[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
H.R. 5414--THE CHECK CLEARING
FOR THE 21ST CENTURY ACT
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 25, 2002
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-84
83-587 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2002
____________________________________________________________________________
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Ohio JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, Chief Counsel and Staff Director
Subcommittee on Financial Institutions and Consumer Credit
SPENCER BACHUS, Alabama, Chairman
DAVE WELDON, Florida, Vice Chairman MAXINE WATERS, California
MARGE ROUKEMA, New Jersey CAROLYN B. MALONEY, New York
DOUG BEREUTER, Nebraska MELVIN L. WATT, North Carolina
RICHARD H. BAKER, Louisiana GARY L. ACKERMAN, New York
MICHAEL N. CASTLE, Delaware KEN BENTSEN, Texas
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma MAX SANDLIN, Texas
BOB BARR, Georgia GREGORY W. MEEKS, New York
SUE W. KELLY, New York LUIS V. GUTIERREZ, Illinois
PAUL E. GILLMOR, Ohio FRANK MASCARA, Pennsylvania
JIM RYUN, Kansas DENNIS MOORE, Kansas
BOB RILEY, Alabama CHARLES A. GONZALEZ, Texas
STEVEN C. LaTOURETTE, Ohio PAUL E. KANJORSKI, Pennsylvania
DONALD A. MANZULLO, Illinois JAMES H. MALONEY, Connecticut
WALTER B. JONES, North Carolina DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois JULIA CARSON, Indiana
PATRICK J. TOOMEY, Pennsylvania BARBARA LEE, California
ERIC CANTOR, Virginia HAROLD E. FORD, Jr., Tennessee
FELIX J. GRUCCI, Jr, New York RUBEN HINOJOSA, Texas
MELISSA A. HART, Pennsylvania KEN LUCAS, Kentucky
SHELLEY MOORE CAPITO, West Virginia RONNIE SHOWS, Mississippi
MIKE FERGUSON, New Jersey JOSEPH CROWLEY, New York
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
C O N T E N T S
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Page
Hearing held on:
September 25, 2002........................................... 1
Appendix:
September 25, 2002........................................... 39
WITNESSES
Wednesday, September 25, 2002
Biggerstaff, Joel, CEO, AirNet Systems, Inc...................... 29
Fenner, Robert M., General Counsel, National Credit Union
Administration................................................. 8
Ferguson, Hon. Roger W. Jr., Vice Chairman, Federal Reserve Board 6
Hage, Curtis L., Chairman & CEO, Home Federal Bank............... 21
Hillebrand, Gail, Senior Attorney, Consumers Union............... 23
Schram, Lee, Vice President and General manager of Payment
Solutions, NCR Corporation..................................... 27
Walker, David, President and CEO, Electronic Check Clearing House
Organization................................................... 25
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 40
Ford, Hon. Harold E. Jr...................................... 41
Gillmor, Hon. Paul E......................................... 43
Grucci, Hon. Felix J. Jr..................................... 44
Royce, Hon. Ed............................................... 46
Sherman, Hon. Brad........................................... 47
Biggerstaff, Joel............................................ 48
Fenner, Robert M............................................. 55
Ferguson, Hon. Roger W. Jr................................... 62
Hage, Curtis L............................................... 70
Hillebrand, Gail............................................. 77
Schram, Lee.................................................. 86
Walker, David................................................ 91
Additional Material Submitted for the Record
Kelly, Hon. Sue W.:
Information Technology Industry Council letter, September 25,
2002....................................................... 112
National Association of Federal Credit Unions letter,
September 25, 2002......................................... 113
Biggerstaff, Joel:
Airnet Timelines............................................. 115
Snapshots, November 2001..................................... 126
Association of Corporate Credit Unions, prepared statement....... 127
Association for Financial Professionals, prepared statement...... 131
Chen-Yu Enterprises LLC, prepared statement...................... 137
H.R. 5414, THE CHECK CLEARING
FOR THE 21ST CENTURY ACT
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Wednesday, September 25, 2002
U.S. House of Representatives,
Subcommittee on Financial Institutions
And Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:12 a.m., in
Room 2128, Rayburn House Office Building, Hon. Michael Oxley
[chairman of the full committee] presiding.
Present: Representatives Royce, Lucas of Oklahoma, Kelly,
Gillmor, Grucci, Ferguson, Tiberi, Waters, Watt, Bentsen,
Sherman, Moore, Ford, Hinojosa, Lucas of Kentucky and Inslee.
