Check Truncation Has Not Resulted Yet in Overall Gains in Economic Efficiency for the Federal Reserve or for Banks, but Is Expected to Produce Efficiencies in the Future

Check truncation has not resulted yet in overall gains in economic  efficiency for the Federal Reserve or for the banks we surveyed, but  Federal Reserve and bank officials expect efficiencies in the future. Our analysis of Federal Reserve cost  accounting data suggests that its costs may have increased since the  passage of Check 21, which may reflect concurrent maintenance of its  paper processing infrastructure, investments in equipment and software  for electronic check processing, and incurred costs associated with  closing check processing sites. For example, several of the 10 largest banks noted that  maintaining a dual paper-electronic infrastructure to date had prevented  them from achieving overall lower costs, although they had seen reduced  transportation and labor costs. With reduced paper volumes  accompanying check truncation, the Federal Reserve’s transportation   costs for check services decreased approximately 11 percent from the  fourth quarter of 2001 through the fourth quarter of 2007 (see fig. Use of Substitute Checks and Check Imaging Appears to Have Had a Neutral Effect on Fraud Losses

Based on a recent American Bankers Association’s (ABA) survey of their  members about fraud in deposit accounts, the analysis of responses to our  data collection instrument, and our interviews with banks, we found that  the use of substitute checks and check imaging has had a neutral effect on  fraud losses. Most Bank Consumers Appeared to Have Accepted Changes to Their Checking Accounts from the Check Truncation Process Resulting from Check 21

On the basis of our structured bank consumer interviews, we found only a  small percentage of consumers who preferred to receive canceled checks  with their checking account statement. Also, most of the consumers were not concerned significantly about being  able to demonstrate proof of payment using a substitute check or check  image rather than a canceled check. Few of the consumers reported that  they suffered errors from the check truncation process. Several consumers  stated that they did not need the “extra paper” from canceled checks and  image statements and that online reviewing was more secure than  receiving canceled checks. Bank Consumers Have Realized Benefits and Costs Relating to Faster Check Processing and Access to Information about Their Checking Accounts

To the extent that banks have implemented electronic check processing,  bank consumers have realized both benefits and costs relating to faster  processing and access to information about their checking accounts. We also found that some consumers may incur fees  related to receiving canceled checks and check images with their checking  account statements. Based on our review of available data from 2001  through 2006, it appears that fees for canceled checks have increased and  fees for check images have remained relatively flat. Check 21’s Expedited Recredit Is Considered a Consumer Benefit, but It Appears That a Limited Number of Consumers Filed for the Benefit

One of the expected consumer benefits of Check 21 is the right to  expedited recredit, but the extent to which consumers have benefited is  unclear. On the basis of our consumer and bank interviews, it appears that a small  number of bank consumers have filed expedited recredit claims. The report objectives are to: (1) determine the gains in economic  efficiency from check truncation and evaluate the costs and benefits to  banks and the Federal Reserve System (Federal Reserve) from check  truncation, (2) assess consumer acceptance of the check truncation  process resulting from Check 21, and (3) evaluate the costs and benefits to  consumers from check truncation. More specifically, the structured interview of the 108  consumers included questions on the following issues: (1) bank fees  charged to them to receive canceled checks, substitute checks or image  statements; (2) instances and subsequent resolution of errors involving  their checking accounts; (3) their preferred method of receiving  information from their bank about check payments activity (such as  receiving their canceled checks, reviewing information online, or  reviewing an image statement); (4) instances in which they had to  demonstrate proof of payment using a canceled check or a check image  and their resolutions; (5) their level of concern about using a check image  as a proof of payment; and (6) whether their bank had extended its cut-off  time for accepting deposits and the consumer’s opinion about the merits  of such an action. Appendix II: Econometric Analysis of Check 21 for Economic Efficiency in the Federal Reserve’s Check Services

The Check Clearing for the 21st Century Act of 2003 (Check 21) was  intended to make the check payment system more efficient and less costly  by facilitating wider use of electronic check processing without  demanding that any bank change its current check collection practices. Check 21 facilitates electronic  check processing by allowing banks to use imaging technology for  collection and create substitute checks from those images for delivery to  banks that do not accept checks electronically.
Why GAO Did This Study

Although check volume has declined, checks still represent a significant volume of payments that need to be processed, cleared, and settled. The Check Clearing for the 21st Century Act of 2003 (Check 21) was intended to make check collection more efficient and less costly by facilitating wider use of electronic check processing. It authorized a new legal instrument--the substitute check--a paper copy of an image of the front and back of the original check. Check 21 facilitated electronic check processing by allowing banks to use electronic imaging technology for collection and create substitute checks from those images for delivery to banks that do not accept checks electronically. Check 21 mandated that GAO evaluate the implementation and administration of the act. The report objectives are to (1) determine the gains in economic efficiency from check truncation and evaluate the benefits and costs to the Federal Reserve System (Federal Reserve) and financial institutions; (2) assess consumer acceptance of the check truncation process resulting from Check 21; and (3) evaluate the benefits and costs to bank consumers from check truncation. GAO analyzed costs for the check operations of the Federal Reserve and a group of banks, interviewed consumers about their acceptance of and costs and benefits of electronic check processing, and analyzed survey data on bank fees. The Federal Reserve agreed with the overall findings of the report.

What GAO Found

Check truncation has not yet resulted in overall gains in economic efficiency for the Federal Reserve or for a sample of banks while Federal Reserve and bank officials expect efficiencies in the future. GAO's analysis of the Federal Reserve's cost accounting data suggests that its costs for check clearing may have increased since Check 21, which may reflect that the Federal Reserve must still process paper checks while it invests in equipment and software for electronic processing and incurs costs associated with closing a number of check offices. However, GAO found that the Federal Reserve's work hours and transportation costs associated with check services declined from the fourth quarter of 2001 through the fourth quarter of 2007. Several of the 10 largest U.S. banks reported to GAO that maintenance of both paper and image-based check processing systems prevented them from achieving overall lower costs, although they had reduced transportation and labor costs since Check 21 was enacted. Check imaging and the use of substitute checks appear to have had a neutral or minimal effect on bank fraud losses. Most bank consumers seem to have accepted changes to their checking accounts from check truncation. In interviews with bank consumers, the majority of them accepted not receiving their canceled checks and being able to access information about their checking account activity online. Several reported that they did not need the "extra paper" from canceled checks and that image statements and online reviewing was more secure than receiving canceled checks. Eleven percent of the 108 consumers still preferred to receive canceled checks. Most consumers reported that they were not significantly concerned about their ability to demonstrate proof of payment using a substitute check or check image rather than a canceled check and few reported that they suffered errors from the check truncation process. Also, GAO found that the federal banking regulators reported few consumer complaints relating to Check 21. To the extent that banks have employed check truncation, bank consumers have realized benefits and costs relating to faster processing and access to account information. GAO found that some banks have extended the hours for accepting deposits for credit on the same business day, which can result in faster availability of deposited funds for consumers. Based on consumer interviews, consumers have benefited from receiving simpler imaged account statements and immediate access to information about check payments. Check 21's expedited recredit (prompt investigation of claims that substitute checks were improperly charged to accounts and recrediting of the amount in question) also is considered a consumer benefit. However, based on our consumer and bank interviews, it appears that a small number of consumers have filed expedited recredit claims. Based on analysis of survey data on bank fees, GAO found some consumers may incur fees related to receiving canceled checks and images. Since 2004, fees for canceled checks appear to have increased, while fees for images appear to have remained relatively flat.