From Paper to Electronics

Article excerpt

With Federal Reserve help, electronic check presentment programs look to enhance the efficiency of the payments system

Earlier this year the Rivlin Committee made the important, widely reported announcement that the Federal Reserve should continue providing check collection and automated clearing house services that compete with the private sector. The committee's long-awaited recommendations, though anticipated, critically undergird the long-term competitive viability of the nation's community banks. The Federal Reserve, by providing check clearing and ACH services, provides banks of all sizes equal and fairly priced access to the payments system.

The durability of paper checks remains intact, despite many years of studies, reports and academic white papers predicting their imminent demise. As far back as the 1970s, banking industry analysts loudly began proclaiming the end was near for paper checks. But Americans have yet to be weaned from paper checks. In 1996, about 64 billion checks with a face value of $75 trillion were passed within the United States.

But often overlooked in the Rivlin Committee's report were recommendations to spur development in a faster, less costly payments system for the future. The report, "The Federal Reserve in the Payments Mechanism," encourages the Federal Reserve to continue its work to stimulate the migration toward more efficient check and ACH systems. Rather than exit the check payments system partially or entirely, as some Federal Reserve antagonists suggest, the Rivlin Committee said the Fed should help "evolve strategies for moving to the next generation of payment instruments."

Electronic check presentment could replace the very inefficient method of trucking and flying paper checks for clearing and settlement. Taming the unfettered 2 percent annual growth rate of paper checks by replacing more checks with electronic payments has been the longer term goal of many payments system participants. As checks continue to be used in great numbers, industry leaders also are seeking to make short-term improvements to the electronic check collection system.

Paul M. Connolly, COO of the Federal Reserve Bank of Boston and the Fed's retail payments product director, advocates just that: "collecting check payments without having to collect paper checks."

As Connolly noted at a September banking industry conference, electronic check presentment, dubbed ECP, should be held out "as a long-term goal toward which we should try to move, perhaps while gaining benefits from intermediate versions along the way."

"The change from checks to electronics will be more evolutionary than revolutionary, and so will the adoption of ECP," he cautions. "I do not expect an overnight revolution. I expect electronic check collection is likely to accelerate in the near term."

"We now present electronically more than two billion checks annually to depository institutions across America-about 13 percent of all checks we handle," Connolly says. "More than 2,000 depository institutions of all sizes and types nationwide receive electronic check presentment from their Reserve Banks."

The Fed offers various forms of ECP. "Often we provide the paper checks as well as the electronic information to the receiving institution. Sometimes we truncate these checks and never deliver them to the receiving institutions. But for all of these two billion checks, the delivery of the electronics, not the paper, constitutes legal presentment of the payments," notes Connolly.

All of the 45 Fed check processing centers provide electronic check presentment services. The Federal Reserve is already an influential player in establishing cost-effective and competitive ways to move toward a more permanent electronic environment. Indeed, as with today's check clearing and ACH services, the future of independent community banks would be threatened if the Fed were not involved in electronic check presentment. …