Changes the Federal Reserve Board has proposed to Regulation E regarding the conversion of paper checks to electronic transactions could end up confusing consumers, bankers and merchants say.
Under the Fed’s plan, merchants would have to notify consumers who present checks at the point of sale that their checks may be converted to electronic transactions, that their accounts will be debited quickly, and that their checks will not be returned.
Bankers’ concern “is that their customers not be confused,” said Nessa Feddis, the senior federal counsel at the American Bankers Association. “If they didn’t realize” they had authorized an electronic transaction, “they might call the banks.”
If disclosures are clearer, Ms. Feddis said in an interview, people “won’t be surprised, upset, and calling the bank.”
Checks can be converted at the point of sale by a cashier, or at lockboxes where they are sent for payment. The check is electronically scanned and its MICR code (magnetic ink character recognition) is captured for the routing, account, and serial numbers. That information and the amount of the check are then electronically transmitted to the consumer’s financial institution and debited from a direct deposit account (assuming there are sufficient funds).
The process has been used in various merchant stores for a number of years. Nacha, the electronic payments association, has rules that address the disclosures about converting checks to automated clearing house transactions.
In a Nov. 17 comment letter, Ms. Feddis asked the Fed to delete the proposed disclosure that would say that “funds may be debited from the consumer’s account quickly.”
“We believe that it will be confusing and misleading to consumers as it suggests that the transaction will process more quickly than if it were to be processed as a check,” she wrote.
In the interview, Ms. Feddis said that local checks (which make up the overwhelming majority of those submitted to cashiers) are often processed just as quickly as an electronic transaction through the ACH.
Dave Willis, the vice president of debit card and fund services for Navy Federal Credit Union, said that such a disclosure was unnecessary. Consumers already know “that float is coming out of the system” since check conversion at the point of sale has been around for years, he said.
Also, Mr. Willis said in an interview, the Check Clearing for the 21st Century Act has received much publicity. Since October the law has permitted banks to settle transactions with image replacement documents, not the original check — though banks with the proper technology could also agree to keep the images electronic. Such transactions would go very fast.
Another proposal by the Fed would require merchants and payees who receive paper check remittances at lockboxes and convert them to electronic payments to inform consumers that their checks will not be returned.
“We believe such required disclosure would confuse consumers that already do not receive checks back from their financial institutions with their monthly statements,” wrote Ian W. Macoy, a senior director at Nacha, in a Nov. 19 letter to the Fed.
Under Nacha rules, merchants converting checks at the point of sale must return them to the consumer once they have been converted. Nacha spokesman Mike Herd said in an interview last week that the proposed notification would puzzle rather than inform consumers.
Many institutions today do not return checks received by remittance, he said, so it would confuse consumers to tell them “that they may not get their checks back when they don’t get their checks back” already.
On the other hand, Mr. Herd said, merchants would be required to tell a consumer at the point of sale, “ ‘You’re not going to be getting your check back, when you’re getting your check back.’ ”
The length and complexity of the model notifications the Fed designed were also questioned.
Mallory B. Duncan, the general counsel for the National Retail Federation, wrote in a Nov. 19 letter that notices at the point of sale “are useless unless they are brief and to-the-point, such as ‘Checks may be converted to electronic funds transfers.’ ”
In an interview last week, Mr. Duncan said that longer notices would be more appropriate in a lockbox remittance situation where the consumer had the opportunity to more leisurely read the notice.
The Fed requested comments on the proposed changes to Reg E in September. The deadline was Nov. 19.