The Chairman. [Presiding.] The committee will come to
order.
The chair would like to announce that the reason that
Chairman Bachus is not here is that his 85-year-old mother had
fallen and broken her hip this morning and he is now en route
to Alabama to be with her. Obviously, all of us on the
committee wish Chairman Bachus' mother a speedy recovery. I
will begin the hearing and stay as long as I can, and then Ms.
Kelly will assume the chair.
I want to begin by thanking Chairman Bachus for arranging
this important hearing on the bipartisan legislation introduced
by the gentleman from New Jersey, Mr. Ferguson and the
gentleman from Tennessee, Mr. Ford. I would also like to thank
the panel of witnesses who have come to testify before the
subcommittee and give their insights into the need for this
legislation. In particular, I want to welcome Mr. Lee Schram of
NCR, based in my home state of Ohio in Dayton, and Mr. Joe
Biggerstaff of AirNet Systems, based in Columbus, Ohio. I am
looking forward to your thoughts and comments. I want to
particularly thank Chairman Bachus for having two Ohioans
testify before his committee.
When I became chairman of the Financial Services Committee,
one of my primary goals was to ensure that U.S. financial
institutions have the tools to operate in the most efficient
manner possible, while maintaining the safety and soundness of
the financial system. I believe we must implement the
technological advances made in the field of payment systems to
provide customers with expedited access to capital and credit,
while ensuring that they are protected from fraud. The Check 21
legislation clearly achieves that goal.
Additionally, significant cost savings to customers and
financial institutions will be realized with increased
electronic check presentment. Too often we are hamstrung in our
efforts to provide U.S. businesses and customers with access to
the most effective means of dealing with one another.
There is another important reason why this legislation is
needed. The terror attacks of last year forced us to reexamine
how our country operates under adverse circumstances. This
committee has been at the forefront of the efforts to ensure
the integrity of our capital markets, to protect the U.S. money
supply, to provide insurance against terror attacks, and with
Mr. Ferguson's proposal and Mr. Ford's proposal, to safeguard
the U.S. payment system against interruptions in transportation
services.
So I anticipate we will hear from several of the witnesses.
The days following September 11, 2002, placed the U.S. payments
system in crisis when the flights that normally transported
checks between banks across the country were grounded. With the
enactment of Check 21, the need for the physical transportation
of checks between financial institutions will be reduced, and
any threat to the transportation system will not affect the
presentment of checks in the payment system.
Finally, I would like to thank the Federal Reserve for its
hard work in helping develop H.R. 5414 in consultation with
this committee and other interested parties. I am hopeful we
can achieve broad bipartisan support to move this proposal
early in the next session. I am looking forward to the
discussion on this legislation on future innovations in the
U.S. payments system.
I now yield to the gentlelady from California, the ranking
member of the subcommittee.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 40 in the appendix.]
Ms. Waters. Thank you very much, Mr. Chairman.
We are here today to discuss the Check Clearing for the
21st Century Act. This legislation considers the transformation
of our nation's payment system from a physical one to an
electronic one. I have heard many arguments for and against
this legislation, but my concern today is to ensure that we
have a balanced bill that also focuses on issues that are vital
to consumers. I am not opposed to the principle of having an
efficient payment system in our country which would reduce
significantly the check clearing time and provide substantial
savings to the federal government and financial institutions as
it relates to the transportation of physical checks. If this
process requires elimination of paper checks, then so be it.
Personally, I do not receive my checks back from my bank and
that is by choice. This legislation should be about choice. It
is my understanding that this legislation will eliminate the
ability of millions of U.S. customers to get their checks back.
There are currently 45.8 million households who enjoy receiving
their checks back with their bank statements. This legislation
will force them to change their practices. I do not support the
fact that consumers have to give up their rights to receive
their checks back. These 45.8 million American households
should have the choice to say no to substitute checks.
Another concern I have is the issue of recredit. For
example, if a check is paid twice or for the wrong amount, it
is my understanding that this legislation does not grant the
consumer an automatic right to a recredit of the disputed
funds. In fact, consumers whose accounts are governed by a
voluntary check truncation agreement will not receive the right
of recredit. Instead, they will have to wait months to get
their funds returned since there is no limit on how long the
bank can take to resolve a dispute about a check. My question
is, what are the additional levels of protection a consumer has
that proponents of this legislation are talking about? Does
this proposed legislation cover this?
