Preparing for the day when the paperwork of check clearing gives way to the transfer of check images, the Federal Reserve Bank of Boston released a guide Tuesday for dealing with images of checks returned because of insufficient funds.
The document, "A Framework for Exchanging Image Returns," was developed by the Federal Reserve Board's Industry Image Returns Task Force, which includes representatives of a cross-section of small and large banks and industry groups.
Electronic check images already had the same legal weight as the checks themselves. The primary purpose of the guide, which can be obtained online at www.frbservices.org, is to help banks handle the technical, regulatory, legal, and marketing issues involved in exchanging check images.
Today's process for sending a returned paper check back to the bank of first deposit is lengthy, said Steve Whitney, a senior vice president of retail payments at the Boston Fed.
Often the journey begins when the paying bank sends the check to its local Fed bank, which processes and transports it to the Fed bank in the area of the depositing bank. The check is then sent to the bank of first deposit. This usually takes a day or two, and the bank of first deposit then has to send the check back to the customer who submitted it, he said.
If a check is converted to an electronic image, the paying bank can take that image and transmit it, much faster, along the same lines as the paper check, or send it directly to the bank of first deposit, Mr. Whitney said. In both cases the process should take only a few hours, he said.
"The image of the file gets to the bank of first deposit much more quickly than in today's environment," he said. "The benefit is that a day or two is taken off the time" it takes to return a bounced check.
The bank of first deposit can then send the image electronically to the customer, which is faster than mailing a paper check, he said.
The electronic transmission of bounced checks is particularly helpful in reducing certain types of fraud, Mr. Whitney said. Not only can a bank of first deposit learn more quickly that an account has insufficient funds, which helps it decide whether to put holds on certain accounts, but it also can get that information to its corporate customers more quickly, he said.
This lets retailers, for instance, know not to take a check from a particular customer, he said. "Getting information moving faster among a number of different participants in the process helps reduce check fraud."
The conversion of bouncing checks to electronic images is expected to supplement the Fed's efforts to push the conversion of paper checks to electronic formats, a program that is still in its infancy.
