Although the UCC allows for the use of electronic check presentment, paying banks still have the legal right to insist on paper presentment. To determine the volume of checks that were electronically presented in the United States from 1995 to 1997, we collected data from the Federal Reserve Banks on their ECP services. Under the three nationally available ECP services, the collecting banks deposit checks with the Federal Reserve check offices, but the three ECP services differ in how the Federal Reserve check offices handle the paper checks after they have been electronically presented to paying banks. ECP Represented a Small but Growing Percentage of U.S. Interbank Check Volume in 1997

In 1997, 2.2 billion checks were electronically presented in the United States—almost 5 percent of the estimated U.S. interbank check volume (about 45 billion checks). During this period, the Federal Reserve’s ECP volume increased 114 percent, from slightly more than 1 billion checks to 2.2 billion checks. A Limited Sample of ECP Return Items Suggested That ECP Services Available Nationally Had Little Effect on the Percentages of Checks Returned Within Permissible Hold Periods

Our analysis of a limited sample of returned checks collected in four Federal Reserve check offices during the week of January 12 through 16, 1998, indicated that the use of ECP services that are available nationwide did not have a substantial effect on the percentage of dishonored local checks returned to depositary banks within the 2-day hold period. In interviews with regulatory officials and bankers, we identified several factors that may play a role in discouraging banks from agreeing to accept an electronically presented check, including the lack of a clear economic incentive to use electronic presentment; laws and regulations that require maintaining cancelled checks in certain situations; a perceived consumer preference for receiving cancelled checks with monthly bank statements and state laws requiring that cancelled checks be offered;
UCC and Regulation CC’s requirement that paying banks generally must physically return a dishonored check to depositary banks; operating and business factors that limit banks’ adoption of ECP; and a concern that ECP may increase banks’ vulnerability to forged signatures and counterfeit checks. Bankers Said That ECP Use Makes Banks More Vulnerable to Forged Signatures and Counterfeit Checks

In interviews and written responses to our questions, officials at five commercial banks indicated that forged signatures and endorsements, as well as counterfeit checks, have created their highest check fraud losses in the period since 1995. Because the receipt of the MICR data does not provide paying banks with information viewed as adequate for identifying forged signatures, these banking officials said they have continued to insist on paper presentment. Methodology of the ECP Return Item Survey

To determine how ECP use affects the length of time that it takes for a dishonored check to be returned to a depositary bank, that is, the return cycle time, we used data from surveys conducted by us and the Federal Reserve Board. Magnetic Ink Character Recognition (MICR) Line

The line at the bottom of a check that identifies the routing number of the paying bank, the amount of the check, the number of the check, and the account number of the customer.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the current role of electronic check presentment (ECP) in the collection process for interbank checks, focusing on: (1) identifying and describing the ECP services offered to U.S. banks; (2) determining the ECP volume in the United States for 1995 through 1997; (3) determining whether ECP affects the length of time that it takes for a dishonored check to be returned to the depositary bank; (4) identifying any factors that may limit ECP use; and (5) determining how ECP may affect banks' risk of check fraud.

What GAO Found

GAO noted that: (1) the Federal Reserve System is the leading ECP provider in the United States; it offers three ECP services nationwide; (2) for these services, the collecting banks send the paper checks to the appropriate Federal Reserve check office, which then presents the checks electronically to paying banks; (3) these ECP services differ in how the paper checks are handled after they have been electronically presented to paying banks; (4) delivery of the magnetic ink character recognition (MICR) line data serves as presentment, and the checks are truncated at the Federal Reserve check office serving the paying bank; (5) ECP volume accounts for a small, but growing, percentage of the overall U.S. interbank check volume; (6) from 1995 to 1997, ECP volume increased 114 percent; (7) GAO's analysis of return items that were initially electronically presented suggests that use of the Federal Reserve ECP services may not have a substantial effect on the percentage of dishonored local checks that are returned to depositary banks within the 2-day hold period; (8) for these ECP services, the percentage of local checks returned within 2 days during this period was only marginally higher than the paper-check presentment method; (9) interviews with regulatory and banking officials identified several factors that deter banks from accepting the electronic presentment of checks, including: (a) the concern that ECP may increase a paying bank's vulnerability to check fraud; (b) the lack of a clear economic incentive to use electronic presentment; and (c) a perceived consumer preference for receiving cancelled checks; (10) in addition, certain types of state laws have been identified as having the effect of impeding ECP because of the laws' reliance on paper checks; (11) while ECP may allow paying banks to identify checks that might not be honored sooner and deter certain types of check fraud, banking officials expressed concerns that ECP could make paying banks more vulnerable to other types of check fraud; (12) officials at five large banks told GAO that forged signatures and endorsements, along with counterfeit checks, have created the highest check fraud losses in the period since 1995; and (13) because the receipt of the MICR line data does not provide a paying bank with adequate information for identifying forged signatures, banking officials said they continue to insist on paper checks.