Report says Federal Reserve has not saved money with electronic checks

The process of converting checks to digital images to expedite processing and reduce shipping costs hasn't resulted in savings so far for the Federal Reserve or private banks, according to a Government Accountability Office report released on Tuesday.

Comment on this article in The Forum.Check truncation, or the electronic processing of checks, was supposed to lead to greater efficiency by removing paper from the payment stream and reducing costs. Government auditors found, however, that the Federal Reserve's costs for processing checks have not decreased, mostly because the Fed and other banks currently must maintain the ability to process both paper and electronic checks.

The 2003 Check Clearing for the 21st Century Act (Check 21) intended to make check collection more efficient by facilitating wider use of electronic check processing. The law made it permissible for banks to accept electronic images of checks as substitutes for actual paper checks, which previously had to be shipped to multiple locations to be processed.

Check 21 also allowed banks to create substitute checks for delivery to institutions that don't accept electronic checks, as the original paper versions usually are destroyed after an image is created. Individuals also would no longer receive their canceled checks, and instead would have to go online to track their payments.

But the Fed's concurrent costs of maintaining its paper check processing infrastructure while also investing in the equipment and software needed for electronic check processing have delayed anticipated cost reductions.

In fact, GAO pointed out that cost may have risen slightly since the passage of Check 21, but cautioned that the increase was due mostly to one-time investments in the equipment necessary to process checks electronically. The report did conclude that check truncation reduced work hours for the Fed's check services by almost 50 percent from 2001 to 2007, and transportation costs dropped by about 11 percent during the same time. GAO pointed out, however, that the rise of credit card and automatic online payments contributed to the overall decline in the popularity of checks.

Check payments declined from 46 percent of noncash payments in 2003 to 33 percent in 2006.

As electronic check processing has become more prevalent, the Federal Reserve has managed to reduce the number of check processing centers it operates. The Fed had 45 check offices in 2003; at the end of last month that number was 15, with plans to reduce the figure to four by the first quarter of 2010.

The report concluded the Fed would experience more efficiency in the near future as the banking industry and consumers become more accustomed to digital image transactions. The Fed, which agreed with GAO's findings, said it expected more than 90 percent of its check deposits to be electronic by the end of 2009.