The issue of privacy is also a big concern of mine. There
is a great deal of personal information conveyed on the face of
a check, such as the name, address, telephone number and the
Social Security of the issuer as well as the payee's name. When
this information is captured and stored in a shared database
through electronic imaging, banks can determine the consumer's
check spending habits. Information about the consumer's
religious, political and lifestyle affiliations can be revealed
easily. Will this legislation take the invasion of a consumer's
privacy under consideration?
What about the issue of availability? If customers accounts
are going to be debited faster, will the funds be made
available to them faster. Is the legislation taking this into
consideration?
Having brought up the aforementioned issues to light, I
look forward to the testimonies of the distinguished witnesses
on the panel today and I hope to find answers to my questions.
I yield back the balance of my time, and I thank you.
The Chairman. The gentlelady yields back. Are there further
opening statements?
The gentlelady from New Jersey--well close enough..
Mrs. Kelly. New York.
The Chairman. Yes.
[Laughter.]
Mrs. Kelly. We do not consider it close enough. We like the
state as it is.
Thank you, Mr. Chairman.
Last week, the gentleman from New Jersey, Mr. Ferguson, and
the gentleman from Tennessee, Mr. Ford, introduced H.R. 5414,
Check Clearing for the 21st Century Act, or Check 21. This
builds on a legislative proposal that the Federal Reserve
submitted to Congress last December. We are very pleased to
have the Federal Reserve represented here by Mr. Ferguson, as
well as the distinguished group of other public and private
sector witnesses.
Characterized by innovation, efficiency and speed, our
nation's payment system has no equal in the world. And yet one
of the many hard lessons that we learned in the aftermath of
September 11 terrorist attacks is that this system is not
without vulnerabilities. With planes grounded and the nation's
air traffic system at a standstill, the check collection
process which relies heavily on air and ground transportation
to move checks around the country experienced serious
disruptions. Since one of the terrorists' stated goals is
crippling the U.S. economy, it is clearly in our national
security interest to take those steps reasonably necessary to
insulate the payment system from the effects of future
terrorist attacks that target our financial centers and other
critical infrastructures.
While there has been a marked decline in the use of paper
checks in recent years, as consumers rely more heavily on
credit and debit cards and ATMs and other forms of electronic
payments, Americans still write more than 40 billion checks
annually, according to the Federal Reserve estimates. In
processing this huge volume of paper checks, banks and credit
unions are already realizing significant benefits for
themselves and their customers through the use of electronic
presentment and check imaging technology. H.R. 5414 will help
speed those innovations in the marketplace by removing legal
impediments to electronic check processing, thereby promoting
greater efficiency in the overall payment system and reducing
the system's current reliance on the nation's transportation
grid.
Consumers will benefit from a more electronic banking
environment. Already, many institutions are deploying new
technology to offer their customers enhanced products and
services, including access to images of checks they have
written on secure web sites and even ATMs. The Federal Reserve
has identified other potential consumer benefits from the
proposed changes to the payments system, such as broader
deposit options and more timely account information and faster
check collection and return.
Since receiving the Federal Reserve's check truncation
proposal last December, the committee has engaged in extensive
outreach to all interested parties including regulators, the
banking and credit union industries, and consumer groups. H.R.
5414 is the product of all these consultations. While it does
not reflect perfect consensus on all issues, the legislation is
an excellent first step toward the creation of a payment system
for the 21st century.
Let me again commend Mr. Ferguson and Mr. Ford for their
collaboration on this important work. Thank you. I yield back
my time to the chairman, the gentleman from West Virginia--or
close enough.
[Laughter.]
The Chairman. All right. Touche.
[Laughter.]
Are there further opening statements? The gentleman from
New Jersey, the author of said legislation.
Mr. Ferguson. The gentlelady from New York and the
gentleman from Ohio are both welcome in New Jersey anytime they
would like.
[Laughter.]
Mr. Chairman, I want to thank you and Mr. Bachus for
scheduling this important hearing on legislation that will help
modernize the nation's check payment system and bring paper
checks into the electronic age. As you know, current law
requires banks to physically present and return original
checks. This is a tedious and antiquated process that is
inefficient, expensive and it is rife with potential for fraud.
Today, millions of paper checks are physically transported
between banks every day--a system that has historically relied
on the steady flow of air and ground traffic in order to ensure
that checks are presented to paying banks in a timely manner.
