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Electronic Banking: The Check Truncation Issue

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The clearing process for checks is more expensive than other methods of payment which are cleared electronically, such as credit cards and Internet banking. The main reason is that check clearing requires banks to physically present and return checks unless they obtain legal agreements to clear electronically. The Check Clearing for the 21st Century Act of 2003 (H.R. 1474) would eliminate the requirement to physically return the original checks to the paying bank. On April 3, 2003, the Senate held its first hearing on the Fed’s Check Truncation Act (CTA) proposal that was sent to banking committees of both Houses in December 2001. On June 5, 2003, the House passed H.R. 1474 and referred it to the Senate Committee on Banking, Housing and Urban Affairs. On June 18, 2003, at a markup, the Senate Banking Committee approved its Check Truncation Act of 2003 (S. 1334) and on June 27, 2003, the full Senate passed S. 1334 and incorporated it in H.R. 1474. On October 1, 2003, House and Senate conferees reported H.R. 1474 (Conference Report H.Rept. 108-291).

Estimates of cost savings from moving to electronic check clearing vary widely because estimates of the cost of using a check and the number of checks written each year remain in dispute. Consequently, estimates of cost savings range from $1.4 billion annually for truncation alone to $68 billion for replacing checks with electronic payments. A significant part of the estimated savings comes from eliminating handling, sorting, and physically transporting checks to the paying bank.

In testimony at the hearing of Senate and House banking committees in the 108th Congress, the Fed’s CTA in the Senate and H.R. 1474 in the House were supported by the Federal Reserve Board, which testified that it would like to remove some of the consumer protection provisions that were in its 2001 proposal because they were unnecessary. The Fed argued that the regulatory burden these provisions would place on banks would outweigh the consumer benefits. Still, the bill is supported by America’s Community Bankers, the American Bankers Association, the Consumer Bankers Association, and the Financial Services Roundtable.

The opposition to the CTA came from the Consumers Union, supported in its testimony by the Consumer Federation of America, the U.S. Public Interest Research Group, and the National Consumer Law Center. The Consumers Union argued that the Act would make it impossible for an estimated 45.8 million U.S. households who are currently getting their paper checks back to continue to do so. These consumers would be less protected from fraud under the Act than under the existing check clearing process when there are disputes about check payments. The Consumers Union’s suggested changes in the proposed legislation would significantly increase consumer protection. At the same time, these changes would increase financial institutions’ costs of voluntarily adopting check truncation. Other witnesses argued that those banks with decades of using truncated checks have not experienced many disputed check payments, and when they did they were quickly resolved.

This report will be updated as legislative and financial developments warrant.


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