Electronic Banking: The Check Truncation Issue (CRS Report for Congress)
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| Release Date |
Revised Nov. 8, 2003 |
| Report Number |
RL31591 |
| Report Type |
Report |
| Authors |
Walter w. Eubanks, Government and Finance Division |
| Source Agency |
Congressional Research Service |
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Summary:
The clearing process for checks is more expensive than other methods of payment which are
cleared
electronically, such as credit cards and Internet banking. The main reason is that check clearing
requires banks to physically present and return checks unless they obtain legal agreements to clear
electronically. The Check Clearing for the 21st Century Act of 2003 ( P.L. 108-100 ) eliminates the
requirement to physically return the original checks to the paying bank. Before the bill by the same
title became law, on April 3, 2003, the Senate held its first hearing on the Fed's Check Truncation
Act (CTA) proposal that was sent to banking committees of both Houses in December 2001. On
June 5, 2003, the House passed H.R. 1474 and referred it to the Senate Committee on
Banking, Housing and Urban Affairs. On June 18, 2003, at a markup, the Senate Banking
Committee approved its Check Truncation Act of 2003 ( S. 1334 ) and on June 27, 2003,
the full Senate passed S. 1334 and incorporated it in H.R. 1474 . On
October 1, 2003, House and Senate conferees reported H.R. 1474 (Conference Report
H.Rept. 108-291 ). On October 28, 2003, President Bush signed the Check Clearing for the 21st
Century Act ( P.L. 108-100 ) into law, which is now also known as Check 21 Act.
Estimates of cost savings from moving to electronic check clearing vary widely because
estimates of the cost of using a check and the number of checks written each year remain in dispute.
Consequently, estimates of cost savings range from $1.4 billion annually for truncation alone to $68
billion for replacing checks with electronic payments. In testimony at the hearing of Senate and
House banking committees in the 108th Congress, the Fed's CTA in the Senate and H.R. 1474 in the House were supported by the Federal Reserve Board, which testified that it would like
to remove some of the consumer protection provisions that were in its 2001 proposal because they
were unnecessary. The Fed argued that the regulatory costs these provisions would place on banks
would outweigh the consumer benefits. Still, the bill is supported by America's Community
Bankers, the American Bankers Association, the Consumer Bankers Association, and the Financial
Services Roundtable.
The opposition to the Check 21 Act came from the Consumers Union, supported in its
testimony by the Consumer Federation of America, the U.S. Public Interest Research Group, and the
National Consumer Law Center. The Consumers Union argued that the Act would make it
impossible for an estimated 45.8 million U.S. households who are currently getting their paper
checks back to continue to do so. These consumers would be less protected from fraud under the
Act than under the existing check clearing process when there are disputes about check payments.
The Consumers Union's suggested changes in the proposed legislation would significantly increase
consumer protection. At the same time, these changes would increase financial institutions' costs
of voluntarily adopting check truncation. Other witnesses argued that those banks with decades of
using truncated checks have not experienced many disputed check payments, and when they did they
were quickly resolved.
This report will be updated as legislative and financial developments warrant.