When the horrific events of September 11 halted all air
traffic in the United States, hundreds of millions of checks
did not move and the U.S. payments system was stalled. This
created a situation that severely threatened our economic
security. As a result, the Federal Reserve after consulting
with the banking industry and technology companies and consumer
groups, submitted a proposal to Congress that would reduce the
need for physical transportation of checks through increased
electronic truncation. Since the Fed's proposal, this committee
has been actively engaged in a dialogue with many interested
parties, many of whom are represented here today.
Last week, Congressman Ford and I introduced the Check
Clearing for the 21st Century Act, or Check 21, which builds on
the Federal Reserve's proposal to modernize the nation's check
payment system by allowing banks to exchange checks
electronically. The legislation strengthens our economic
security by capitalizing on existing technology to make the
collection process faster and more efficient, while improving
customer service, access to funds, and anti-fraud protections.
By reducing the dependence of the check payment system on
transportation networks, Check 21 will help to avoid negative
economic impacts from unexpected disruptions to the outdated
transportation system, whether caused by weather, natural
disaster, terrorist attack or any other type of crisis. It will
help to provide the framework for new financial infrastructure
that is stronger, smarter and allows financial institutions to
better serve consumers with quality, efficient products and
services at greater cost savings.
I am pleased with the constructive feedback that we have
already received from many of our witnesses here today and
others, as well as the interest and support that my colleagues
that expressed on this issue. While I believe that the Check 21
legislation is a sound product that reflects a multitude of
views, I recognize that there is much work that needs to be
done before we move toward a final product. I look forward to
hearing the testimony and certainly welcome our witnesses and
appreciate the testimony that they will be sharing with us here
today on this important issue.
I yield back.
The Chairman. The gentleman yields back. The chair would
indicate unanimous consent for any member to submit an opening
statement for the record. Without objection, so ordered.
The chair would note that there are a series of votes--
three votes on the floor of the House. What I would like to do
is get started with the witnesses and then we will suspend and
return. Let me introduce our first panel, the Honorable Roger
W. Ferguson, Jr., vice chairman of the Board of Governors at
the Federal Reserve. Mr. Ferguson, welcome back to the panel.
Our second witness on this panel, Mr. Robert M. Fenner, general
counsel of the National Credit Union Administration. I think
this is your first appearance before the committee, is it not?
Mr. Fenner. In some years.
The Chairman. In some years. Okay.
[Laughter.]
Well, it is good to have both of you here and we appreciate
your participation in this hearing. Mr. Ferguson, we will go
with you first.
STATEMENT OF HON. ROGER W. FERGUSON, JR., VICE CHAIRMAN, BOARD
OF GOVERNORS, FEDERAL RESERVE SYSTEM
Mr. Ferguson. I would like to thank the subcommittee for
inviting me to discuss H.R. 5414, the proposed Check Clearing
for the 21st Century Act. Since many of the members have
already referred to the work of the Federal Reserve system, I
would like to also do something which is frankly unprecedented,
and acknowledge the strong work of three of the staff members
who are here with me today--Stephanie Martin, Louise Roseman
and Jack Walton.
This bill, which is similar to a proposal the board sent to
Congress late last year, will remove existing legal barriers to
the use of new technology in check processing, and holds the
promise of a more efficient check collection system. The board
commends Representative Ferguson and Representative Ford for
introducing this bill.
Check processing is far more efficient than it once was.
Less than 50 years ago, clerks hand-sorted millions of checks
each day. In the 1960s, the banking industry began to use
mechanical high-speed check processing equipment to read and
sort checks. Today, banks, thrifts and credit unions, which I
will collectively refer to as banks, process, as you have
already noted, more than 40 billion checks that consumers,
businesses and the government write each year.
Legal impediments, however, have prevented the banking
industry from fully using new electronic technologies such as
digital imaging, to improve check processing efficiency and
provide improved services to customers. This is because
existing law requires that the original paper checks be
presented for payment unless the banks involved agree
otherwise. During each step of the check collection process,
the check must be physically shipped to its destination by air
or ground transportation from the branch or ATM of deposit to
the bank's operations center and often through one or more
intermediaries before being delivered to the bank on which it
was drawn. Of course, banks can agree to accept checks
electronically, but the large number of banks in the United
States makes it unfeasible for any one bank to obtain such
agreements from all other banks, or even a large proportion of
them.
