United States General Accounting Office

GAO Report to the Subcommittee on

Financial Institutions and Consumer

Credit, Committee on Banking and

Financial Services, House of

Representatives

July 1998 Retail Payments Issues

Experience With

Electronic Check

Presentment

GAO/GGD-98-145

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-277713 

July 14, 1998

The Honorable Margaret Roukema

Chairwoman

The Honorable Bruce Vento

Ranking Minority Member

Subcommittee on Financial Institutions

 and Consumer Credit

Committee on Banking and Financial Services

House of Representatives

The Expedited Funds Availability Act (EFAA), enacted in 1987, limits the

time that banks1

 can hold funds deposited into customer accounts before

the funds are to be made available for withdrawal. In 1996, the Board of

Governors of the Federal Reserve System (Federal Reserve Board)

recommended that the maximum permissible “hold period” for local

checks be extended from 2 to 3 business days after the day of deposit to

give banks adequate time to identify fraudulent checks that should be

dishonored.2

 Consumer groups disagreed with that recommendation and

countered that giving banks an additional day would create hardships for

consumers. The 2-day hold period for local checks remains in effect.

Concerns about both check fraud risk and depositors’ access to funds

have heightened interest in how technology can help the check-collection

process by potentially speeding up the return of checks dishonored due to

insufficient funds, fraud, or other reasons, while continuing to allow ready

access to deposited funds. According to the Federal Reserve Board, the

experience of depositary banks (the first bank at which a check is

deposited) in receiving returned checks is one of the most significant

factors to consider in assessing uniform time schedules under which bank

deposits should be made available to depositors.

You requested that we provide information about the current role of

electronic check presentment (ECP) in the collection process for

“interbank checks”—checks for which the depositary bank and the paying

bank are not the same entity. With ECP, the check is presented

electronically to the paying bank by transmission of the magnetic ink

character recognition (MICR) line data at the bottom of the check, which

identify the routing number of the paying bank, the amount of the check,

1

In this report, the term “bank” includes any depository financial institution, such as a commercial

bank or savings bank.

2

Checks are “dishonored” for reasons that include being written on a closed account or one with

insufficient funds to cover the check, showing evidence of check counterfeiting or forged signatures,

or other evidence of fraud.

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the number of the check, and the account number of the customer. With

ECP, the paying bank must decide whether to honor the check, or have the

check returned to the depositary bank, upon receipt of the electronic data

rather than the paper check.

As agreed with your offices, our objectives were to (1) identify and

describe the ECP services offered to U.S. banks; (2) determine the ECP

volume in the United States for 1995 through 1997; (3) determine whether

ECP affects the length of time that it takes for a dishonored check to be

returned to the depositary bank; (4) identify any factors that may limit ECP

use; and (5) determine how ECP may affect banks’ risk of check fraud.

Background In 1996, an estimated 64 billion checks were written in the United States.

Approximately 30 to 35 percent of these checks were “on-us” checks—that

is, checks for which the collecting bank (any bank except the paying bank

handling the item for collection) and the paying bank (the bank on which

the check is drawn) are the same entity. On-us checks never enter the

interbank check-collection process. The remaining 65 to 70 percent (about

45 billion checks in 1996) of the checks written were interbank checks.3

Interbank checks are cleared and settled through an elaborate

check-collection process. The check-collection process includes, among

other steps, check presentment and the final settlement of checks.4

 Check

presentment occurs when the checks are delivered to the paying banks for

payment and the paying banks must decide whether to honor or return the

checks. Final settlement of checks occurs when the collecting banks are

credited and the paying banks are debited, usually through accounts held

at either Federal Reserve Banks or correspondent banks.5

In the check-collection process, depositary banks generally sort deposited

checks by destination and dispatch them for collection. Depositary banks

can physically present paper checks to paying banks through several

methods:

• direct presentment of the paper checks to the paying banks;

3

The figure used for the interbank check market includes share drafts drawn on credit unions.

4

This process is described in greater detail in Payments, Clearance, and Settlement: A Guide to the

Systems, Risks, and Issues (GAO/GGD-97-73, June 20, 1997).

5

A correspondent bank is a bank that holds deposits owned by other banks and performs banking

services, such as check collection.

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• exchange of paper checks at clearing houses in which the depositary

banks and the paying banks are members;

• presentment of the paper checks through intermediaries, such as

correspondent banks or Federal Reserve check offices; or

• some combination of the above methods, such as depositary banks using

correspondent banks to collect checks and the correspondents collecting

those checks through local clearing houses or Federal Reserve check

offices.

When paying banks decide not to pay certain checks, they must return the

dishonored checks to the depositary banks.6

 Under the Uniform

Commercial Code (UCC), the paying bank generally has until midnight of

the day following presentment (“midnight deadline”) to return dishonored

checks or send notices of dishonor. (The UCC and other laws and

regulations governing the check-collection processes are described

below.) Banks use this period to decide whether or not to pay checks.

Dishonored checks are returned for several reasons, such as insufficient

funds in the check writer’s account, issuance of a stop-payment order on

the check, or because the check was written on a closed account. Banks

vary considerably in their policies for making pay/no pay decisions and

may view these decisions as a matter of customer service. Thus, even if

banks have earlier information indicating that some checks may have to be

returned, using the entire period permitted by the UCC may enable the bank

to honor the check. The paying banks may return dishonored checks,

commonly referred to as return items, directly to the depositary banks,

through clearing house associations, or to any returning bank (a bank

handling a returned check), including the Federal Reserve Banks.

Although most paper checks are physically presented to the paying banks,

checks can be presented electronically by agreement with paying banks.

When checks are electronically presented, the MICR data are electronically

transmitted by the presenting bank to the paying banks and the receipt of

these data constitutes presentment, rather than the paying banks’ receipt

of the paper checks. The paper checks may be sent to the paying banks at

a later time or may be “truncated” or held, at some point in the collection

process, depending upon the terms of the applicable electronic

presentment agreement. When checks are truncated, the check writers do

not receive the cancelled checks. Checks can be truncated at depositary

banks or at intermediary banks, such as Federal Reserve Banks or

correspondent banks.

6

In providing check clearing services, Federal Reserve Banks are collecting banks.

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The check-collection process is regulated by a complex system of laws

and regulations. The primary laws affecting checks are Articles 3 and 4 of

the UCC, as adopted in each state; EFAA; and the Federal Reserve Board’s

Regulations CC and J. The UCC is a set of model laws that govern

commercial and financial activities. Efforts have been made to encourage

each of the 50 states to enact UCC articles in a uniform manner. The UCC’s

Articles 3 and 4 govern negotiable instruments, including checks and bank

deposits, and collections, respectively. Article 4 was revised in 1990, in

part, to promote the efficiency of the check-collection process by making

the provisions of Article 4 more compatible with the needs of an

automated system and to facilitate the adoption of programs allowing for

the presentment of checks by electronic transmission of information.

Although the UCC allows for the use of electronic check presentment,

paying banks still have the legal right to insist on paper presentment. EFAA,

which is implemented through Regulation CC, limits the time that banks

can hold funds deposited into customer accounts before these funds must

be made available for withdrawal. Regulation CC, which preempts the UCC

or other state law to the extent that either is inconsistent with Regulation

CC, also governs the collection and return of checks. Regulation J governs

checks collected through the Federal Reserve System.

