Financial Update (July-September 2000)


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Check Relay Network Moves Checks Efficiently Across the Country

Thirty years ago, when the first electronic payments systems were in their infancy, many people believed that electronic payments would replace checks as the predominant way of making payments.

But checks are still going strong in 2000 and show no signs of disappearing in the near future. For better or worse, consumers and businesses are still writing checks, and these checks still need to be processed efficiently through the payments system.

The check clearing process may appear simple but is actually rather complex behind the scenes. Checks may be routed through several banks before reaching their final destination. In many cases, banks of first deposit present checks to paying banks via an intermediary, such as the Federal Reserve, which processes perhaps a quarter of all checks in the United States.

Reserve Banks contract with local private-sector couriers to send checks to paying banks within their own check-processing territories. But Reserve Banks use an air and ground transportation network of private vendors that links the Fed’s check processing locations to transport checks deposited at one Fed office and drawn on paying banks located in another Fed district. About 20 percent of the checks the Fed processes need to be transported via this network.

A network is born

The Fed’s check transportation system was first launched in 1973 with initial flights connecting Chicago and Cleveland. The network quickly expanded to reach 27 cities. That same year, the Federal Reserve established new regional check-processing facilities throughout the nation to expand the areas in which checks could be cleared on a daily basis and thus help meet the tight deadlines, set by law, for making funds available to depository institutions.

Failure to meet these check delivery deadlines creates float: money that appears simultaneously in the accounts of two depository institutions during the time between the writing of the check and the receipt of credit. Because float temporarily exaggerates the amount of money in the banking system, it has a significant impact on the Fed’s day-to-day monetary policy decisions. So the primary goal of the Check Relay network is to deliver checks on time to minimize system float. (For more information about float, see “Float in Check Clearing Creates Challenges for Banks and the Fed,” Financial Update, April–June 2000, 8–9.)

The dispatch and delivery schedules of the Check Relay network are coordinated with Reserve Banks’ deposit deadlines to improve the availability of funds to depository institutions.

The Atlanta Fed takes the reins

Beginning in 1998, the Atlanta Fed assumed responsibility for coordinating the check transportation network for the entire Federal Reserve System. The Check Relay department at the Atlanta Fed manages this network, which connects 45 endpoints in a hub-and-spoke configuration. Five hubs — in Philadelphia, Cincinnati, Chicago, Atlanta and Dallas — link to the remaining Federal Reserve check processing sites location throughout the country (see the map).

Four nights a week, Monday through Thursday, between 8 p.m. and 8:30 a.m., 192 flights per night are made to these 45 endpoints. Most of these sites have two dispatches and deliveries per night with arrival deadlines of 3 a.m. and 8:30 a.m. These flights, which log more than 55,000 miles nightly, are provided by private vendors selected through a competitive bid process. The vendors employ 15 jets and 31 twin-engine turboprop and piston planes as well as ground transportation in spoke cities. The planes connect spoke and hub cities in five of the six delivery zones. The Fed also contracts with vendors to send checks by airfreight forwarding through the Cincinnati hub to the western-most zone. The three-hour time-zone difference between the East and West Coasts makes this slower delivery method feasible.

On an average weeknight, the network transports about 23 tons of checks with a face value of approximately $13 billion. About 28 tons of checks are transported over an entire weekend, when a three-day delivery window also permits the use of less expensive airfreight forwarding and long-distance ground transport.

At each Federal Reserve check processing facility, checks to be sent through the network are sorted by zone. Each of the six zones has a unique color designation; each bag or bundle of checks receives a color tag that indicates not only the destination zone but also a Federal Reserve processing site within that zone.


Check Relay

A well-grounded system

The dispatch and delivery schedules of Check Relay are coordinated with Reserve Banks’ deposit deadlines to improve the availability of funds to depository institutions. But other types of coordination are also needed to keep the network running smoothly. Federal Reserve staff in the Check Relay department at the Atlanta Fed perform many behind-the-scenes functions, such as administering the contracts of commercial air carriers and ground courier services, airfreight forwarders and fuel vendors; vendor payments; fuel inventory and purchasing; coordinating with airport authorities; and monitoring carrier performance.

Each morning a member of the day staff calculates the float that has been incurred because of any transportation delays during the night and reports the amount of float exposure to the New York Fed. This estimate of daily float exposure is used along with other information to help guide the Open Market Desk as it buys and sells government securities in its efforts to smooth fluctuations in the aggregate level of bank reserves.

At the beginning of the night shift, the staff in the Check Relay operations center in Atlanta receive manifest data from the sending sites to project piece counts and weights for the crews of the nightly flights. This accounting is necessary to avoid overloading the aircraft and can be used to provide a value estimate for the shipments to and from each destination.

During the night, the network manager monitors flight conditions across the country and remains in contact with dispatchers at all the plane and ground transport vendors’ home bases. He also oversees the cargo handlers at the hub locations. Besides managing the routines of normal operations, the night staff also have to be prepared to deal with emergencies such as late shipments, weather problems, airport delays or mechanical failure of planes or ground vehicles. By allowing quick tactical responses to developing problems, this centralized coordination helps to minimize delivery delays and potential associated float.

The Federal Reserve is strongly promoting the use of electronic payment methods such as Direct Deposit and Direct Payment. And the Fed encourages banks to use the Fed’s electronic check presentment services, which scan paper checks and transmit them electronically to payor banks, thus saving the costs of transporting physical checks and minimizing float. But until the popularity of paper checks wanes, the Fed-run Check Relay system will be at work night and day speeding checks to their final destination.