Econ Focus

What "Check Truncation" Would Mean for Banks and Consumers

Less than 50 years ago, clerks sorted checks by hand. Today, check clearing institutions use mechanical and electronic means to sort and process the more than 40 billion checks written each year.

Now, it is possible to photograph checks and eliminate the need to physically ship checks to their destination. If the Check Clearing for the 21st Century Act passes Congress, legal changes will allow checks to be removed from the collection or return process. A substitute check would serve as the legal equivalent of the original check and would include all information on the original. While a bank could no longer demand to receive the original check, it could still ask to receive a paper check. Banks wouldn't need to send couriers every afternoon to each of their branches and ATMs to fetch checks or fly checks across the country each night. Instead, digital images of checks could be transmitted electronically from those locations to the banks' operations centers for processing. That would dramatically reduce time and cost associated with physical transportation and would also reduce risks of lost or delayed checks because of bad weather or even plane crashes.

The advantages of such a change became clear after Sept. 11, 2001, when check flows slowed considerably. During the week of the attacks, the Federal Reserve Banks' daily check float, typically a few hundred million dollars, ballooned to more than $47 billion. (Check float occurs when the Fed credits a bank for depositing a check and, because of processing delays, has not yet collected the funds from the bank upon which the check is drawn.)

According to Federal Reserve Board Vice Chairman Roger Ferguson Jr., if check truncation had been in use, banks could have collected many more checks by transmitting electronic information and presenting substitute checks to paying banks.

Several consumer groups object to the legislation, however, because they say it forces check truncation on people who may not want it. Consumer groups also say the act doesn't restrict fees for substitute checks nor does it restrict how banks use information from check images.

Many banks and credit unions already truncate checks, providing copies on request. Under this legislation, however, people will lose the choice to receive their original checks.

"If the check clearing act is adopted, it may take longer to resolve a dispute about the payment of a check, since the original check won't be in the consumer's possession or even at the consumer's bank," says Gail Hillebrand of Consumers Union. Vice Chairman Ferguson has said that debate continues about whether additional customer protections may be necessary for substitute checks and, if so, how extensive those protections should be.