EFAA and Regulation CC establish the specific funds availability schedules

for checks. Generally, funds are to be made available for withdrawal

within 2 business days after the day of deposit for local checks and within

5 business days for nonlocal checks. Local checks, in general, are those for

which the depositary bank and the paying bank are located in the same

Federal Reserve check-processing region. Nonlocal checks, in general, are

those for which the depositary bank and the paying bank are located in

different Federal Reserve check-processing regions.

EFAA and Regulation CC also require that the first $100 of a depositor’s

aggregated checks and certain other types of checks, such as Treasury,

state and local government, or cashier’s checks, are to be made available

for withdrawal by the next business day after the day of deposit. Under

EFAA and Regulation CC, banks are permitted to hold checks longer for,

among other things, checks over $5,000 or suspicious checks. In certain

circumstances, such as when banks have reasonable cause to believe that

certain checks are uncollectible or when an account is new, the banks may

delay the availability of funds. In such a case, the banks must notify the

customers, explain the delay, and indicate when the funds will be

available.

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Results in Brief The Federal Reserve System is the leading ECP provider in the United

States with broadly available services; it offers three ECP services

nationwide. 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. These ECP services differ in how the

paper checks are handled after they have been electronically presented to

paying banks. For example, the Federal Reserve’s basic ECP service

provides the paper checks to the paying bank on the same day as

presentment. However, with another Federal Reserve ECP service, checks

are not delivered to the paying bank. Delivery of the MICR line data serves

as presentment, and the checks are truncated at the Federal Reserve

check office serving the paying bank. In addition to the three nationwide

services, the Federal Reserve Bank of Minneapolis (FRBM) offers the

Electronic Check Clearing Service (ECCS) to banks located in the Upper

Peninsula of Michigan. The fundamental characteristic of ECCS that

distinguishes it from other ECP services is that depositary banks

electronically transmit the MICR data to the FRBM, rather than transporting

the paper checks.

ECP volume accounts for a small, but growing, percentage of the overall

U.S. interbank check volume. From 1995 to 1997, ECP volume increased

114 percent. In 1997, ECP volume was about 2.2 billion checks, almost 5

percent of the estimated U.S. interbank check volume. The 2.2 billion ECP

checks represented approximately 14 percent of the almost 16 billion

checks that the Federal Reserve collected in 1997.7

Our analysis of a limited sample of return items that were initially

electronically presented suggests that use of the three Federal Reserve ECP

services that were nationally available 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. For these three ECP services, the

percentage of local checks returned within 2 days during this period at the

Federal Reserve check offices was only marginally higher than the

percentage returned within 2 days using the paper-check presentment

method.

For ECCS, the percentage of local checks returned within the 2-day hold

period was substantially higher than the percentage of paper checks that

were physically presented and returned. This comparison of ECCS and

paper-presentment methods showed that substantial improvements in

7

Since the Federal Reserve check offices process checks through reader sorters from which they

maintain an accounting of the processed checks, the volume figures for the Federal Reserve’s check

collection services should be considered exact.

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check-return performance occurred for those banks when the paper

checks were held at the depositary bank until the checks were finally paid.

Given the small sample size of this comparison and the particular

conditions of the Upper Peninsula of Michigan (such as the remote

location of banks and a relatively low check volume), it is not possible to

know whether these improvements could be achieved in other

geographical areas or nationwide.

Our interviews with regulatory and banking officials identified several

factors that, in their views, deter banks from accepting the electronic

presentment of checks. These factors include (1) the concern that ECP may

increase a paying bank’s vulnerability to check fraud, (2) the lack of a

clear economic incentive to use electronic presentment, and (3) a

perceived consumer preference for receiving cancelled checks. 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.

While ECP may allow paying banks to identify checks that might not be

honored sooner and deter certain types of check fraud, banking officials

we talked with expressed concerns that ECP could also make paying banks

more vulnerable to other frequently occurring types of check fraud. In

interviews and written responses, officials at five large banks told us that

forged signatures and endorsements, along with counterfeit checks, have

created the highest check fraud losses in the period since 1995. Because

the receipt of the MICR line data does not provide a paying bank with

information viewed as adequate for identifying forged signatures, these

banking officials said they have continued to insist on paper presentment.

Scope and

Methodology

To identify and describe the ECP services offered to U.S. banks, we

interviewed officials from the Federal Reserve Board and FRBM and

reviewed Federal Reserve Board documents that described the Federal

Reserve’s ECP services. We also interviewed officials at the New York

Clearing House Association (NYCHA), the Electronic Check Clearing House

Organization (ECCHO), and the American Bankers Association (ABA).

To determine the volume of checks that were electronically presented in

the United States from 1995 to 1997, we collected data from the Federal

Reserve Banks on their ECP services. To calculate the percentage of the ECP

volume in the U.S. interbank check-collection market, we used the number

of interbank checks cited in the January 1998 report by the Committee on

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the Federal Reserve in the Payments Mechanism.8 The number of

interbank checks is an estimate because the actual number of checks that

are cleared through clearing houses and correspondent banks, and by

direct presentment, as well as the number of on-us checks, is unknown.

To determine how ECP affects the length of time it takes for a dishonored

check to be returned to a depositary bank, we used data from a survey

coordinated by the Federal Reserve Board and conducted by four Federal

Reserve offices. At our request, the Federal Reserve collected information

on the return cycle time for a small sample of items that were initially

presented by either paper check or electronic transmission and that were

returned as dishonored through four Federal Reserve check offices. This

information was collected for a sample of 2,258 return items, primarily

during the week of January 12 through 16, 1998.9

 The four check offices

were selected because they had higher-than-average ECP volumes. Also, the

Federal Reserve Board applied the same ECP return item survey to FRBM’s

additional ECP service, ECCS, which is offered only to banks located in the

Upper Peninsula of Michigan. For comparison purposes, we also collected

comparable check-return data from 10 judgmentally selected banks in the

Upper Peninsula of Michigan that do not participate in ECCS.

Because the sizes of the samples were small and not selected on a random

basis, we could not make any statistical generalizations regarding the

entire banking industry or the Federal Reserve’s ECP services on the basis

of these surveys. Since the samples were selected during an 1-week period

at 4 Federal Reserve check offices, we could not ascertain whether our

results would differ if the samples were taken over a longer period of time

or collected at more of the Federal Reserve’s 45 check offices.

Furthermore, our results may not fully reflect differences among paper

presentment and ECP services because the checks are not assigned to these

processes on a random basis, but rather on the basis of each paying bank’s

decisions. It is reasonable to expect that paying banks make decisions to

accept electronic presentment based on a number of criteria, such as price

and availability of services. Thus, the returned checks collected from the

different presentment methods may well have different characteristics;

these could, in turn, affect the time required for their return if they are

dishonored by the paying bank. This nonrandom selection process limited

our ability to determine whether ECP services available nationwide had any

effect on check return cycles.

8

The Federal Reserve in the Payments Mechanism, Committee on the Federal Reserve in the Payments

Mechanism, Federal Reserve System, January 1998.

