Feditorial: When Is a Check Not a Check?

Hank Bourgaux

In a study released last November, the Federal Reserve showed that while the retail payment market continues to grow, the use of the check to pay for goods and services is shrinking. Many years into what some people call the "payments revolution," the Fed and most financial institutions are starting to experience a drop in the number of physical checks we process. Where are they going? Our study documented that over the past 20 years, electronic payments had grown from about 15 percent of the retail payment market to about 40 percent. And the growth isn't just from credit cards, debit cards, smart cards and the like. Today, we are seeing merchants—from mom-and-pop stores to the largest department stores—"electrifying" the check at the point-of-sale, lock-box collection services converting the check to an ACH item and more financial institutions providing only check images in bank statements. No wonder electronic check conversion can be confusing to some consumers.

Bankers can easily determine if the check is a check or if it has become an ACH item: If a check is collected and settled within the existing check processing system (even if it is done electronically), it is still a check. Even check images that replace paper checks are still considered checks. But it can get confusing for customers who hand over a check to merchants, who then use their check data to collect and settle through an electronic network. In this case, the check has been converted, and the electronic payment rules apply. Baffled consumers are given back a voided check and are left to wonder if any payment was actually made, and if so, what kind. Unfortunately, cash register clerks don't always know how to respond to such confusion.

As the number of electronic payments continues to grow, it becomes the responsibility of the financial services industry to educate consumers about the differences between traditional paper checks and electronic payments, such as differences in processing times and legal rights.

To support financial institutions in their educational efforts, the Federal Reserve System offers several free resource materials about electronic check conversion and electronic payments, available online or in a format that can be downloaded. They are: http://www.federalreserve.gov/pubs/checkconv/default.htm and http://www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2002/cflaug2002_180.pdf. I hope these help.

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