Retail Payments Issues:

Experience With Electronic Check Presentment

GGD-98-145: Published: Jul 14, 1998. Publicly Released: Jul 14, 1998.

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Thomas J. McCool
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Pursuant to a congressional request, GAO reviewed the current role of electronic check presentment (ECP) in the collection process for interbank checks, focusing on: (1) identifying and describing the ECP services offered to U.S. banks; (2) determining the ECP volume in the United States for 1995 through 1997; (3) determining whether ECP affects the length of time that it takes for a dishonored check to be returned to the depositary bank; (4) identifying any factors that may limit ECP use; and (5) determining how ECP may affect banks' risk of check fraud.

GAO noted that: (1) the Federal Reserve System is the leading ECP provider in the United States; it offers three ECP services nationwide; (2) for these services, the collecting banks send the paper checks to the appropriate Federal Reserve check office, which then presents the checks electronically to paying banks; (3) these ECP services differ in how the paper checks are handled after they have been electronically presented to paying banks; (4) delivery of the magnetic ink character recognition (MICR) line data serves as presentment, and the checks are truncated at the Federal Reserve check office serving the paying bank; (5) ECP volume accounts for a small, but growing, percentage of the overall U.S. interbank check volume; (6) from 1995 to 1997, ECP volume increased 114 percent; (7) GAO's analysis of return items that were initially electronically presented suggests that use of the Federal Reserve ECP services may not have a substantial effect on the percentage of dishonored local checks that are returned to depositary banks within the 2-day hold period; (8) for these ECP services, the percentage of local checks returned within 2 days during this period was only marginally higher than the paper-check presentment method; (9) interviews with regulatory and banking officials identified several factors that deter banks from accepting the electronic presentment of checks, including: (a) the concern that ECP may increase a paying bank's vulnerability to check fraud; (b) the lack of a clear economic incentive to use electronic presentment; and (c) a perceived consumer preference for receiving cancelled checks; (10) in addition, certain types of state laws have been identified as having the effect of impeding ECP because of the laws' reliance on paper checks; (11) while ECP may allow paying banks to identify checks that might not be honored sooner and deter certain types of check fraud, banking officials expressed concerns that ECP could make paying banks more vulnerable to other types of check fraud; (12) officials at five large banks told GAO that forged signatures and endorsements, along with counterfeit checks, have created the highest check fraud losses in the period since 1995; and (13) because the receipt of the MICR line data does not provide a paying bank with adequate information for identifying forged signatures, banking officials said they continue to insist on paper checks.

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