In addition to guiding monetary policy and supervising and regulating
member banks, the Federal Reserve also provides a number of
financial services to member banks and to the federal
government. These services include payment systems
policies and solutions as well as currency distribution operations.
The Banker's Bank
The financial services that the Federal Reserve Banks provide their member
banks include:
Maintaining the banks' deposit accounts with the Federal Reserve.
Providing payment services, including collecting and processing
checks as well as bank-to-bank electronic fund transfers (ETFs) and
automated clearing house (ACH) services. One of the problems
that caused the banking crises in the early 1900s was that many banks
and clearing houses at the time refused to clear checks drawn on certain
other banks. Congress gave the Federal Reserve the authority to
create a nationwide check-clearing system to ensure that each check is
cleared — no matter which bank it's drawn on.
Distributing and receiving U.S. currency into and out of the banks'
deposit accounts. It is the responsibility of the Federal Reserve
Banks to meet public demand for currency to ensure that fluctuations in
demand (such as those that occur just before holidays) don't disrupt the
banking industry.
In some cases, such as check, ETF, and ACH processing services, the
Federal Reserve Banks compete with private-sector providers. In
that way, the Federal Reserve can encourage competitiveness and innovation
in the industry as a whole.
The Government's Bank
The financial services that the Federal Reserve Banks provide the
federal government include:
Acting as fiscal agents.
Paying treasury checks.
Processing electronic payments.
Issuing, transferring, and redeeming U.S. government securities.
Innovation In Payment Processing
One of the purposes of having the Federal Reserve Banks compete with
private-sector firms to provide services like check, ETF, and ACH
processing is that it encourages competitiveness and, in turn, innovation
and efficiency.
For example, the Federal Reserve Banks are currently in the process of
making check processing more efficient through electronic scanning and
electronic check presentment, which both work to increase the speed of
check processing and reduce its costs. In 2003, Congress passed the
Check Clearing for the 21st Century Act (informally known as Check 21),
which removed the barriers to such electronic check processing.