9

See appendix I for a more detailed discussion on the methodology of the ECP return item survey.

Page 7 GAO/GGD-98-145 Electronic Check Presentment
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To determine potential legal and operational impediments to ECP, we

interviewed officials at several large banks, the Federal Reserve Board, the

Federal Reserve Banks of Minneapolis and Boston, and NYCHA. We asked

these officials how certain provisions of the UCC’s Articles 3 and 4, EFAA,

and the Federal Reserve Board’s Regulation CC and other issues may

impede increased ECP use.

To determine how ECP may affect a bank’s risk of check fraud, we

interviewed officials at the Federal Reserve Bank of Boston (FRBB), NYCHA,

and three large commercial banks in New York City. In addition, we sent a

survey of written questions regarding ECP and check fraud risk to six large

commercial banks that are members of ECCHO. Five of the six banks

responded to our survey questions.

We obtained written comments on a draft of this report from the Federal

Reserve Board. Their comments are discussed near the end of this report

and are reprinted in appendix II. We did our work from July 1997 to

April 1998 in Washington, D.C.; Minneapolis, MN; and New York City in

accordance with generally accepted government auditing standards.

The Federal Reserve

Offers ECP Services

Nationwide, While the

Private Check

Clearing Houses Offer

Electronic Check

Information Services

The Federal Reserve Banks offer banks three ECP services: basic MICR

presentment (Basic), MICR presentment plus (MICR Plus), and check

truncation (Truncation). In addition, FRBM offers ECCS to banks located in the

Upper Peninsula of Michigan. For all four ECP services, Federal Reserve

check offices transmit the electronic data to the paying banks and receipt

of these data constitutes presentment. Under the three nationally available

ECP services, the collecting banks deposit checks with the Federal Reserve

check offices, but the three ECP services differ in how the Federal Reserve

check offices handle the paper checks after they have been electronically

presented to paying banks. The return process for Basic items is the same

process used to return checks that were physically presented. The other

two nationally available ECP services, MICR Plus and Truncation, use different

processes to return checks than those used to return physically presented

checks.

The fundamental characteristic of ECCS, which distinguishes it from other

Federal Reserve ECP services, is that banks using the service do not deliver

paper checks to FRBM; instead, they electronically transmit the checks’

MICR data to FRBM. Since depositary banks keep the deposited checks until

the checks are finally paid, they can pull any paper checks that are

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dishonored by the paying banks. Under ECCS, depositary banks receive

notices of dishonored checks from paying banks through FRBM.

Table 1 lists the four Federal Reserve ECP services and explains (1) how

collecting banks deposit checks with the Federal Reserve check offices

and (2) how paper checks and return items are handled after electronic

presentment.

Table 1: Descriptions of the Four Federal Reserve ECP Services

ECP service

How banks collect checks using

Federal Reserve check officesa

How paper checks and return items are handled after electronic

presentment

Basic Collecting bank deposits the paper

checks with the Federal Reserve check

office.

Federal Reserve check office delivers paper checks to the paying bank

on the same day as electronic presentment. Paying bank returns items

as it would under paper presentment.

MICR Plus Collecting bank deposits the paper

checks with the Federal Reserve check

office.

Federal Reserve check office serving the paying bank holds paper

checks for 1-3 days after electronic presentment and pulls and delivers

return items from stored checks at the paying bank’s request. After 1-3

days, the remaining paper checks are delivered to the paying bank.

Truncation Collecting bank deposits the paper

checks with the Federal Reserve check

office.

Federal Reserve check office serving the paying bank holds the paper

checks after electronic presentment and pulls and delivers the return

items from the stored checks at the paying bank’s request. Generally,

after 60 days, the paper checks are destroyed.b An image of each paper

check (front and back) is stored at the Federal Reserve check office for

7 years.

ECCSc Collecting bank provides MICR data

electronically to FRBM.

The depositary bank stores the paper checks for 1 day. The paying bank

returns items electronically through the FRBM to the depositary bank,

which pulls the checks. The depositary bank delivers the remaining

paper checks to the FRBM. FRBM sorts the paper checks by the paying

bank and either delivers the checks to the paying bank or truncates the

checks.

aThe collection of checks (ECP or otherwise) may involve two Federal Reserve check offices.

bSome physical checks are retained longer as established by agreement between the paying

bank and the Federal Reserve Bank.

cFRBM offers ECCS to banks located in the Upper Peninsula of Michigan.

Source: Federal Reserve Board.

Private Check Clearing

Houses’ Electronic

Services Do Not Constitute

Presentment

Private clearing houses offer electronic check information services to

banks. These services transmit the MICR data to the paying banks, but they

do not constitute electronic presentment of checks.10 Industry officials we

interviewed noted that, while agreements between or among banks that

10In addition to ECP products, the Federal Reserve Banks also offer an electronic check information

product. This product is similar to the electronic check information products offered in the private

sector. In 1997, the Reserve Banks’ MICR information volume totaled 1.4 billion items.

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would enable them to present checks directly and electronically are

possible under the UCC, few such agreements exist. NYCHA offers electronic

check informational services to banks in which the MICR data are

transmitted to paying banks with the paper presentment to follow. Banks

perceive some advantages to receiving MICR data before the paper checks

are physically presented. One banking official told us that electronic

transmission of MICR data, used as an informational service, may assist a

paying bank with its cash management services or allow the bank to debit

a customer’s account earlier than it otherwise could. Such information

may also provide for earlier identification of checks that cannot be paid.

For instance, checks written on closed accounts cannot be paid and thus

are returned to the depositary bank. NYCHA estimated that in 1997 its

members electronically transmitted data on 53 million checks, or

approximately 19 percent of the total volume of checks exchanged at

NYCHA. Additionally, several commercial banks formed ECCHO in 1989 to

coordinate the use of electronic check information among banks and to

design standards for the use of electronic check information. In 1997,

ECCHO reported that its members transmitted data on 567 million checks.11

ECP Represented a

Small but Growing

Percentage of U.S.

Interbank Check

Volume in 1997

In 1997, 2.2 billion checks were electronically presented in the United

States—almost 5 percent of the estimated U.S. interbank check volume

(about 45 billion checks). According to a recent Federal Reserve report,

the Federal Reserve Banks accounted for about 35 percent (about

16 billion checks) of the total interbank check-collection market in 1996.

The remaining 65 percent of the market (about 29 billion checks) were

presented directly or through private, local clearing houses. The 2.2 billion

checks electronically presented by the Federal Reserve in 1997

represented 14 percent of the total number of checks the Federal Reserve

collected that year.

Electronically presented checks as a percentage of the Federal Reserve’s

overall check collection volume grew from 1995 to 1997. During this

period, the Federal Reserve’s ECP volume increased 114 percent, from

slightly more than 1 billion checks to 2.2 billion checks. From 1996 to

1997, the Federal Reserve’s ECP volume increased 56 percent, from

1.4 billion to 2.2 billion checks.

Although all 12 Federal Reserve Banks offered ECP services, ECP volume

was concentrated primarily in the southern and midwestern Federal

11According to NYCHA officials, ECCHO’s report of 567 million checks may include check data

transmitted by NYCHA members.

