A good idea catches on fast. In order to reduce costs, while also keeping customers happy, the St. Louis Fed recently discontinued cash services at the Little Rock and Louisville branches and established cash depots. Now the boards of directors for all Reserve banks, the Board of Governors and the Fed's Conference of Presidents have approved and announced locations for three additional depots which will open within the next six to 12 months.
Under the cash depot system, the Federal Reserve signs a contract with a third party, usually an armored carrier, which then accepts cash deposits and delivers orders for financial institutions. The Federal Reserve pays all transportation costs between the Reserve bank office and the depot operator, and the operator must follow strict procedural guidelines.
A Federal Reserve office in a different city maintains the responsibility for counting deposits and preparing orders. Currently, Memphis services the Little Rock depot, while Cincinnati is servicing the Louisville depot. For the new cash depots, Atlanta will serve Birmingham, Dallas will serve Oklahoma City, and Seattle will serve Portland, Ore.
So far, the transition to cash depots has gone smoothly with little to no impact on commercial bank customers. John Baumgartner, vice president of Cash Operations at the St. Louis Fed, credits good planning, which began about 18 months before the depots were created. No specific dollar figures are in yet, but the Fed has already seen dramatic cost savings.
"The Eighth District basically became the proving ground to show that cash depots could work for the System," says Baumgartner. "We started the ball rolling, and I'm proud to say that our staff will be assisting other districts as they begin their transition to cash depots."
The move to cash depots began with the Strategic Direction Project, undertaken by the Fed's Council of Presidents, which studied cash service across the country. During the project, the committee examined the population and the volume of currency usage in the markets the Fed serves.
"We asked ourselves, 'Are we located where we need to be, compared to where we were when we began our operations?'" says Baumgartner.
Since the founding of the Federal Reserve System in 1913, the population has shifted and business climates have changed. Yet, despite the increased usage in electronic payments over the past few years, the committee found that cash remains not only a vital part of the payment system but also is increasing. By the end of 2004, about $720 billion of U.S. currency was in circulation, 88 percent more than 1994.
The committee examined several possibilities before deciding on four possible options:
The decision became apparent after the Fed's Retail Payments Office decided to discontinue check operations in Little Rock and Louisville. Without check processing, the Cash department would have to pick up all support and overhead costs for those two facilities. The Fed's Cash Product Office had also instructed the Eighth District to maintain customer service without dramatically increasing costs.
Baumgartner explains, "Our senior management felt that cash depots were the best solution for maintaining a service presence in our markets, with a minimal impact on costs to the financial institutions we serve. If we had gone to a full shutdown, for instance, customer service as well as cost would have been affected. But with cash depots, we're proving to financial institutions that our focus is not just to reduce costs-we also value our customer service relationships."
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Fed in Print: An index of the economic research conducted by the Fed.