from financial institutions and consumers as well.

Guzman: Thank you very much, both of you, for this wonderful insight and sharing the time with us. This is all the time that we have today and we would like to thank our speakers for participating. On behalf of everyone, I would like to thank you for joining us. We will continue to host these webinars and highlight additional actions the Fed is taking to support our communities during these uncertain times. If you know someone that would find this session valuable, the audio file and transcript will be archived at our website at frbatlanta.org.

We will like to draw your attention to a text-to-join slide. If you aren't already a subscriber, I encourage you to subscribe to our Weekly Digest newsletter for the most up-to-date information by texting FRB8 to 33777.

Finally, be sure to join us for our next event this Thursday, April 30, at 11 a.m. eastern. We will have Sarah Stein, our adviser in our community and economic development team, speaking, and Domonic Purviance, a senior financial specialist in our Supervision, Regulation, and Credit Division, as our guest speaker. They will explain current housing policy related to mortgage relief, forbearance, and rental affordability. They will also talk about an eviction moratorium and answer some of your questions. With that, I'll officially bring this session to a close. Thank you for joining us. Take care and stay safe.