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Reserve Districts. As shown in table 2, the check offices comprising the

Federal Reserve Bank of Atlanta electronically presented the highest

volume of checks (420 million). The Federal Reserve Bank of Boston

electronically presented the lowest number of checks among the Federal

Reserve Districts in 1997 (46 million).

Table 2: The Federal Reserve ECP

Volume in 1997, by Federal Reserve

District

Federal Reserve District

ECP volumea

(millions)

Total checks

collected

(millions)

ECP percentage

of total checks

collected

Atlanta 420 2,366 17.8%

Kansas City 316 1,161 27.2

Cleveland 234 1,104 21.2

St. Louis 222 903 24.6

Minneapolis 203 973 20.9

Dallas 192 1,205 15.9

Richmond 169 1,732 9.8

San Francisco 164 2,030 8.1

Chicago 113 1,688 6.8

New York 113 1,226 9.2

Philadelphia 49 718 6.9

Boston 46 862 5.3

System total 2,241 15,949 14.0%

aECP volume for each Federal Reserve District includes Basic, MICR Plus, and Truncation. The

volume for Minneapolis also includes ECCS.

Source: Federal Reserve Board data.

The most commonly used Federal Reserve ECP service was Basic

presentment. In 1997, about 1.5 billion checks were presented using the

Basic presentment service. Truncation was used to present about 558 million

checks, and MICR Plus was used to present about 204 million checks.

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A Limited Sample of

ECP Return Items

Suggested That ECP

Services Available

Nationally Had Little

Effect on the

Percentages of

Checks Returned

Within Permissible

Hold Periods

Our analysis of a limited sample of returned checks collected in four

Federal Reserve check offices during the week of January 12 through 16,

1998, indicated that the use of ECP services that are available nationwide

did not have a substantial effect on the percentage of dishonored local

checks returned to depositary banks within the 2-day hold period. On the

basis of our analysis of the 1-week sample, the percentage of dishonored

checks initially presented through Basic, MICR Plus, and Truncation services

and then returned to depositary banks within the 2-day hold period was

only marginally higher than the percentage of returned checks under

paper presentment. However, our analysis did show that the percentage of

local checks returned within the 2-day hold period using ECCS was

substantially higher than the comparable percentage of physically

presented paper checks. Our comparison of ECCS and paper-check

presentment methods indicated that substantial improvements in

check-return performance occurred when the paper check was held at the

depositary bank until the expiration of the “midnight deadline” specified in

the UCC. Given the small sample size of this comparison and the particular

conditions of the Upper Peninsula of Michigan (severe winter weather

conditions and the low volume of checks electronically presented through

ECCS), however, it is not possible to know whether these improvements

could be achieved in other settings or nationwide.

Results Showed Marginally

Better Local Check-Return

Performance for ECP

Services Compared With

Paper-Check Presentment

Our analysis of a 1-week sample of returned checks indicated that the

percentages of dishonored local checks returned within the holding period

were only marginally higher for checks electronically presented through

Basic, MICR Plus, and Truncation services compared with checks presented in

paper form. Almost 15 percent of the electronically presented local checks

in our sample were returned within 2 business days after they were

deposited compared with only 6 percent of the physically presented local

paper checks.

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Table 3: Dishonored Local Checks in Sample That Were Returned Within 2 or 3 Business Days, by Presentment Method

2 business days 3 business days

Dishonored local checks in sample returned

within

Presentment method Number Percent Number Percent

Total sample

items reviewed

ECP services offered nationwide

Basic 53 14% 311 82% 381

MICR Plus 0 0 228 85 269

Truncation 122 22 472 87 544

Paper 17 6 201 69 291

Source: Federal Reserve Board.

The majority of the electronically presented checks were not received by

the depositary bank until the third business day. (See table 3.) Truncation

produced the best 2-day cumulative percentage of the electronically

presented checks: 22 percent. However, at 3 business days, paper-check

presentment’s cumulative percentage was 69 percent, which was less than

the cumulative percentages of Basic, MICR Plus, and Truncation services at

82 percent, 85 percent, and 87 percent, respectively.

According to the Federal Reserve Board, the time required to return

checks handled by the Federal Reserve likely represents the upper bound

of overall check-return cycle times. In a Federal Reserve Board survey,

Federal Reserve Banks indicated that, in 1995, they delivered about

15 percent of local returned checks that they processed to the depositary

bank by the second business day.12 This check-return performance is low

compared with the bank average reported by the Board in the same

survey. Depositary banks received about 48 percent of all local returned

checks within 2 business days, according to the survey. The differences in

these check-return performances appear to be an indicator of the

significance of depositary banks’ direct presentment of paper checks to

paying banks and exchanges of paper checks at clearing houses. The

Federal Reserve Board said that checks returned through one or more

intermediary banks, such as Federal Reserve Banks, were not received by

depositary banks as quickly as checks returned directly to depositary

banks by paying banks. Federal Reserve Board officials said that the

Federal Reserve’s lower percentage of returned checks delivered within

the 2-day hold period reflects, in part, the Federal Reserve’s obligation to

12Report to the Congress on Funds Availability Schedules and Check Fraud at Depository Institutions,

Board of Governors of the Federal Reserve System, October 1996, p. 5.

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provide services to handle checks that cannot be easily processed by

direct presentment or through a clearing house.

Results Showed Banks

Using ECCS Had a Better

Check-Return Performance

Than Banks Presenting

Paper Checks

We found that ECCS, the ECP service available only to banks in Michigan’s

Upper Peninsula, provided a better check-return performance than the

paper-check presentment method used by banks in the same area. The

basis for this finding was a comparison of the percentage of returned

checks for which ECCS banks received a return notification within 2

business days after the checks were deposited and the percentage of

returned checks received by paper presenting banks within the same 2-day

period. (As previously noted, depositary banks using ECCS keep deposited

checks until the expiration of the “midnight deadline” specified in the UCC

and pull returned checks when they receive a return notice through FRBM

from a paying bank.)

This comparison of the ECCS and paper-check presentment methods

indicated that substantial reductions in return cycle times are possible

when the paper check is held at the depositary bank. For the week of

January 12 through 16, 1998, the 8 banks that used ECCS received a return

notification on 131 local dishonored checks, while the 10 judgmentally

selected Upper Peninsula banks, which constituted our paper presentment

comparison group, received 276 dishonored local checks. We found that

the return notifications for the 131 ECCS dishonored checks were provided

to depositary banks within 2 business days after the checks were

deposited. (See table 4.) Moreover, 82 percent of the 131 return notices

were received by depositary banks within 1 business day after the checks

were deposited. In contrast, only about 8 percent of the 276 dishonored

checks that were physically presented were returned to depositary banks

within 2 business days after the checks were deposited.

Page 14 GAO/GGD-98-145 Electronic Check Presentment
B-277713 

Table 4: Dishonored Local Checks in Sample That Were Returned Within 2 or 3 Business Days, by Presentment Method

Within the Upper Peninsula

2 business days 3 business days

Dishonored local checks in sample returned

within

Presentment method Number Percent Number Percent

Total sample

items reviewed

ECCS (ECP service offered only in the Upper Peninsula of

Michigan) 131 100% N/A N/A 131

Paper 21 8 113 41 276

Legend

N/A = Not applicable.

