As part of the nation’s central bank, Reserve Banks are actively involved in the nation’s payments system to help it operate as efficiently and safely as possible. Unlike private providers of payments services, Federal Reserve Banks do not offer these services to make a profit—their service fees must closely match and not exceed their costs.

Since the passage of the Depository Institutions Deregulation and Monetary Control Act of 1980, Reserve Banks’ financial services have been available not just to banks that are members of the Federal Reserve System but also to nonmember commercial banks, savings and loan associations, credit unions, and mutual savings banks.

In some ways Federal Reserve Banks’ services to depository institutions are similar to depository institutions’ services to their customers—transferring funds, providing cash, and accepting and safeguarding deposits.

Payment System Services
Most of the nation’s spending money is held in some form of checking accounts. Although checks are the most common means of paying for transactions, electronic transfers are gaining in use.

Check collection. Frequently a check is cashed or deposited at a depository institution far from the institution on which it is drawn. More than a third of such checks are collected through the Federal Reserve Banks’ check collection system. (Another large portion is handled within banking organizations or their correspondent banks. The remainder are processed by commercial banks or other private-sector check-processors.) High-speed, computer-controlled machines at Reserve Banks sort checks, total the amounts, credit the depositing institution, and charge the institution on which they are drawn. The checks are then sent to the latter depository institution.

Electronic transfers. Electronic funds transfer (EFT) and automated clearinghouse (ACH) are terms that relate to computerized transfers of funds. Unlike a check—which may travel thousands of miles in several days and be processed many times—an electronic transfer can do the same job in seconds by computer, with no paper to mail. The Reserve Banks’ computer-based communications network makes these operations possible.

Cash services. Although checks and electronic funds transfers account for most of the dollar volume of spending, cash is still an important medium of exchange.

New coins and notes are shipped from the U.S. Treasury to the Federal Reserve Banks, where the cash is stored until needed to fill orders from depository institutions. Depository institutions, of course, furnish cash to businesses and the public.

When depository institutions have excess cash on hand they may return it to the Reserve Banks, where the amount is verified and worn-out notes are destroyed. Counterfeits are removed and sent to the Secret Service. Worn, bent, and foreign coins, too, are culled. Reusable coins and notes are stored until needed. When depository institutions order cash, the Reserve Banks fill the orders from their stocks of new and used coins and notes.

Safekeeping and Transfer of Securities
Depository institutions may request a Reserve Bank to hold securities either for safekeeping or as collateral for loans from the Federal Reserve. U.S. government securities are usually held in book-entry (computer record) form only, while other types may be held in paper form. Reserve Banks also perform such services as transferring securities between accounts, delivering coupons, and processing associated payments.

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