Therefore, legal changes are needed to facilitate the use
of technologies that could improve check processing efficiency,
which should lead to substantial reductions in transportation
and other check processing costs. H.R. 5414 makes such changes.
The proposed Check Clearing for the 21st Century Act solves a
longstanding dilemma--how to foster check truncation earlier in
the check collection or return process, without mandating that
banks accept checks in electronic form. The Act facilitates
check truncation by creating a new negotiable instrument called
a substitute check which would permit banks to truncate the
original checks, to process the check information
electronically and to deliver substitute checks to banks that
want to continue receiving paper checks.
A substitute check, which would be the legal equivalent of
the original check, would include all the information contained
on the original check--that is, an image of the front and back
of the check, as well as the machine-readable numbers that
appear on the bottom of the check. Under this Act, while a bank
could no longer demand to receive the original check, it could
still demand to receive a paper check. Because substitute
checks could be processed just like original checks, a bank
would not need to invest in any new technology or otherwise
change its current check processing operations.
This change would permit banks to stop transporting
original checks and would enable the banking industry to reduce
its reliance on physical transportation, thereby reducing the
risk that checks may be delayed in transit, for example, due to
inclement weather. The banking industry's extensive reliance on
air transportation was underscored in the aftermath of the
September 11 tragedy, when air transportation came to a
standstill and the flow of checks slowed dramatically. During
the week of the attacks, the Federal Reserve banks' daily check
flow ballooned to more than $47 billion, which is more than 100
times its normal level. Had the proposed legislation been in
effect at that time, banks may have been able to collect many
more checks by transmitting electronic check information across
the country and presenting substitute checks to paying banks.
The Act might also better position banks to provide new and
improved services to their customers. For example, banks might
allow some corporate customers to transmit their deposits
electronically. Further, if banks begin to transmit check
images from the point of deposit to their operations centers
for processing, they may be able to establish branches or ATMs
in more remote locations and provide later deposit cut-off
hours to their customers. Because the Act will likely encourage
greater investments in image technology, banks might also be
able to expand their customers' access to enhanced account
information and check images through the Internet. In addition,
banks might be able to resolve customer inquiries more easily
and quickly than today by accessing check images.
We recognize that the most challenging policy issues in the
proposed law and the aspect of this legislation that has
generated the most spirited discussion relates to customer
protections. Current check law protects customers if there is
an unauthorized debit to their accounts. A customer already has
a claim against its bank for an unauthorized charge, and the
bank may be liable for interest on the amount of the
unauthorized charge and consequential damages for the wrongful
dishonor of any subsequently presented check.
The proposed legislation applies these existing check
protections to substitute checks. There are, however, differing
views as to whether additional customer protections are
necessary for substitute checks and if so, how extensive those
protections should be. We believe that in determining the form
these protections should take, the associated benefits and
costs will need to be carefully balanced. There are some
technical matters in the current version of the bill that could
be improved or clarified and we look forward to working with
the committee as it further considers this legislation.
In conclusion, although an increasing number of payments
are being made electronically, it is clear that checks will
continue to play an important role in the nation's payments
system for the foreseeable future. We believe that over the
long run, the concepts embodied in the proposed Check Clearing
for the 21st Century Act will spur the use of new technologies
to improve the efficiency of the nation's check collection
system and provide better services to bank customers.
It is important to recognize three fundamental facts.
First, the proposed Act merely replaces one piece of paper, the
check, with another piece of paper, the substitute check, both
of which contain exactly the same information front and back.
Secondly, the proposed legislation lightens the regulatory
burden on banks. And the third benefit is that it removes
barriers to progress in this important area of payment systems.
Because the Act should also result in substantial cost savings,
it would also be desirable to begin obtaining these savings in
the near future, ideally before the bill's proposed 2006
effective date.
Thank you for your time, and I would be happy to answer
your questions.
[The prepared statement of Roger W. Ferguson Jr. can be
found on page 62 in the appendix.]
The Chairman. Thank you, Mr. Ferguson. It is the intention
of the chair to recess the committee to go over to the floor
and vote, and then we will begin with Mr. Fenner when we
return. The committee stands in recess for probably 20 minutes.
[Recess.]
The Chairman. The committee will reconvene. Before
recognizing Mr. Fenner, the chair would ask unanimous consent
that the imaging exhibit that Mr. Ferguson referred to in his
testimony be made part of the record so that the members can
actually get a look at the process. Without objection, so
ordered.
