New Fed Pricing Expected to Spur Further Moves to Electronic Processing

The Federal Reserve Board is cutting its fees for handling Check 21 items delivered to paying banks electronically but raising tariffs for processing paper checks and the substitute checks authorized under Check 21, a Fed announcement released on Tuesday says. Effective Jan. 2, the Fed's new rates for 2008 will include a 3.2% drop in fees payable by collecting banks for checks cleared as images. But, in a move that will likely lead to even more electronic check clearing, fees for images cleared as substitute checks at paying banks will rise 10.3%. Also known as image-replacement documents, substitute checks are paper printouts of images authorized under the Check Clearing Act for the 21st Century, the 2004 law known as Check 21 that encouraged check image exchange. Meanwhile, fees for forward collection of paper checks will jump 12.5%. One of two operators in the automated clearing house system, the Fed is largely leaving ACH pricing alone. Fees for origination and receipt of ACH transactions will remain at 2007 levels, while a $2.50 fee for input file processing is being eliminated. In a Federal Register notice announcing its price changes, the Fed also notes a rapid increase in image exchange in 2007. Through September, nearly 38% of the Fed's check volume at collecting banks had been handled via image or substitute check through a service called FedForward. That figure for September reached almost 51%. On the receipt side, paying banks cleared nearly 19% of Fed volume via image through the first nine months of the year, with the September number standing at 26.7%. Fed officials expect electronic check processing to grow significantly in coming years, helped along by Fed pricing incentives for electronics and disincentives for paper. “This is a market-driven phenomenon,” says Jack K. Walton, associate director for the Board of Governors of the Fed. “The idea is to let the market figure out the best way and the right pace to move toward electronic payment. The Fed's pricing will try to help encourage that.” Walton predicts Fed pricing for all-electronic check clearing will approach that for ACH processing within five years; Fed ACH pricing is under a penny per transaction, compared to the Fed's best FedForward rates, which range from a penny up to 3 cents per item. Over the past four years, the Fed has reduced the number of check-processing sites from 45 to 19, and has plans to reduce that count to four by early 2011.