Federal Reserve Bank checking out of the paper-handling business

For 67 years, the Federal Reserve Bank of Minneapolis has opened its doors, around-the-clock, to legions of delivery trucks brimming with checks.

About 800 million of the pieces of paper go through the system each year, so many that, stacked one on top of the other, they'd stretch 125 miles high. Within the space of a year, that all will change.

Waves of electrons have been eroding the mountain of paper at the Minneapolis Fed. Electronic banking is so rapidly becoming the norm that only one in three non-cash transactions are now made with paper checks, according to a Fed survey.

The change is taking place at a geometric pace -- last year, 7 percent of the checks going through the Minneapolis Fed were electronic, this year the share rose to 35 percent, and next year, two-thirds of the transactions are expected to be composed of bits and bytes, not paper.

"It's a significant change for us," said James Lyon, Minneapolis Fed first vice president. "Because of the importance that check-processing has played over the years, it's a difficult and sometimes painful transition."

Come 2009, the 800 banks and credit unions that rely on the Minneapolis Fed for check clearing will see most of what's left of their paper transactions handled by the Federal Reserve Bank of Cleveland. By 2010, only the Fed banks in Cleveland, Atlanta, Philadelphia and Dallas will still be clearing checks.

That compares with 45 that were doing it at the start of this decade.

At its peak, the Minneapolis Fed check-clearing operation employed 365 people, or more than one in three Minneapolis Fed employees. But technology has changed the need for labor. The paper that remains is sorted by high-speed machines, which read at blinding speed the routing numbers at the bottom of checks that identify individual banks.

Dwindling to 20 workers

Next year, the process will employ about 180 people, or about 15 percent of the jobs at the bank. By the third quarter of 2009, only 20 workers will remain.

The last of the workers will make photocopies of checks, sending the duplicates to banks that haven't updated their back office operations and still require paper for their accountants. For the foreseeable future, the Minneapolis Fed will print 1 million duplicates each day.

The bank plans to use some of the 100,000 square feet that will be freed of check handling to accommodate its own growth, provide space for other government agencies or lease to a business that can live with federal security in a post-9/11 world.

"You can rest assured, it wouldn't be a for Kmart," Lyon said.

For Diane Boyd, manager of check processing, the end of an era will mean the loss of the only job she's known. She started at the Minneapolis Fed at age 17, and has worked there for 32 years.

Workers got the news last spring.

"Even though we knew it was coming, it was a very sad day," Boyd said. "Many of us had tears in our eyes while the announcement was read."

Part of her job now is helping fellow employees write résumés and practice mock job interviews. Many, like her, have spent much of their careers sorting and recording checks.

Boyd hopes her experience will help her find a management job elsewhere in the financial industry.

"Running an operation, whether it's checks or widgets, I think I could do it," she said.

Before the Minneapolis Fed got into the check-clearing process, banks could have to wait days or weeks to reconcile the accounts of customers who wrote checks with those who cashed them.

"Getting that check cleared was a very difficult process," Lyon said.

The process of shipping checks got more expensive, and slower, the farther the distance between banks. To compensate for the cost, a bank in Georgia might shave several percentage points off the face value of a check drawn on a Minnesota account.

Electronic banking accelerated the process, but at a price. Computerized banking was accurate but expensive: It cost a penny or two more to process an electronic transaction than a paper check -- until this year.

The cost of electronic banking has declined rapidly, while the tab for processing paper checks has been going in the other direction, as a result of rising costs for labor and the fuel costs involved in transporting checks across the system.

This year, the Fed's price for clearing a check electronically is 2 to 3 cents, while a paper check costs 5 to 6 cents to clear.

While the number of paper checks will keep dwindling, Lyon doubts the number ever will fall to zero.

"We just invent new payment options," he said. "We never really get rid of the old ones."

Mike Meyers • 612-673-1746