We now turn to the aforementioned Mr. Fenner. Mr. Fenner, I
am sorry for that delay, but you are now recognized for your
testimony.
STATEMENT OF ROBERT M. FENNER, GENERAL COUNSEL, NATIONAL CREDIT
UNION ADMINISTRATION
Mr. Fenner. Thank you, Chairman Oxley and members of the
subcommittee. I am pleased to be here to report on NCUA's
experience with truncation of sharedrafts in the credit union
system. From 1974 when NCUA first authorized sharedraft
accounts, which are the credit union version of checking
accounts, until 1982, NCUA regulations actually required
truncation. Truncation was an integral part of the early
proposals that were developed in the credit union system for
sharedraft programs, and NCUA believed that requiring
truncation would foster the development of a more efficient
system of checking accounts for credit unions and their
members.
In practical terms, what truncation in credit unions meant
then and what it means now is that when a member writes a check
on the member's account at the credit union, the draft or the
check proceeds all the way through the clearing process to the
point where it is truncated or held by either the credit union
or its corporate credit union or other processor. At that
point, the information on the draft is stored electronically
and printed on the member's monthly statement. In some cases,
electronic images of the draft are returned with the statement,
but that is not required.
When a member requests production of the original draft or
a copy, the issue of fees is determined by agreement between
the credit union and the member, and also issues of liability
in the case of fraud or improper debiting or the like are
determined under the Uniform Commercial Code and other relevant
law. Since 1982, NCUA has not required truncation, but rather
our regulations now leave that decision to the individual
credit unions. Nonetheless, today 20 years later, 91 percent of
all credit unions that offer sharedraft accounts do utilize
truncation. We believe that that is the best evidence that
truncation has been both a cost-effective innovation and one
that is well accepted by credit union members.
Moreover, our evidence suggests that truncation has not
been a frequent source of credit union member complaint.
Surveys of our regional offices over the last two years have
revealed no unusual hardships to credit union members, and only
two instances of complaints made to NCUA. Both of those
complaints related to fees associated with obtaining the
original or a copy of a canceled draft, and that is an issue
that we believe should be determined in the marketplace, and
not by government regulation.
In closing, considering our positive experience with
truncation, we are pleased to support the initiatives being
considered by the subcommittee that would facilitate truncation
at a much earlier stage in the collection process than the
practices that exist in credit unions today, and also allow
truncation of the check return process. We believe this
legislation would clearly facilitate broader use of truncation
and in our view it would improve the efficiencies of the
payment system.
Thank you.
[The prepared statement of Robert M. Fenner can be found on
page 55 in the appendix.]
The Chairman. Thank you, Mr. Fenner.
Let me begin the questioning with Mr. Ferguson. In the
Fed's initial proposal, Treasury checks were exempted from
being electronically truncated. Can you explain to the
subcommittee why this provision was included in the initial
draft? Assuming that there will be universal security
precautions, shouldn't we be able to assume the safety of both
federal checks and of private checks?
Mr. Ferguson. That is obviously a very good question. You
are right to note that in the draft that had been originally
sent up from the Board, an exemption for the Treasury was
included. That was included explicitly after some discussion
with the Treasury. I do note that in H.R. 5414, there is no
such exemption. From my personal point of view, and I think
others who have thought about this would share this
perspective, if the government through the course of the
Congress and then through legislation signed by the president,
believes that this approach as put forward in H.R. 5414 is a
proper approach, then I would think it is quite reasonable for
representatives of the Treasury to come forward to Congress and
explain why it is that one set of checks issued by the
government should be exempt from a procedure when we are
allowing it for others.
The other thing to recognize is, as I have said before,
this is really a question in which there are options being
presented. Truncation is not being mandated. I do not think we
should have the debate about truncation, so much as about
whether or not one piece of paper should be allowed to
substitute for another. But to answer your question again on
the Treasury, I think it is appropriate since it is not
included in the Act, for them to simply come forward and
explain their rationale. That seems to me a perfectly
reasonable place to start this discussion.
The Chairman. We appreciate the Fed's efforts in this
regard to modernize our payments system. Have you had any
estimates as to how much money the government can save as a
result of this legislation?