Source: Federal Reserve Board data and our analysis of data from 10 banks that did not

participate in ECCS.

Conditions in the Upper Peninsula region, such as relatively low check

volume and banks that are remotely located, and other factors may well

have played a role in showing ECCS to its best advantage in comparison

with paper presentment. As a result, it is not likely that the savings in the

time between ECCS and paper presentment may be achieved in the banking

industry as a whole. First, several regional conditions complicated the

return of dishonored checks within the 2-day hold period for local checks

using the paper presentment process. These conditions included severe

winter weather conditions, the distances between the banks and the most

commonly used private check clearing house and the Federal Reserve

check office in Minneapolis, and the two time zones dividing the banks in

the Upper Peninsula area.

In addition, the composition of ECCS participating banks and the low

volume of checks electronically presented through ECCS may have

contributed to its better performance. Banks participating in ECCS had to

store a fairly limited number of checks and retrieve a small number of

return items. All of the ECCS participating banks were small, with assets

ranging from $52 million to $350 million. In 1997, ECCS volume was nearly

1.9 million checks. This volume constituted about 0.2 percent of the

973 million checks that the FRBM check office collected in 1997.

Results Suggested Similar

Nonlocal Check Return

Performance for All Check

Presentment Methods

In our analysis, we also compared return times for electronic and paper

presentment of nonlocal checks. Our data showed that the check-return

performance against the funds availability schedules of electronically

presented nonlocal checks was not very different from that of

Page 15 GAO/GGD-98-145 Electronic Check Presentment
B-277713 

paper-presentment checks. Again, we evaluated the return cycle times of

nonlocal checks using the applicable availability schedule specified in EFAA

for nonlocal checks—that is, the 5-business-day funds availability. We

found that a very high percentage of dishonored checks were returned to

depositary banks within 5 business days after the day the checks were

deposited, regardless of whether the checks were electronically or

physically presented. Approximately 90 percent of the electronically

presented nonlocal checks were returned within 5 business days to

depositary banks, while 89 percent of the physically presented checks

were returned within 5 business days.

Our data showed that a considerable number of electronically presented

nonlocal checks were returned to depositary banks within 3 business days

after the checks were deposited. As shown in table 5, 43 percent of the

checks presented through the Basic service and 35 percent of the checks

presented through the Truncation service were returned to depositary banks

within 3 business days. This compares with 14 percent of the nonlocal

checks returned under paper presentment.

Table 5: Dishonored Nonlocal Checks in Sample That Were Returned Within 3, 4, or 5 Business Days, by Presentment

Method Nationwide

3 business days 4 business days 5 business days

Dishonored nonlocal checks in sample returned within

Presentment method Number Percent Number Percent Number Percent

Total sample

items reviewed

ECP services offered nationwide

Basic 81 43% 146 78% 176 94% 188

MICR Plus 0 0 32 43 61 82 74

Truncation 105 35 210 71 272 92 297

Paper check 12 14 52 63 74 89 83

Source: Federal Reserve Board data.

Several Factors

Currently Limit ECP

Use

While some observers believe that ECP may potentially contribute to a

more efficient check-collection process, several factors were mentioned as

currently limiting ECP use. As previously noted, although the UCC permits

the use of electronic presentment agreements between the presenting

bank (the last bank in the check-collection process demanding payment

from the paying bank) and paying banks, few such agreements have been

negotiated, and private clearing houses do not currently offer ECP services.

In interviews with regulatory officials and bankers, we identified several

Page 16 GAO/GGD-98-145 Electronic Check Presentment
B-277713 

factors that may play a role in discouraging banks from agreeing to accept

an electronically presented check, including

• the lack of a clear economic incentive to use electronic presentment;

• laws and regulations that require maintaining cancelled checks in certain

situations;

• a perceived consumer preference for receiving cancelled checks with

monthly bank statements and state laws requiring that cancelled checks be

offered;

• UCC and Regulation CC’s requirement that paying banks generally must

physically return a dishonored check to depositary banks;

• operating and business factors that limit banks’ adoption of ECP; and

• a concern that ECP may increase banks’ vulnerability to forged signatures

and counterfeit checks.

While there are current impediments to expanded ECP use, the Federal

Reserve Banks and some check-collection service providers are working

to create a more favorable environment for ECP growth, including possible

ways to promote ECP use and establishing standards for using ECP.

Banks Lack a Clear

Economic Incentive to Use

Electronic Presentment

For a bank, deciding on the relative advantages and disadvantages of ECP

use requires weighing the potential gains in its role as a depositary bank

against the potential losses in its role as a paying bank. In its January 1998

report, the Committee on the Federal Reserve in the Payments Mechanism

concluded that paying banks have little incentive to speed up the

presentment process because they receive benefits from “float.” Float

occurs in the check-collection process because of the time it takes to

process a check—that is, the time between when the check is accepted for

payment and when the paying bank deducts the amount of the check from

the check writer’s account. Since the paying bank has use of the funds

during that time, it has little incentive to speed up the process. When a

bank is the depositary bank, however, it has a clear incentive to collect the

check—and receive payment—as quickly as possible and at the lowest

cost.

Laws and Regulations

Require the Retention of

the Cancelled Check in

Specific Situations

Many states have laws or regulations that require certain individuals,

businesses, and organizations to maintain cancelled checks. Cancelled

checks also serve as documentation for federal and state tax authorities

and as proof of payment for certain categories of commercial transactions.

The Federal Reserve Bank of Boston (FRBB) compiled a survey (dated

Page 17 GAO/GGD-98-145 Electronic Check Presentment
B-277713 

1997) of federal and state laws and regulations that relate to the retention

of an original cancelled check. On the basis of our analysis of the survey,

41 states, plus the District of Columbia, had at least 1 law or regulation

that required individuals or organizations to retain their cancelled checks

for various purposes, including documentation for state and local

governments and by certain businesses. The remaining nine

states—Alaska, Georgia, Iowa, Maryland, Michigan, Nebraska, Oregon,

West Virginia, and Utah—were not listed as having any laws or regulations

that required the retention of cancelled checks.

An example, cited in the survey, of a state law requiring the retention of

cancelled checks was a Florida law that provides, in general, that county

officials are required to retain cancelled checks as a part of the permanent

record of the applicable office. Another example was a California

regulation requiring investment advisors to retain cancelled checks for at

least 6 years—during the first 2 years of which, the cancelled checks are to

be held in a location that is easily accessible.

Customer Preference and

State Laws Regarding

Cancelled Checks

The perceived consumer preference for receiving cancelled checks is

another operational deterrent to ECP use. If consumers are to receive their

cancelled checks in their monthly statements, banks cannot use check

truncation anywhere in the collection process. Federal Reserve Board

officials and banking officials with whom we spoke expressed a belief that

many consumers want their cancelled checks returned.

Additionally, two states have laws that guarantee bank consumers the

right to receive cancelled checks. According to the FRBB’s survey, New

York and Massachusetts have such laws. A New York law requires, in

general, that banking institutions offering consumer accounts offer a

consumer account through which cancelled checks are returned to the

customer with a periodic statement of the account. In Massachusetts, a

state law requires that, if depositors request their cancelled checks, the

bank must return the cancelled checks without charging a fee.

