The Federal Reserve Banks and the Federal Reserve System are well aware of the fact that they must not only continually adapt to a rapidly changing technology in banking, but also that they must be leaders in the field of change or they will very quickly become obsolete.
Dick Heiber, Helena Branch Assistant Cashier, Circa 1967
Dick Heiber's insight into the role of the Federal Reserve in the banking industry is just as relevant in the 21st century as it was at the end of the 1960s. The period from 1996 to the present day confirms Mr. Heiber's observations.
In 1996, it became apparent that significant changes were taking hold in America's banking industry. Not only were new technologies changing the way that the Federal Reserve did business, but for the first time in its history, the volume of paper checks processed began declining around the country. In Helena, the Branch continued to enjoy overall volume increases in both its Check and Cash operations during the late 1990s. However the rate of annual volume increases in Check began to steadily decline beginning in 1996.
1996 dawned with the installation and testing of new high-speed currency sorting equipment in Cash Services. The BPS 3000 was installed by February, and within six months, Cash staff resumed setting Federal Reserve System sorting records. Helena also earned the distinction in that year of being one of the first Federal Reserve Banks to use the BPS 3000 for processing food coupons in addition to currency.
To accommodate the money sorted for destruction by the new BPS 3000 in Cash Services, a 792 square foot "baghouse" was constructed to house a high-powered hammermill.
The Branch also expanded its community outreach programs in 1996 by producing an educational video on Branch operations for schools and civic organizations and by hosting the Branch's first Montana Economics Challenge competition.
The Montana Economics Challenge program, modeled after a similar program in Minnesota, is designed to test the economic aptitude of both individual and teams of high school students and to promote interest in the field and the Federal Reserve System. In its first year, 15 students from around the state participated in the Challenge, with the winner of the team competition being Jefferson County High School from Boulder. By 2005, participation had grown to 60 students.
In response to anticipated changes in the banking industry and particularly in check processing, the Branch developed a business process "reengineering team" in mid-1996, charged with the task of reviewing the operational processes and workflows of the Branch check operation, in light of changing technologies in the banking industry and changing consumer preferences, and recommending changes, cost reductions and enhancements.
1997 opened with the announcement of the Branch Reengineering Team's recommendation to embark upon a pilot project unlike any other ever undertaken by the Federal Reserve System. Heeding Dick Heiber's observations 30 years earlier that the Federal Reserve Banks must be "leaders in the field of change or they will very quickly become obsolete" the Reengineering Team suggested that the Branch begin promoting the electronic collection of check payments in Montana by partnering with Montana financial institutions and taking advantage of imaging technologies that were rapidly establishing footholds in the banking industry. With that suggestion, EPIC® (Electronic Presentment/Image Check), a complex and ambitious multiyear project, was conceived by a newly formed implementation team, and preparations began for building a fully electronic image-supported check processing platform in Helena and developing new financial services and products to accompany it.
Initial preparations for the EPIC project included building a business case for the pilot, along with launching a public awareness and communications plan. Branch Business Development staff held several focus group meetings and made presentations to the Branch's larger customers and various trade organizations about the Branch's electronic check presentment direction.
Coinciding with EPIC, the Branch also embarked upon another project of "epic" proportions. The Century Date Change (CDC) project also began in 1997 across the Federal Reserve System to prepare the System's computerized processes and programs for revisions as the year 2000 approached. This program included completing an inventory of, upgrading and testing automated systems throughout the Branch to ensure a smooth transition with the year 2000 date change.
Another System project that began in 1997 was the COSO project. Four years before various corporate scandals involving accounting fraud and the lack of internal controls and governance in corporate America emerged, the Fed once again established itself as an industry leader. The purpose of COSO (Committee of Sponsoring Organizations) was to establish a framework for internal controls and assessing internal controls in the Federal Reserve Banks.
In addition to the inception of several large projects, an era of cost containment and operational downsizing appeared in 1997. In Cash Services, for example, courier-operated runs for registered mail were eliminated and brought in-house. In addition, the Branch's armored carrier service was discontinued, reducing annual costs for the Branch by over $300,000. In the Financial Management Department, 90% of all expense payments were converted to ACH payments, achieving considerable savings on printing costs and reducing personnel resources.
By 1998, EPIC and CDC consumed Branch resources. The EPIC project team selected ImageSoft and Unisys as the Bank's image software and hardware vendors, respectively, and three staff were added to support project preparations and marketing. A "Test of Concept" paper, outlining the business case and market analysis for EPIC, was submitted to the System's Retail Product Office for formal project approval.
