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Debate on Check Truncation Heating Up

Debate on Check Truncation Heating Up
September 11 taught the world many lessons about what happens to the nation when business is suddenly halted, and the banking industry certainly was no exception. One of the lessons learned was just how heavily the nation's check-clearing system relies on air travel, a fact brought out recently at a hearing on the Check Clearing for the 21st Century Act.

As Federal Reserve Board Vice Chairman Roger W. Ferguson, Jr., explained at that hearing:
"During the week of the attacks, the Federal Reserve Banks' daily check float, which is normally a few hundred million dollars, ballooned to more than $47 billion. Had the proposed legislation been in effect at the time and had banks been using a robust electronic infrastructure for check collection, banks would have been able to collect many more checks by transmitting electronic check information across the country and presenting substitute checks to paying banks."

Those substitute checks are a key provision of the proposed bill and their use addresses one of the main issues that have impeded the growth of electronic checking: what to do for banks and bank customers that want a returned piece of paper.

Currently, truncation of checks at the point of deposit or origin is only allowed in situations in which the banks involved in the check clearing process have an agreement - which means that widespread use of the method is impractical due to the large number of banks in the U.S.

The act allows all banks to participate in such a method - turning the information on the check into an electronic transaction and destroying the check at the point of origin. Banks who want a negotiable paper instrument but still want to participate in the electronic process, however, could create a substitute check - an image of the front and back of the check with accompanying machine-readable numbers that could be used for legal purposes. Meanwhile, the information needed to move the financial transaction along could be transferred electronically for faster payment processing.

The nation's major banking trade associations are supportive of the act, though they'd like to see it implemented sooner than 2006, as the act provides. Curtis L. Hage, chairman of America's Community Bankers, explained at the same hearing that the act facilitates innovation in the check collection system "without mandating receipt of checks in electronic form."

"We believe that by providing financial institutions with clear authority to use substitute checks to reach banks and their customers not currently participating in check image programs, Congress can help drive significant cost savings and efficiencies that will benefit both customers and financial institutions," Huge said. He was representing not only ACB, but also the American Bankers Association, The Financial Services Roundtable and the Independent Community Bankers of America.

Consumers groups, however, are objecting to the proposal, saying it would disturb the current practices of millions of households without guaranteeing them any benefit and that resolving disputes might take longer because the original check wouldn't be in the consumer's hands.

ABA Offers Electronic Fingerprint Checks
Financial institutions now have an option that allows faster employee background checks because American Bankers Association is offering electronic fingerprint matching with the FBI.

Since 1982, ABA has served as that agency's channeling agent for checking fingerprints. Financial institutions are required by regulation to check certain employees' backgrounds for possible criminal activity, and sending fingerprints to the FBI is part of that process. ABA reconciles, screens, batches and sends fingerprint cards to the FBI to be screened through the law enforcement agency's national database. About 10 percent of the prints that are submitted to the FBI reveal criminal activity. Meanwhile, financial institutions awaiting results waste valuable training resources.

Paper fingerprint cards sent into the FBI can take two months to process. Electronic transmission of fingerprints takes four to six days.

To file electronically, financial institutions will need to use approved scanning equipment and software. For information or to receive ABA's specifications for electronic submission, call 1-800-BANKERS or visit www.aba.com.

Copyright © 2002 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 12, No. 9, 12/02

First published on 12/01/2002

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