Regulation CC Requires

That a Dishonored Check

be Physically Returned

Regulation CC, which governs funds availability and the collection and

return of checks, requires that paying banks must physically return the

original dishonored check to the depositary bank if it is available.13 This

13While Regulation CC provides that, in certain circumstances, a bank may send a copy or notice in

place of a check, such notice in lieu of return is permitted only when a bank does not have and cannot

obtain possession of the check or must retain possession of the check for protest. Regulation CC

commentary provides that a check is not unavailable for return if it is merely difficult to retrieve from

a filing system or from storage by a keeper of checks in a truncation system.

Page 18 GAO/GGD-98-145 Electronic Check Presentment
B-277713 

requirement applies to all checks, regardless of whether they were

electronically or physically presented. The Federal Reserve ECP services

were structured so that paper checks can be returned to depositary banks.

Federal Reserve Board officials told us that Regulation CC could be

amended to permit banks to return dishonored checks using images in lieu

of the paper check but that before Regulation CC could be modified,

certain operational and legal issues would need to be resolved.

Business Factors Could

Impede ECP Growth

On the basis of our interviews with banking officials, we also identified

business factors that could play a role in discouraging banks from

choosing electronic check presentment and truncation, including the

current concentration of resources on ensuring that banks’ computers are

able to handle dates after the year 2000 and the potential for depositary

banks to secure access to information on the paying banks’ customers.

Banks must ensure their computer systems are able to handle dates in

2000 and beyond. However, many banks may not have sufficient resources

to both ensure that their computers are able to handle this date change

and make necessary investments to use ECP. Officials of large banks told

us that they have allocated significant resources toward ensuring that their

computers are able to handle these dates. As a result, any significant

changes in check clearing technology are not likely to be considered until

after 2000 in many banks.

Banks Are Concerned That

ECP Use May Increase

Their Vulnerability to

Forged Signatures and

Counterfeit Checks

From our interviews and from written responses from banking officials at

five large banks, we learned that these banks do not consider MICR data

adequate information for detecting certain types of fraud, particularly

forged signatures and counterfeit checks. (The potential effects of ECP use

on check fraud are discussed in the next major section of this report.)

Future Plans for ECP

Growth

Despite the current limitations previously mentioned, the Federal Reserve

Banks, some private organizations, and several large banks in the United

States are working to create a more favorable environment for ECP growth.

Two of these efforts include (1) the establishment of a working group

comprising officials from banks, the Federal Reserve Banks, and check

collection service providers and (2) the expected creation of the first

multilateral ECP organization, that is, an ECP organization established by an

agreement involving more than two banks.

Page 19 GAO/GGD-98-145 Electronic Check Presentment
B-277713 

In its January 1998 report, the Committee on the Federal Reserve in the

Payments Mechanism concluded that “it is not yet clear” whether the

whole check system would benefit from moving toward ECP and

truncation. The report recommended that a working group comprising

banks, the Federal Reserve, and other check-collection process

participants should be convened to determine the cost and feasibility of

further ECP use and truncation. The report outlined possible steps that the

Federal Reserve might take if this working group concludes that such a

coordinated move is both feasible and advisable. For example, the report

stated that the Federal Reserve could amend Regulation CC to permit

banks to return dishonored checks, or return items, using images or

electronic transmissions in place of the original checks.

In addition, several commercial banks, with the assistance of NYCHA, are

forming the first national multilateral ECP organization, The Small Value

Payments Company, L.L.C., which was expected to begin operations in

mid-1998. Thirteen of the largest U.S. banks are to become owners in The

Small Value Payments Company. Under current plans, the organization

would be established in stages. In the initial stage, banks are to transmit

electronic check information among themselves, but the receipt of the

paper check would still constitute presentment. According to an NYCHA

official, the initial phase would provide The Small Value Payments

Company with time to ensure that ECP standards are established and that

banks are complying with the standards. As currently proposed, the final

phase would be realized when the transmission and receipt of the MICR

data constitute presentment and when the checks are truncated at

depositary banks. The same NYCHA official acknowledged that The Small

Value Payments Company faces obstacles in completing the final phase of

its operation. One of these obstacles is state laws that guarantee

consumers the right to elect to receive cancelled checks. But the NYCHA

official predicted that the final phase may be completed within 4 to 5 years

from the initial operating date of The Small Value Payments Company.

Bankers Said That

ECP Use Makes

Banks More

Vulnerable to Forged

Signatures and

Counterfeit Checks

In interviews and written responses to our questions, officials at five

commercial banks indicated that forged signatures and endorsements, as

well as counterfeit checks, have created their highest check fraud losses in

the period since 1995. Under the UCC, banks may be responsible for

recrediting the account of a customer if the bank charges the account for a

check that is not properly payable, such as a check with a forged

signature. According to these banking officials, perpetrators of fraud are

becoming more sophisticated in committing check fraud. A banking

Page 20 GAO/GGD-98-145 Electronic Check Presentment
B-277713 

official told us that large banks in New York City and San Francisco face a

greater potential for check fraud than small banks located in rural areas.

Of the five commercial banks that responded to our written survey

questions, four listed forgeries of either signatures or endorsements as the

type of check fraud that has caused them their highest dollar losses since

1995. The fifth bank reported that counterfeit checks constituted its

highest fraud losses for the same period.

Banking officials, in interviews and written responses to our questions,

informed us that they do not consider the receipt of the MICR data as

providing adequate information for detecting certain types of fraud,

particularly forgeries and counterfeit checks. According to one banking

official, banks need access to the paper checks to detect potential forged

signatures or counterfeit checks. Because the receipt of the MICR data does

not provide paying banks with information viewed as adequate for

identifying forged signatures, these banking officials said they have

continued to insist on paper presentment. As previously noted, although

the UCC permits the use of electronic presentment agreements between the

presenting bank and the paying bank, very few agreements have been

negotiated.

A potential alternative to paper checks is a digitized image of checks.

According to banking officials, transmitting a digitized image of the paper

check along with the MICR data would allow banks to verify signatures.

Specifically, a digitized check image would allow paying banks to inspect

the image as they would inspect a check for possible fraudulent

signatures.

However, we were told that both business and technological

considerations currently limit widespread use of digitized check images.

First, according to one banking official, banks are unlikely to invest their

financial resources in check imaging technology because customers

expect to have their cancelled paper checks returned. Second, check

images cannot currently be economically transmitted. One check image

consists of a massive amount of digital information—that is, about 50,000

bytes of information, compared with 94 bytes of information for a MICR

data transmission. The Committee on the Federal Reserve in the Payment

Mechanism, in its January 1998 report, stated that imaging technology

would require both additional investment and ongoing costs for banks.

The committee also noted in the report that “there is some risk that

changes in technology and the evolution of the retail payments system will

overtake the cost and benefit issues” associated with check imaging. For

Page 21 GAO/GGD-98-145 Electronic Check Presentment
B-277713 

example, while “there is little evidence to suggest that the volume of

checks is likely to drop substantially over the next several years,” check

imaging could become obsolete if other electronic payment methods

emerge and lead to a decreased use of checks.