Seminars for financial institutions were held by the Branch on the CDC initiative, regulatory requirements for Banks and the Branch's preparations to ensure a problem-free transition to the year 2000 (Y2K). Both internal and customer testing began during the first half of 1998.
Coinciding with the Branch's major projects, the Strategic Planning Input (SPI) Team was developed in 1998 to provide a vehicle for staff input to the Branch's strategic planning process. The SPI Team, composed of a cross section of employees who volunteered to participate, provided management with a general employee perspective on both new and ongoing projects and business strategies, as well as communicating to other employees the things that they learned about the strategic planning process.
Community outreach activities grew during 1998, with an expansion of the Helena Branch's "School-To-Business" partnership with Hawthorne Elementary, a nearby grade school. The partnership, which began in 1991, provides an opportunity for Branch staff to work with Hawthorne students and classes on various projects and to have the students into the Bank for special events. The program was enhanced in 1998 when a pen pal program was added for Branch staff and the fourth and fifth grade classes at the school.
EPIC was formally approved by the Director of Reserve Bank Operations and Payment Systems (RBOPS) in January 1999, and the first phase of EPIC was implemented in June. Over $3 million in state-of-the-art hardware and software were installed in the Branch's check sorter and computer rooms that allowed for the capture and archiving of images for all checks processed. Internet access to the image archive was granted to several financial institutions, and an EPIC Advisory Group, composed of a cross section of commercial bank CEOs and operations officers, was established to provide guidance in setting future strategy as the EPIC project progressed. In September, the second phase of the project was implemented, and several financial institutions began to use images in the return check process. By year-end 1999, EPIC's initial phases were implemented—on schedule and per budget—and the target of 38% for electronic check presentment (ECP) volume penetration was achieved.1
After the project's initial phases were completed, EPIC gained national attention. Branch management met with several local and national financial institutions, trade organizations and conferences to talk about the progress of the project. One element of the project's second phase, the Image Replacement Document (IRD) used in the return item phase of the check process, was particularly of interest to national groups promoting market acceptance of electronic check processing. The Branch's IRD would later become one of the major elements supporting national "Check 21" legislation, passed in 2003, legalizing replacement documents for paper checks in the national payments system.
Supporting the Branch's responsibilities with regard to EPIC, a third officer was added to the Branch staff for the first time in several years. This management addition also helped with the management of the increasingly important CDC project to which over 11,000 staff hours were devoted during 1999. CDC preparations also included building a contingency cash Y2K inventory.
Automated system installations and upgrades in 1999 included a new automated cash entry system known as CashLan, an upgraded video surveillance system in Protection and a new Item Processing System (IPS) in Check.
Fortunately for the Federal Reserve and the overall banking industry "century rollover weekend" occurred without a hitch. As a result of the thousands of hours of preparation by staff and Montana financial institutions, automated systems at the Branch were unaffected by CDC, allowing Helena to direct more of its resources and efforts to supporting EPIC, as well as other projects during 2000.
The conclusion of CDC and the launch of EPIC coincided with some concerns regarding the future of the Branch's fledgling electronic check processing project. In late 1999, the Federal Reserve System announced that it was moving from a check processing strategy largely built upon the local autonomy of its check offices to a standardized strategy—the Fed planned to standardize on an IBM-based check processing platform, as well as to standardize its check imaging systems in all of its offices. Nonetheless, implementation of EPIC proceeded given that capital investments had already been made. Also, at the time, it appeared that ImageSoft was a viable candidate to become the Systemwide imaging software vendor, and the Branch was assured that solutions would be pursued to support EPIC products and services as well as implementation of the later phases of the project following the Branch's conversion to the standardized platforms and systems.2
Market acceptance of electronic check processing improved in 2000, although not to expected levels. Participation in electronic check products and services rose from 39% to 42%, but was well below the 59% target rate for market penetration. And, while significant internal operational improvements were realized, the Branch's cost recovery figure was off its target by 12%, creating concerns regarding compliance with the Monetary Control Act's requirement of full cost recovery.
Despite falling short of its 2000 financial objectives, EPIC was continuing to gain national attention for its innovations in the payments system. Hardware vendor Unisys nominated EPIC for an award under the Computerworld Honors Program. Computerworld, jointly with the Smithsonian Institute, annually recognizes organizations that pioneer innovative applications of information technology to benefit society. The Branch received this award the following spring.
