Group In Congress Wants To Ensure Check 21 Benefits Are Returned

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A group of bipartisan lawmakers said last week they will move to ensure that consumers share in the expected billions of dollars in benefits that will be created from the new Check 21 law that establishes electronic versions of checks as legal tender.

But such action is not expected to occur for several years, despite legislative pressure to do so sooner, because of slow implementation of the law just six months after its enactment and a resulting paucity of data illustrating the financial benefits.

Still, Rep. Spencer Bachus (R-AL), chairman of the House Financial Services Subcommittee on Financial Institutions, insisted he and other congressional leaders are determined that the billions of dollars of interest to be earned from reduced clearing time for checks allowed under Check 21 is shared by credit unions, banks and other financial intermediaries with consumers. "Simple fairness would dictate that consumers should also benefit from reductions in the time necessary for holding their deposits," said Bachus, during a hearing last week on the implementation of the new check law.

Rep. Carolyn Maloney (D-NY) used the hearing to tout her bill, which would reduce time a financial institution may hold a check before crediting an account, in line with the projected improvement in check clearing. Maloney's bill, called the Consumer Checking Account Fairness Act, would reduce the allowable hold time to give consumers faster access to their funds.

But a top official with the Federal Reserve cautioned the panel that it is far too soon to either draw conclusions on the effects of the new law or to be acting to adjust hold times on checks. Louise Roseman, director of the Fed's division of Reserve Bank Operations and Payment Systems, said implementation of Check 21 has been slow, with only 400,000 of the 50-million checks processed by the Fed each day now being converted to digital images as allowed under the new law.

"Ongoing improvements in the check-collection system have not yet been extensive enough to warrant a reduction in the maximum permissible check-hold periods, but we will continue to monitor development closely," she told the panel.

"To date," she said, "relatively few banks have taken advantage of the opportunities provided by Check 21. The rate of adoption of Check 21 is not at all surprising: we did not anticipate that there would be an immediate, large shift in the way checks are collected."

"Still," she added, "there have been some important first steps that help enable banks to leverage new Check 21 authority, such as numerous agreements on technical standards for creating substitute checks. It is important to recognize, however, that while a critical impetus for change, banks will no longer need substitute checks for processing once they both collect and receive checks electronically."

Many reforms in the private-sector payments systems must still be made to take full advantage of Check 21, said Roseman. Among them are broader adaptation of systems by software vendors and third-party check-processors to support the creation of substitute checks and the exchange of digital images. In addition, banks and credit unions will need to adjust their own operations to make best use of new technologies. They will also need to make sure their updated systems are compatible with those of other banks and credit unions in the system to allow them to exchange checks electronically.

But Roseman said data clearly indicates the vast reduction in paper check usage and the concurrent movement towards electronic transactions is continuing at a rapid pace. The expanding variety of electronic transactions, including Internet-based, credit and debit, and person-to-person transfers, has revolutionized the payments system, reducing the number of paper check transactions by a fourth-from 50 billion in the mid-1990s to around 37 billion in 2003, according to the Fed.

And a new study by NACHA-The Electronic Payments Association-shows automated clearinghouse payments grew 20% last year to more than 12 billion, which was largely driven by a six-fold increase of accounts receivable check conversion (electronic conversion) to more than 1.25 billion. As Roseman pointed out during her congressional testimony last week, ARC does not involve the collection of checks or use of the authority granted under Check 21, but is simply the collection of funds from a consumer's bank or credit union account using information that appears on checks, like routing, account or serial numbers. This form of payment, grew by more than one billion payments and accounted for 54% of all ACH transaction growth in 2004.

Internet-initiated ACH payments represented the second biggest growth area, with 967 million ACH debit payments, valued at more than $300 billion, made over the Internet, last year. That's up 40% from 2003. NACHA estimated that 80% of Internet-based transactions were to pay bills; 18% were to transfer funds; and 1% were to make purchases.

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