Mr. Ferguson. What we know overall, not just the
government, but overall in the country, the cost of processing
checks is about 50 cents per check, which is about $20 billion
given that there are 42-43 billion checks written. It is very
hard to get a sound estimate of the savings that would emerge
out of this proposed bill for the following reason. The way the
bill works, it is really up to each individual bank to decide
the degree to which they want to pursue this process of
creating substitute checks, as opposed to sending paper checks
through the system. The bill does something very clever, and I
commend you for it, it puts the onus, if you will, on banks to
look at both the benefits and the costs to determining whether
or not they want to pursue this path. Since we do not know at
this stage the answers from all of the banks that might be open
to using a substitute check, it is very hard to figure out what
the cost savings would be.
I would also encourage you--I know there will be some
bankers who may have some experience and some exposure in this
area--they may be able to give you the individual institution's
perspectives, but we have not attempted to try to quantify
particular savings here for the country overall, recognizing
that there are decisions that will be made by individual
institutions.
The Chairman. Thank you.
Mr. Fenner, NCUA adopted truncation back in 1980, and it
did so even though there were some objections raised by the
opponents for such a change. What has been your experience in
this change? Is there any potential undue harm done to
consumers because of the system that you have developed?
Mr. Fenner. The potential is always there, of course, but
our experience has been very positive.
The Chairman. Have you had any horror stories in those 20-
some years?
Mr. Fenner. No, we do not. We actually first authorized
sharedrafts for credit unions way back in 1974. From that time
until 1982, we required truncation. We stopped requiring it
when we deregulated in 1982, so for the last 20 years, it has
been the choice of each individual credit union whether to
truncate the drafts or return them to the member. There is
something in the range of 6,000 credit unions offering
sharedraft programs today. Over 90 percent, over 5,000 of them
still make the choice to truncate. What that suggests to us is
that they find it to be more efficient and that their members
accept it.
The one specific piece of information I can give you about
consumer complaints is that we did survey our regional offices.
In the last two years, we have had only two complaints come to
our attention from credit union members, and those were
complaints about the fees that they were assessed for obtaining
an original or a copy of a draft that they needed.
The Chairman. If you could just take me briefly through--I
am a member of the Wright-Patman Federal Credit Union here on
the Hill. I write checks to all kinds of folks. Take me through
the process as to how the system works today, versus what it
was before 1980. I would not notice any real difference unless
I insisted on having my canceled checks, right?
Mr. Fenner. The only difference which I think is immaterial
to the credit union member is that until 1980, credit unions
were required to use what we call a payable-through bank and
truncate at that point. Now, they are allowed to truncate at
the credit union, at their corporate credit union or at their
other processor. But in all of those situations, it is the case
that truncation for credit unions takes place very late in the
clearing process, either at the credit union or at the point
where their processor receives the draft.
The Chairman. It is true, though, that the sooner in the
process, earlier in the process you can truncate, the more
savings that are acquired?
Mr. Fenner. The more cost-efficiencies in the collection
and processing of the system, and that is why most credit
unions truncate today. This legislation, if it were enacted,
would give them the ability to truncate at an earlier stage and
provide more efficiencies.
The Chairman. Very good.
My time has expired. The gentlelady from California, Ms.
Waters?
The gentleman from Texas?
Mr. Bentsen. Thank you, Mr. Chairman.
I do have a couple of questions. Governor Ferguson, the
bill has certain consumer protections that I want to ask you
about, then I want to ask you about the whole clearance and
payments. This is a pretty low-tech issue, but thinking about
this bill, I have had a couple of experiences of my own. I was
talking to staff about one where I had paid a phone bill back
in Texas, and went through a six-month debate with the phone
company over whether or not I had actually paid the bill.
Finally, they said you are going to have to send us a check,
and my bank has an image form check that they give you of just
the front. So then I had to order from the bank the image form
front and back and fax it to the phone company, which of course
was a disaster because then they could not read the fax.
Ultimately, seven months later, the phone company realized that
the check I wrote them for $39.50 or whatever it was had been
deposited in a wrong account and so they credited my account
and we worked it all out and the phone company did not go
bankrupt because they did not get my $39.50.
I had another instance where I had a check from a prior
employer some years back that I deposited in my account, and
for whatever reason the number was misread on the back and it
did not go into my account, it went into some omnibus account
within the bank. Ultimately, I went back to my employer, got
the check as it cleared. They found that in fact it did not go
in there. Well, it was a de minimus amount of money, it was not
a huge amount. Nonetheless, how are we certain that this bill
will be structured that everyday consumers are certain that
they can make sure that their funds end up where they are
supposed to, and they do not have to pay $10 fees or $15 fees
to get a copy of the check just to make sure that they are
protected? I understand the high-tech aspect of this, and it
makes perfect sense, but how are we certain that this bill will
protect that? And then I have a follow-up question.