Although significant resources were assigned to EPIC and forest fires raged throughout much of the summer in Montana, the Branch was still able to prepare for and successfully host two significant meetings during 2000: a tour and visit for a delegation of 13 Singapore bankers and the Federal Reserve System's Conference of Presidents in August.
The Singapore visitors, representing the Association of Banks in Singapore, visited Helena to learn about the Branch's EPIC project first-hand, as well as to study Montana's banking structure. The group was treated to two panel discussions on legal and regulatory issues in the United States affecting electronic check presentment and the impact of check imaging on commercial bank operations.
The Conference of Presidents, a meeting of all Bank presidents in the Federal Reserve System, including the Ninth District's own President Gary Stern, inspired significant remodeling in the Branch, including painting, work area reorganizations, new carpet installation, and acquisition of additional pieces of art.
The Federal Reserve System forged "full steam ahead" with its four-pronged Check Modernization initiative in 2001:
Coinciding with this strategic change, EPIC continued to miss its financial targets, due largely to the fact that large bank participation did not occur despite indications of earlier market research. Ultimately, large banks were concerned about investing in a nonstandard process. In addition, the Branch was scheduled to transfer to the new standardized ISS in June, which was not compatible with the Branch's ImageSoft-based imaging technology. Thus, the Branch exited its EPIC initiative in order to focus more fully on achieving its increasingly challenging financial targets and on preparing for the significant changes that would result from the new Systemwide Check Modernization initiative. Although EPIC was never fully implemented, the project itself provided considerable insights for the Federal Reserve System and the banking industry into the barriers, incentives, capabilities and challenges associated with image-supported electronic check processing.3
This change in focus to financial measures and Check Modernization implementation required that Branch management initiate one of the most rigorous cost reduction and revenue enhancement strategies in its 80-year history, cutting expenses in all areas by nearly $500,000 in order to come closer to its local net revenue (LNR) target and to standardize its Check and Cash services. Changes included:
The Branch also launched a new initiative named the "Branch Future Direction Project" with the objective of identifying further cost reduction strategies to enhance the long-term efficiency and viability of the Branch as it moved into the new era of standardized and electronic check processing and national Fed products and services.
2001 was also a notable year for enhanced security measures at the Branch. Immediately following the September 11 terrorist attacks in New York City and Washington, D.C., changes to the Federal Reserve's security infrastructure began. At the Branch, this meant implementing additional screening measures, including x-raying all incoming check shipments, as well as other parcels and deliveries; screening all non-employee vehicles; screening all visitors through a magnetometer; hiring five additional Protection officers; planning for the training and credentialing of all Protection officers as Federal Law Enforcement Officers; and planning for significant perimeter improvements, beginning in 2002.
Considerable budget pressures, along with residual expenses from the abandoned EPIC project, led to another series of cost and personnel reductions beginning in 2002. The Branch Future Direction Project Team, composed of officers from both Minneapolis and Helena, recommended sweeping changes to the organizational structure at the Branch, including outsourcing the janitorial duties of the Facilities Department; eliminating the Human Resources department, and centralizing its core responsibilities in the Minneapolis office; and downsizing positions in other business support areas, such as Administration, Business Development, and Financial Management. The Branch officer ranks were once again reduced to two. In all, 14 positions were eliminated. These "painful" changes, as described by Branch Manager Sam Gane in the Annual Report, helped the Branch achieve most of its significant financial targets in 2002, including exceeding its check local net revenue target and coming in below its annual expense budget.
The Federal Reserve System also embarked upon a multiyear Check Infrastructure Study in 2002 in an effort to overcome its Systemwide financial shortfall in the Check business, with the Branch, due to its small check volumes and size, among a short list of offices considered for closure as the System consolidated its check processing offices. Largely due to the cost reductions achieved during 2002, the Branch was not among the list of 13 offices slated for check consolidation, as announced in early 2003.
As the national check business struggled to cope with the changing landscape of the financial services industry, other areas of Branch business saw positive growth. Planning began in late 2002 to add a Community Affairs liaison position to bring a new focus to the Branch on community banking issues, particularly with regard to financial services in Indian Country and financial literacy in the state of Montana.
In addition, the Law Enforcement Department saw considerable change as the System adopted more stringent security requirements in response to September 11 and terrorist threats on the United States' financial infrastructure. 2002 saw the reconfiguration of the courier entrance, upgraded security gates, and construction of a hardened perimeter wall on the east and south sides of the Branch grounds. Law Enforcement officers were also trained and credentialed as Federal Law Enforcement Officers and given arrest authority.
