"Check 21": Beyond Truncation, Bill's Provisions Provide Service Opportunities for Credit Unions

With the House poised (as of this writing) to vote on the Check Clearing for the 21st Century Act (“Check 21″), and with the Senate considering its own legislation, credit unions and other financial institutions are on the verge of revolutionizing the way that share drafts and checks are processed. Indeed, cost savings will be realized by consumers and by credit unions and others when this legislation is enacted. If enacted, these bills would increase the ability of financial institutions to convert paper checks into electronic checks and to use electronic checks in the check collection/return process. The legislation would accomplish this by allowing financial institutions to send checks electronically to another financial institution, without a prior agreement to do so. Currently, a prior agreement is required. A financial institution would not have to accept electronic checks; however, it could request a paper copy of the electronic check file, which would be called a substitute check. The practical effect of this legislation is that financial institutions will have the ability to truncate paper checks – that is turn them into electronic files at will and send those electronic files to other financial institutions without prior agreements and consumers will not necessarily get share drafts or checks returned. As a result, this legislation would increase check truncation among financial institutions and provide numerous advantages to the payments system. Even if a consumer’s financial institution provides returned checks as a service, the consumer may not receive these checks because other financial institutions may have truncated and destroyed the check earlier in the check collection process. When a consumer claims that the share draft is necessary to resolve a dispute, then the experience of credit unions has been that at nearly all times consumers are satisfied with a clear, legible copy. In general, this legislation would increase check truncation among financial institutions and provide numerous advantages to the payments system. Electronic check processing would likely quicken the collection and return of checks, reduce the costs of processing checks, eliminate the need to physically transport checks, and reduce the vulnerability of our check system to attacks that affect our transportation networks. Although these bills would allow greater use of check truncation, they would have less of an impact on credit unions and their members (than bank and bank customers) because credit unions already truncate or safe-keep share drafts. Credit unions tend to truncate checks at the last step in the check collection process by not distributing share drafts to their members. Under this system, there are two processes. In the first case, a credit union may receive the checks that a member writes against his or her account at the credit union, but the credit union does not pass those checks onto the member. In the second case, a credit union may have their members’ checks truncated by a Federal Reserve Bank or a third-party processor, and the essential share draft information is transmitted electronically to the credit union for payment or dishonor. In this scenario, neither the credit union nor the member receives the original share draft. This type of truncation, where the financial institution does not return the share draft or check, is called check safekeeping. This usage of check-safekeeping among credit unions is widespread. For instance, sixty-four percent of credit unions offer share draft accounts, and of those credit unions ninety-one percent do not return share drafts. The impact of these bills, as currently drafted, on credit unions also would be limited because the bills apply to substitute checks. As a result, they would not affect existing safekeeping operations, like those currently conducted at credit unions. In particular, the new consumer provisions in Check 21 only apply to substitute checks and should not be applicable to the share drafts offered to members. This legislation would assist credit unions in offering services that benefit their members. For example, the ability of a credit union to truncate checks drawn on another financial institution that the credit union member deposits into his or her account or uses to make a credit union loan payment can help members. Studies have shown that electronic checks are usually returned faster than paper checks. As a result, a credit union may be able to inform a member faster if an electronic check that the member deposited will not be honored. Also, some credit unions have combined their check-safekeeping programs with check imaging systems. Imaging programs provide consumers with access to the image of their share draft or check. In particular, some credit unions have used imaging to post images online and increase the access their members have to copies of their share drafts. At least one credit union has seen its members rely heavily on this feature to inspect their checks, and the credit union received numerous compliments for providing this service. In addition, imaging and truncation have substantially reduced the time required for some credit unions to retrieve a copy of a share draft, which allows credit union personnel to investigate complaints and resolve disputes involving share drafts much more quickly. This bill would encourage the electronic processing of checks, instead of paper processing of checks. The move to electronification will probably help consumers in unanticipated ways, likely in relation to the current fears regarding loss of privacy and fraud. Paper processing of share drafts and checks make them accessible at many points in the physical transportation process to many people and multiple personnel. Electronic check files may pose less of a risk because they often have greater security features such as password and encryption enhancements. Moreover, there have been reports of check fraud from thieves stealing mail or scouring garbage cans for canceled checks. Since the electronic systems of check truncation reduces the accessibility of paper checks and eliminates the need for physical transportation, electronic processing should leave fewer opportunities available for criminals to engage in check fraud. There is a concern that this legislation could create the risk of double debits if a paying financial institution receives a substitute check and an electronic file for the same transaction and posts both. Credit unions have not experienced double debits with their financial institutions, and double debits could be addressed by a financial institution within its normal routines for exception processing and dispute resolution. Moreover, consumers are protected against double debits by consumer protections in current laws. This legislation has the potential to increase substantially the efficiency of the payment system as a whole, quicken check processing among financial institutions, and improve the services offered to consumers in clear, indisputable ways. The hesitation produced by concerns regarding privacy, fraud and double debits are too speculative to let the opportunity pass to advance this legislation.