Technology did not suddenly roil the nation's payments system in the 21st century. Rather, a wave of advances in making and processing payments built for nearly a half century and crested in the 2000s, with profound implications for the Atlanta Fed and the Federal Reserve System overall.
Perhaps most significantly, the Fed has largely dismantled its paper check-processing infrastructure. Between 2003 and 2010, the central bank reduced its number of paper check processing locations from 45 to 1. As part of those cutbacks, the Atlanta Fed consolidated all check processing from its five branches across the Southeast into the Atlanta headquarters. And as consumers increasingly used electronic means to make payments—and as federal legislation facilitated the electronic processing of checks—the Fed also phased out its Atlanta-based network that flew checks around the country for clearing. The check relay network consisted of 70 jets that each night transported paper checks among financial institutions.
9/11 attacks ground flights, accelerate decline of paper checks
Those jets, like all civil aircraft, were grounded by the September 11 terror attacks. With the jets idled for an unknown duration, Atlanta Fed officials quickly cobbled together alternative arrangements to move checks to keep the country's vital payments system functioning. As traumatic as that day was, the event made clear the need to adopt a more efficient means of handling paper check payments in the digital age (watch the video below).
Thus in the wake of the 9/11 crisis, the Fed encouraged passage of the Check Clearing for the 21st Century Act, known as Check 21. The federal law allowed financial institutions in the payments stream to create electronic images of checks and send those images, rather than the actual paper checks, through the system.
When Check 21 was implemented in October 2004, all of the payment items the Fed processed were paper. Today more than 99 percent are processed as images. As early as the end of 2005, the volume of electronic transactions was climbing by an average of 20 percent a month. At the same time, consumers were turning away from paper checks in favor of more convenient electronic methods of payments.
The 9/11 Story
The aftermath of September 11, 2001, a staggering national crisis, showcased the Fed's role in preserving public confidence in the nation's financial system. Depository institutions depend on the Fed to act as the nation's lender of last resort. Fed Vice Chair Roger Ferguson assured the financial sector early that day that "the Federal Reserve is open and the discount window is available for meeting liquidity needs." Banks received the message enthusiastically. Discount window lending surpassed $82 billion that week, contributing to the largest single week of lending activity to date in central bank history.
Consumers and businesses across the country needed their transactions processed, too. With airline traffic shut down nationwide for three days after the attacks, the Atlanta Fed's Retail Payments Office (RPO) assumed a leadership role. The RPO mobilized an interim ground transport network to manage operations and swap check processing work among the Federal Reserve System's 45 check offices. Working nearly around the clock with colleagues across the country, the RPO and marketing staff communicated frequently with banks and their customers, assuring them that the Fed would provide credit for all checks deposited at the Reserve Banks. The Fed incurred billions of dollars of check float costs during the crisis.
The Fed's decisive and innovative response to the challenges of September 11 ensured a fully functioning payments system when the private sector could not, helping avert a broader financial crisis.
From 2003 to 2012, the number of paper checks paid in the United States declined by more than half, from 37.3 billion to 18.3 billion, according to studies of the payments system the Federal Reserve conducts every three years. By 2006, two-thirds of all noncash payments were electronic.
The Atlanta Fed played a major role in decisions shaping the payments system because the Reserve Bank in the 1990s became home to the Federal Reserve's Retail Payments Office (RPO). Until then, the Fed had rotated the headquarters of the payments operation among its 12 regional Reserve Banks. But the Atlanta Fed secured the payments headquarters on the strength of its history of efficient operations and deep payments expertise (watch the video below).
The RPO's permanent move to Atlanta not only made the Reserve Bank home to a high-profile Fed business. It also gave rise to the Federal Reserve's first virtual organization, as the Atlanta staff was supplemented by payments experts at the Cleveland Fed and other Fed locations.