onsumers and businesses continue to substitute electronic payments for paper checks, and the Fed has noticed. The Federal Reserve Banks announced plans to reduce staff, close offices and consolidate back-office check-processing operations in order to adjust to the decline in check payments in the last decade.

Recent Federal Reserve studies in check use found that approximately 40 billion checks were written in the United States in 2002, down from about 50 billion checks written in 1995.

The Federal Reserve Banks, collectively the nation's largest processor of checks, process about 17 billion checks each year, previously at 45 different locations. The Federal Reserve is comprised of 12 regional banks, their 24 branches, and all national and state banks that are part of the system.

From 1992 to 2001, the Reserve Banks earned an average annual after-tax profit of 12.2%. In 2002, this declined to 4.2%, which the Fed attributes mainly to declining check volume. In response to these changes in the marketplace, the Fed plans to reduce check-service operating costs by $60 million in 2005 and about $300 million over the next five years.

"The Federal Reserve Banks are committed to remaining a leader in providing payment services, including check processing," Cathy Minehan, President and CEO of the Federal Reserve Bank of Boston and Chair of the Reserve Banks' Financial Services Policy Committee, said in a statement. "Adjusting our operations to respond to changes in the marketplace will position the Banks to continue to fulfill this roll."

To achieve their cost-cutting goals, 13 of 45 Reserve Banks no longer will process checks, and five of the 13 will close altogether.

The eight locations that no longer will process checks but will remain open include Little Rock, Ark.; Louisville, Ky.; Miami; Omaha, Neb.; Pittsburgh; Richmond, Va.; San Antonio; and El Paso, Texas. In addition, check adjustments will be handled at only 12 Reserve Bank locations (down from 43).

The five offices closing are in Charleston, W.Va.; Columbia, S.C.; Indianapolis; Milwaukee; and Peoria, Ill.

In response to the closings, nine locations will expand their check-processing capacity. These include the offices in Baltimore; Cincinnati; Cleveland; Charlotte, N.C.; Chicago; Dallas; Des Moines, Iowa; Jacksonville, Fla.; and Memphis, Tenn.

The Banks also will eliminate overall check-service staff by 8%, about 400 positions. Staff reductions will occur through layoffs and attrition although exact numbers have not been released.

Using new check-imaging and check-adjustment technology, the Banks vow to continue providing check services across the U.S. with the goal of maintaining current service levels.

To help handle the new volume, the Banks estimate they will add about 900 new positions at locations that still process checks.

In 2003, the Reserve Banks said they expect to post an after-tax loss brought about by costs associated with the restructuring; however, they project the changes in operations will position check services to recover completely by 2005.