January 2003 marked the Branch's long-awaited transition to the Federal Reserve System's standardized check processing environment. Coinciding with this move in Check, the Branch took the last steps toward standardizing its Cash Services department as well. Cash exited the coin wrapping business and worked with the armored carrier industry to establish coin terminals in both Helena and Kalispell.
Also in January of that year, the role of the Branch's Board of Directors in providing input into monetary policy increased by providing for its recommendation on interest rates to the Bank's President. The President, along with the Minneapolis Board of Directors, provides economic input to the Federal Open Market Committee, which sets interest rates. Prior to 2003, the Branch's Board provided only anecdotal information on regional economic conditions to Minneapolis, rather than a recommendation on the adjustment of the primary credit rate.
Continuing its drive to prove its viability, the Branch embarked upon another project to further streamline its check processing operation in early 2003. The "Cash Cow or Bust" (CCOB) project was charged with the task of making the Helena check operation as efficient and financially viable as possible. This initiative resulted in restructuring the department's Other Fed deadline, collapsing three shifts into two, and eliminating costly transportation and an additional 10 positions in the Branch's Check operation. The Branch also added a new "Deposit MICR" service, which helped it achieve its local net revenue target and come in under the annual budget. The changes were quite timely as the national trend of consistently declining check volumes finally arrived at the Branch, which experienced a 2.2% drop in check processing volumes in 2003.
In contrast to the previous two years, 2004 dawned with very little change on the horizon. Largely as a result of the CCOB restructuring, the Branch was not among an additional nine check processing offices targeted for closure, as announced by the second round of the Check Infrastructure Study in early 2004.
The Branch began to prepare for the implementation of the Check Clearing for the 21st Century Act (Check 21) slated for October 28, 2004, by communicating with and providing seminars for Banks, vendors and other interested parties regarding the impact of this legislation and the multitude of standardized Check 21 products and services that would be rolled out by the Federal Reserve System upon enactment.
The Branch also launched an internal controls initiative to raise employee awareness of the importance of key operational and custody controls in the Bank and related accountability, training and procedure documentation.
Beginning in 2003, the Community Affairs function at the Branch began to take on a more visible role in Indian Country and financial education issues in the western half of the Ninth District. From 2003 to 2005, Branch Manager Sam Gane served as President of the Executive Committee of the Montana Council on Economic Education (MCEE), which plays a predominant role in promoting economic and financial education in the state. By 2004, Branch Community Affairs staff had worked closely with several Montana Indian nations and the National Conference of Commissioners on Uniform State Laws to draft and advocate the adoption of a model tribal commercial code, aimed at breaking down barriers to commercial and consumer credit. Branch Community Affairs staff also partnered with the MCEE and 16 other organizations to establish and lead the Montana Financial Education Coalition (MFEC) and host the first two annual Montana Financial Education Conferences.
At the end of 2004, it was abundantly clear that the drastic cost containment measures taken in the previous two years had paid off. The Branch exceeded its local net revenue target by over 34%, came in under its annual expense budget by almost $532,000, and finished amortizing all outstanding expenses from the EPIC project.
In early 2005, the Branch learned that, although it had again been among a short list of offices considered for closure during a third round of review and recommendations by the Check Infrastructure Study, it was not selected for consolidation. The Branch continued to look for ways to improve its overall efficiency however, restructuring its weekend Check operations by using Check 21 processes and participating in a District-led Cash Infrastructure Study to determine where opportunities for significant cost savings, improved productivity and greater efficiencies might be found in delivering Cash services to Montana financial institutions.
This history of the Helena Branch's first 85 years offers a glimpse into the influence that the Branch has had on the community of Helena as well as on the lives of its employees. It also exemplifies how the Branch has been swayed by historical events and, at the same time, has created its own place in history. From coping with a building damaged by an earthquake to protecting a building from terrorist (and other) threats, and from operating in a relatively stable environment to adjusting to the complexities of the information age and a declining check processing market, the Branch has shown its ability to adapt when needed and move into the future both effectively and efficiently. These characteristics suggest a continuing opportunity for success in the Branch's next 85 years.
1 Epic: A Project Review, Susan Woodrow, Workgroup Chairperson, May 2002, p. 14.
2 Ibid, p. 16.
3 Ibid, p. 22.