Check Collection:

Competitive Fairness Is an Elusive Goal

GGD-89-61: Published: May 12, 1989. Publicly Released: May 12, 1989.

Additional Materials:

Contact:

James L. Bothwell
(202) 512-8678
contact@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

In response to a legislative requirement, GAO assessed private banks' ability to compete with Federal Reserve banks in providing check collection services, focusing on: (1) the Federal Reserve System's exemption from the imposition of presentment fees; (2) the impact of the imposition of presentment fees on check collection system efficiency; and (3) whether the Federal Reserve System required check clearinghouses to provide services to the Federal Reserve banks and whether those banks should pay check clearinghouses for any such services.

GAO found that: (1) the Federal Reserve uses its authority to deviate from state laws governing private banks to advance check collection system efficiency; (2) Reserve banks require paying banks to make payment on the same day Reserve banks present checks and without charging fees, to make check payments that Reserve banks have not endorsed, and to make payment on checks Reserve banks present after the customary presentment time; (3) collecting banks need to match Reserve bank collection terms, including choosing which customers they serve, to be competitive; (4) Reserve banks do not have the authority to unilaterally vary from state check collection laws; (5) collecting banks negotiate agreements with other banks for check presentment and payment terms, which usually entail the collecting banks paying presentment fees to the paying banks; (6) presentment fees increased bank check collection costs from 18 to 40 percent; and (7) although banks join clearinghouses to facilitate check exchanges among banks, they still negotiate arrangements to present checks to banks outside the clearinghouse. GAO also found that the: (1) differences between the collecting and Reserve banks' abilities to present checks are not essential for the safety, soundness, or efficiency of the check collection system; and (2) Federal Reserve had not developed criteria for evaluating competitive fairness, making it difficult to deal with potential conflicts of interest between its roles as a competitor and payment system overseer.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The policy adopted in March 1990 addressed the recommendation. As noted above, the policy has been used to address complaints on the check transportation policy.

    Recommendation: The Board of Governors should clarify existing policies and procedures covering the Federal Reserve commitment to competitive fairness. Specifically, the Board of Governors should require Federal Reserve officials to develop a forum for hearing disagreements raised by private-sector participants over changes made by the Federal Reserve that may result in the private sector being precluded from effectively offering competing check collection services.

    Agency Affected: Federal Reserve System: Board of Governors

  2. Status: Closed - Implemented

    Comments: The Federal Reserve reduced the price on the major product it offered that could not be offered competitively by private banks. However, it has not adopted a general policy, for proprietary reasons, of disclosing its markups. At this point, it would be reasonable to wait until another specific problem arises before pursuing the matter further.

    Recommendation: The Board of Governors should clarify existing policies and procedures covering the Federal Reserve commitment to competitive fairness. Specifically, the Board of Governors should require Federal Reserve officials to closely oversee prices on products that cannot be offered by collecting banks on an equal basis to ensure that markups are not unreasonable and to make public disclosure of what those markups are.

    Agency Affected: Federal Reserve System: Board of Governors

  3. Status: Closed - Implemented

    Comments: The policy adopted in March 1990 addressed the recommendation. The policy was used to address a complaint regarding Federal Reserve transportation of checks.

    Recommendation: The Board of Governors should clarify existing policies and procedures covering the Federal Reserve commitment to competitive fairness. Specifically, the Board of Governors should require Federal Reserve officials, when deliberating on regulatory, price, and service changes, to identify any practical and legal differences between Reserve and collecting banks that may hinder collecting banks' ability to effectively offer competing check collection services. For differences that are found, Federal Reserve officials should provide the Board with proposals for eliminating the differences or an explanation of why continuation of those differences are necessary to promote the safety, soundness, or efficiency of the payments system. Full disclosure of the basis for decisions should be made to the public.

    Agency Affected: Federal Reserve System: Board of Governors

  4. Status: Closed - Implemented

    Comments: In March 1990, the Board issued formal procedures for assessing the competitive impact of changes in Federal Reserve Bank services.

    Recommendation: The Board of Governors should clarify existing policies and procedures covering the Federal Reserve commitment to competitive fairness. Specifically, the Board of Governors should define its commitment to competitive fairness by explicitly adopting the principle that collecting banks should have the same abilities as Reserve banks to collect on checks unless fulfillment of payments system safety, soundness, or efficiency objectives indicate Reserve banks should take on unique abilities.

    Agency Affected: Federal Reserve System: Board of Governors

  5. Status: Closed - Implemented

    Comments: Regulation CC was modified in October 1992, to provide same day settlement to presenting banks.

    Recommendation: The Board of Governors should, consistent with the recommended policy and procedural changes, develop a revised, comprehensive same-day-payment proposal that both balances the interest of paying collecting banks and eliminates differences in presentment abilities between Reserve and collecting banks that are not necessary for safety, soundness, or efficiency of the payments system.

    Agency Affected: Federal Reserve System: Board of Governors

 

Explore the full database of GAO's Open Recommendations »

Sep 21, 2016

Aug 3, 2016

Aug 1, 2016

Jul 14, 2016

Jul 5, 2016

Jun 30, 2016

Jun 28, 2016

Jun 23, 2016

Jun 22, 2016

Looking for more? Browse all our products here