Fed proposes reduced check services

Dive Brief:

• The Federal Reserve Board last week made a move toward potentially reducing the availability of check processing services that it provides to banks and credit unions, asking the public for input on what level of services are required. It’s also undertaking an analysis of the issue.
• “To help the Board understand stakeholder needs and balance tradeoffs as it considers the future of the Reserve Banks’ check services, the Board is seeking input on potential future changes to check services with varying effects on the level of check services offered and their costs,” a Thursday notice said.
• In a Thursday vote on whether to ask for public comment on the issue, the Fed board members voted six to one to ask the public for input on various possibilities. The Fed’s vice chair for supervision, Michelle Bowman, was the only member to vote against the proposal.

Dive Insight:

The Fed, which provides services for financial institutions’ processing of checks, is seeking input from the public, including the payments industry, as it weighs how much to invest in continuing to provide check processing services for the future. It laid out three potential scenarios to characterize its potential action in the face of recent declining use of paper checks by businesses and consumers.

The central bank said it could skip any investment in bolstering the check infrastructure and maintain its current operating costs, potentially precipitating declining reliability of processing services; invest in the check processing system to potentially improve the services, pushing operating costs up; or reduce check services and cut costs. 

The Fed plans to use the feedback to consider possible strategies with respect to the check system, as well as potential effects, and to consider other possible steps, the request said. 

In support of issuing the request, a Fed staff memo called attention to the move earlier this year by the Trump administration to have the Treasury Department largely stop issuing paper checks; the decline in check use since 1992 in the wake of digital alternatives; and a rise since then in check fraud.

“As these trends in check usage unfold, the Reserve Banks’ check-processing infrastructure is aging and will soon require substantial investments relative to ongoing operating costs to support existing service levels,” a Fed staff memo said.

In explaining why she couldn’t support the Fed request for comment on the issue, Bowman said she viewed the request for public input as biased in favor of discontinuing check processing services offered by Federal Reserve Banks.

She also voted against the proposal because of the integral role that checks still play in the payments system, she wrote in a statement.

“The Check Services RFI seems to favor the discontinuation of check services by Reserve Banks, even while checks remain an important payment mechanism,” Bowman said in her dissenting statement.

The increase in check fraud doesn’t justify reducing check processing services, she added. “Discontinuing Federal Reserve check services is not an efficient solution to the growing problem of payments fraud, particularly in light of the ongoing role of checks in the payments system,” she wrote.

The elimination of the Fed’s check processing infrastructure should be seen in the context of the central bank’s ability to increase use of its young, faster FedNow instant payments system, said Georgetown University professor Jim Angel, who previously served on a U.S. faster payments task force. He argues that FedNow, launched in 2023, hasn’t spooled up sufficiently at this point.

“The biggest reason to keep checks around is the failure of the Fed to create a low-cost instant payment system similar to what Brazil and India have,” Angel said by email. “We currently have a hodge podge of non-interoperable, non-bank instant-payment systems along with the costly Visa and Mastercard systems.”

“First we need a modern payment system, then we can get rid of paper checks,” Angel concluded.

The board said comments are due in 90 days, but noted that it wouldn’t proceed with significant changes without seeking more comment. “If commenters and the Board’s analysis support a strategy that may have significant longer-run effects on the nation’s payments system, the Board would seek additional public comment on such changes to check services prior to adoption,” the Fed notice said.