ECP use may enhance a bank’s ability to identify checks that cannot be

paid, such as checks written on closed accounts, and potentially deter

some types of check fraud. Fraudulent practices like “paperhanging” and

“check kiting” can be created from closed accounts and insufficient funds,

respectively.14 If the MICR data were presented faster to the paying banks

than paper checks are, this action might facilitate the identification of a

check written on a closed account or a check written on an account with

insufficient funds.

However, a Federal Reserve official and a banking official noted that both

ECP and paper presentment methods have some limits in detecting some

types of check fraud, particularly forged endorsements, and that it would

be difficult to judge which method is superior. A banking official noted

that forged endorsements often are not detected until the proper payee of

a check notifies the check writer that a payment is missing.

Agency Comments

and Our Evaluation

We requested comments on a draft of this report from the Federal Reserve

Board. The Board’s comments are reprinted in appendix II. The Board

agreed with the facts as stated in our report. In addition, the Board

provided technical comments, which we have incorporated where

appropriate.

We are sending copies of this report to the Chairman and the Ranking

Minority Member of the House Committee on Banking and Financial

Services; the Chairman and the Ranking Minority Member of the Senate

Committee on Banking, Housing, and Urban Affairs; the Chairman of the

Board of Governors of the Federal Reserve System; the Presidents of the

Federal Reserve Banks of Boston and Minneapolis; and others upon

request.

This report was prepared under the direction of James M. McDermott,

Assistant Director, Financial Institutions and Markets Issues. Other major

14The term paperhanging refers to checks that are deliberately written on closed accounts. Check

kiting may take many forms, but it often involves the writing of checks on two or more banks for the

purpose of fraudulently obtaining interest-free, unauthorized loans.

Page 22 GAO/GGD-98-145 Electronic Check Presentment
B-277713 

contributors are listed in appendix III. Please contact me on (202) 512-8678

if you have any questions about this report.

Susan S. Westin

Associate Director, Financial Institutions

 and Markets Issues

Page 23 GAO/GGD-98-145 Electronic Check Presentment
Contents

Letter 1

Appendix I 

Methodology of the

ECP Return Item

Survey

26

Appendix II 

Comments From the

Board of Governors of

the Federal Reserve

System

31

Appendix III 

Major Contributors to

This Report

32

Glossary 33

Tables Table 1: Descriptions of the Four Federal Reserve ECP Services 9

 Table 2: The Federal Reserve ECP Volume in 1997, by Federal

Reserve District

11

Table 3: Dishonored Local Checks in Sample That Were Returned

Within 2 or 3 Business Days, By Presentment Method

13

Table 4: Dishonored Local Checks in Sample That Were Returned

Within 2 or 3 Business Days, by Presentment Method Within the

Upper Peninsula

15

Table 5: Dishonored Nonlocal Checks in Sample That Were

Returned Within 3, 4, or 5 Business Days, by Presentment Method

Nationwide

16

Table I.1: Total Size of ECP Return Item Sample, by Presentment

Method

28

Table II.2: Total Size of Upper Michigan Bank Sample for Paper

Checks

29

Page 24 GAO/GGD-98-145 Electronic Check Presentment
Contents

Abbreviations

ABA American Bankers Association

Basic Basic MICR Presentment Service

ECCHO Electronic Check Clearing House Organization

ECCS Electronic Check Clearing Service

ECP Electronic Check Presentment

EFAA Expedited Funds Availability Act

FRBB Federal Reserve Bank of Boston

FRBM Federal Reserve Bank of Minneapolis

MICR Magnetic Ink Character Recognition

MICR Plus MICR Presentment Plus Service

NYCHA New York Clearing House Association

Truncation Check Truncation Service

UCC Uniform Commercial Code

Page 25 GAO/GGD-98-145 Electronic Check Presentment
Appendix I 

Methodology of the ECP Return Item Survey

To determine how ECP use affects the length of time that it takes for a

dishonored check to be returned to a depositary bank, that is, the return

cycle time, we used data from surveys conducted by us and the Federal

Reserve Board. The survey instruments we and the Federal Reserve Board

used captured the return cycle times and other characteristics of a small

sample of returned checks that were initially presented by paper check

and by electronic transmission. The Federal Reserve, at our request,

sampled dishonored checks as they were being returned by the paying

bank to four Federal Reserve check offices (Kansas City, Jacksonville,

Minneapolis, and Richmond), primarily during the week of January 12

through 16, 1998.15 These four check offices were selected on the basis of

the amount of their ECP volume and the number of banks that acquire ECP

services from the four Federal Reserve check offices. Since ECP is a paying

bank service, the samples were drawn at the Federal Reserve office that

served the paying bank.

Also, the Federal Reserve Board applied the same ECP return item survey

to FRBM’s additional ECP service, ECCS, which is offered only to banks

located in the Upper Peninsula of Michigan.

To collect a sample of paper checks comparable to those ECCS items

obtained from the Minneapolis check office, we judgmentally selected 10

banks located on the Upper Peninsula of Michigan, all of which are in the

Minneapolis check processing region, where ECCS is offered. Then, we

asked the 10 banks, which did not participate in ECCS, to record

return-time data, using the same survey forms and instructions used by the

Federal Reserve Board, for all checks returned to them during the study

week of January 12 through 16, 1998.

Return Item Sample Design For the Basic, MICR Plus, and Truncation ECP services, the 4 Federal Reserve

check offices were instructed to select 25 return items daily for each

presentment service from a list of return items received from paying banks

and to record the return time data. In addition, they were instructed to

collect 25 paper items each day during the 5-day study period. Therefore,

the weekly sample size of each service (Basic, MICR Plus, Truncation, and

Paper) was expected to be 125 items at each of the 4 check offices, and the

total sample size for each presentment service was to be 500 items. For

determining the return cycle time of ECCS, the Minneapolis check office

15Survey data collected by the Federal Reserve Board included 213 items that were outside of the study

period out of a total sample of 2,258 items.

Page 26 GAO/GGD-98-145 Electronic Check Presentment
Appendix I 

Methodology of the ECP Return Item Survey

was instructed to select 75 return items daily, or all items if there were

fewer than 75 returns for any day.

The Federal Reserve check offices were instructed to decrease the

likelihood of bias in the sample of return items by allocating the sample

across all the cash letters (i.e., a listing of return items) received from

banks of various sizes on a particular day, to the extent possible.

The 10 Michigan banks that we selected were instructed to select all of the

return items (i.e., dishonored checks) returned to them, as depositary

banks, on each day of the study week.

Because the check offices, Michigan banks, and check samples were not

selected on a random basis, we cannot make any statistical generalizations

regarding the entire banking industry, or the Federal Reserve’s ECP

services, on the basis of this analysis.

Survey Data Collection Return items from 515 paying banks were selected by the 4 Federal

Reserve check offices. Data from 2,258 return items were recorded by the

Federal Reserve Board, after those items that had been sent through the

collection process more than once had been discarded. A depositary bank

may potentially send a dishonored check back through the collection

process multiple times before a check is paid. The inclusion of those items

might have skewed our results because it is very difficult to determine the

endorsement and return dates for checks that have been presented more

than once. Table I.1 shows the actual sample size for each presentment

service.

Page 27 GAO/GGD-98-145 Electronic Check Presentment
Appendix I 

Methodology of the ECP Return Item Survey

Table I.1: Total Size of ECP Return

Item Sample, by Presentment Method

Presentment services

Number of

return items

used in study

Number

of items

presented

more than

once

Total

samplea

ECP services offered nationwide

Basic 569 72 641

MICR Plus 343 32 375

Truncation 841 143 984

ECCS (ECP service offered only in the

Upper Peninsula of Michigan) 131 0 131

Paper check 374 47 421

Total 2,258 294 2,552

aIncludes both local and nonlocal checks.

Source: Federal Reserve Board.

The number of paper items in the overall sample was lower than the 500

items originally planned. We were advised by Federal Reserve Board staff

that, because Federal Reserve Bank staff collected the sample of paper

items during the busy processing cycle, they were generally unable to

collect as many paper items as instructed.

Moreover, the MICR Plus sample was also smaller than originally planned.

Return items that were initially presented by MICR Plus were sampled at

three of the four Federal Reserve check offices. Federal Reserve Board

officials advised us that one check office did not have any MICR Plus

customers from which they could take a sample of items. However, the

other three offices did achieve a total sample size of 421 MICR Plus return

items.

The actual number of ECCS items received by the FRBM fell below the

sample quota of 75 per day, and all items were selected, resulting in a total

of 131 items for the study week. Items that were presented through ECCS

were all local paper checks that were not presented more than once.

Therefore, to compare the return cycle times of checks that were

presented through ECCS with those that were physically presented, we

included only the 276 physically presented local paper checks that had not

been represented by the 10 Michigan banks in our analysis. (See table II.2.)

Page 28 GAO/GGD-98-145 Electronic Check Presentment
Appendix I 

Methodology of the ECP Return Item Survey

Table II.2: Total Size of Upper Michigan

Bank Sample for Paper Checks Paper check type Total sample

Local 276

Nonlocal 73

Represented 127

Total 476

Source: GAO.

We did not verify that this data-collection process was followed at the

Federal Reserve check offices or at the 10 Michigan banks. However, we

examined check endorsement and presentment and return dates for

out-of-range values and logical consistency. We also resolved, to the

extent possible, data coding and entry problems with respondents at the

banks and officials at the Federal Reserve Board.

Data Elements Collected

by the Return-Item Survey

We and the four Federal Reserve check offices used the same data

collection instrument to record return cycle times and other check

characteristics. This instrument was similar to one developed and

administered by the Federal Reserve Board in previous check return time

surveys. The ECP return item survey instructed the Federal Reserve Bank

staff and officials at the 10 Michigan banks to collect certain data elements

located on paper checks. These data elements included (1) the

endorsement date or the date the check was deposited, (2) the date the

check was presented to the paying bank, and (3) the date the check was

returned to the depositary bank. In addition, the survey instrument

collected the ABA numbers of both the depositary banks and paying banks

so that checks could be categorized as local or nonlocal. Also recorded

were the reasons the checks were returned, whether the checks had been

represented, and whether intermediaries were involved in the return

process.

Calculating the Return

Cycle Time

To ascertain the return cycle times for both local and nonlocal checks, we

calculated the number of days from the endorsement date (the date the

check was deposited at the depositary bank) to the return date (the date

the dishonored check was received by the depositary bank). For the

checks sampled at the Federal Reserve check offices, we added 1 day to

the return cycle for nonlocal checks because the samples were drawn and

the final date was recorded at the Federal Reserve offices that served the

paying banks. Since the samples were not drawn at the depositary banks,

Page 29 GAO/GGD-98-145 Electronic Check Presentment
Appendix I 

Methodology of the ECP Return Item Survey

we needed to adjust the recorded return dates to include the time required

for transporting the return items from the Federal Reserve check offices to

the depositary banks.

According to the Federal Reserve Board official who supervised the ECP

Return Item Survey data collection, because the samples were drawn at

the Federal Reserve check office serving the paying bank, any nonlocal

return items would have been delivered overnight to the Federal Reserve

check office serving the depositary bank. The official acknowledged that

there may have been instances in which the return item took more than 1

day to actually reach the depositary bank, but these instances would have

been rare and nearly impossible to identify. We agreed that the Federal

Reserve Board’s approach of adding 1 day to the return cycle time for

nonlocal checks seemed to be reasonable, given that the sample could not

be drawn at the Federal Reserve check office serving the depositary bank

and that the understatement of return cycle times would be small.

For local checks, no adjustments were made to the calculated return

cycles because the same Federal Reserve check office served both the

depositary bank and the paying bank. Again, we felt that any

understatement of return cycle times would be small.

Because the dates on which the 10 Michigan banks recorded their check

data also represented the actual return dates for checks so recorded, no

return cycle time adjustment was necessary.

Return dates for checks were recorded, and cycle times were calculated,

in whole days. Weekends and holidays were excluded from the elapsed

times. Some of the return dates fell outside of the study week. The 213

such cases in the Federal Reserve data were included in the analysis, while

cases that were outside of the study period were excluded from the

Michigan bank data. For those return items with return dates falling on a

weekend date, the dates were adjusted to have been returned on the next

business day because checks cannot be collected or returned on a

nonbusiness day, weekend date, or holiday.

Page 30 GAO/GGD-98-145 Electronic Check Presentment
Appendix II 

Comments From the Board of Governors of

the Federal Reserve System

Page 31 GAO/GGD-98-145 Electronic Check Presentment
Appendix III 

Major Contributors to This Report

General Government

Division

Nancy Eibeck, Evaluator-in-Charge

Carl Ramirez, Senior Social Science Analyst

Catherine M. Hurley, Computer Specialist

Jerry Sandau, Social Science Analyst

Desiree W. Whipple, Communications Analyst

Office of the General

Counsel

Geoffrey Hamilton, Senior Attorney

Page 32 GAO/GGD-98-145 Electronic Check Presentment
Glossary

Clearing House

Association

A voluntary association formed by banks that establishes a meeting place

for the exchanging of checks drawn on those banks.

Collecting Bank Any bank except the paying bank handling a check for collection.

Correspondent Bank A bank that holds deposits owned by other banks and performs banking

services, such as check collection.

Depositary Bank The first bank at which a check is deposited.

Float The time between when the check is accepted for payment and when the

paying bank deducts the amount of the check from the check writer’s

account.

Interbank Checks Checks for which the depositary bank and the paying bank are not the

same entity.

Intermediary Bank A bank other than the depositary or the paying bank to which a check is

transferred in the course of collection.

Magnetic Ink Character

Recognition (MICR) Line

The line at the bottom of a check that identifies the routing number of the

paying bank, the amount of the check, the number of the check, and the

account number of the customer.

Midnight Deadline Midnight on the next banking day following the banking day on which the

paying bank received the check.

On-Us Checks Checks for which the collecting bank and the paying bank are the same

entity.

Paying Bank The bank on which the check is drawn.

Presenting Bank The last bank in the check-collection process demanding payment from

the paying bank.

Page 33 GAO/GGD-98-145 Electronic Check Presentment
Glossary

Returning Bank A bank handling a returned check.

(233528) Page 34 GAO/GGD-98-145 Electronic Check Presentment
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