Mr. Ferguson. Very good questions. Obviously, many of your
two anecdotes deal with things outside of the banking system.
They deal with the telephone company and their ability, so we
should recognize that some of these problems are not in the
world of the check. To answer your specific question about how
we can be certain, one of the things that the bill does is it
creates again in the institution that initially decides to
convert the check from the original paper to the image that you
are looking at now, a number of warranties and indemnities that
travel throughout the system. The warranties are quite
important. They say two things basically from the original bank
that converted the check. It says first that this image is an
accurate image of everything on the check that is relevant to
the payment process. And then the warranty also says that there
will not be any double-debits of the type of you might have
mentioned, or you sort of implied.
It is quite important, because if you look through the rest
of the bill, when you get to the section that deals with
indemnities, where in fact all the banks in the line, but
ultimately the one that originally converts the check, agree
that if something goes wrong and they are notified of it, that
they will indemnify for the results, the bad things that have
happened. Under the part where it deals with warranties, they
will not just simply pay whatever the face value of the check
was, but also any of the damages that the bill calls
proximately caused by the failure of those warranties, which
gives a potentially very broad range of protections. It also
gives the banks involved in this an economic incentive to get
it right because they know that if at the end of the day if
they do not get it right, they will have to pay potentially not
just the face value of the check that went wrong, but if it is
the failure of the imaging process or the use of the image or
the electronics, they may have to pay a broad range of damages
that resulted from that failure. That is really I think a very
strong set of consumer protections.
Mr. Bentsen. I appreciate that.
Let me ask another question before my time is up. The way I
understand this Act from your testimony, the clearance system
could almost work electronically, and even though banks
conceivably could do it now under the law, it would be mandated
now so that I write a check on my account at Wright-Patman or
wherever, or Acme Bank and Trust in Texas, and it goes to Acme
Phone Company--they clear that check almost simultaneously.
Does EFAA give the Fed the authority, then, if this were to
become law, where there is same-day settlement on the check so
that the money comes out of my account--basically, are we going
to be able to shorten the time frame with which funds are
available from what it is under the law?
Mr. Ferguson. Let me give you some facts and then answer
your question. First, now about 93 percent of checks clear
overnight. We should recognize that we really have an extremely
efficient check processing system. This bill, if it becomes
law, will make it dramatically more efficient, but we are
working with a system that is pretty efficient. There might be
a few pockets of change where you would see that come down
because of this for sure. Under the EFAA, Congress has in fact
required the Fed to reduce the holds on most checks to try to
get things moving sooner and we will continue to follow that
process. If the banks under this law, which is really not
mandatory, really quite optional--it does not mandate
truncation; it mandates only they accept the electronic image
which they may then--someone may reconvert to paper. If as a
result of this indeed time is compressed, then under EFAA the
Fed should be watching that closely. If it does lead to that
kind of result, then that is what we should do. It is not clear
to me yet what the result is going to be, but obviously that is
what the--
Mr. Bentsen. Madam Chair, if I might very quickly, this is
very important--right now, if you deposit an out-of-town check
in your account, I think it is a two-day or three-day hold
period on the check.
Mr. Ferguson. Right.
Mr. Bentsen. If in fact that check can clear immediately
through an electronic image, should the consumer--in what is in
effect same-day funds for the banks--should the consumer get
same-day funds as well?
Mr. Ferguson. We should be careful about understanding what
happens in terms of the clearing. What this will allow to have
happen first is moving the presentment faster. The bank will
then still have to see if there is sufficient funds. They will
have to go through their process to see if there is a return.
And so while the process will speed up quickly, I do not want
to leave the impression that everything happens sort of
instantaneously. So to keep going, to answer your question,
insofar as there are benefits that emerge here, and again we
have not seen them all yet, the EFAA does require us to monitor
that closely and to change--now, as you observe in some cases,
a three-day hold or a two-day hold for some checks--to change
that. I do not know yet if that is what will happen, but that
is what the EFAA requires us to do. So by definition, we will
have to monitor closely and change the holds that are required
here. But we also want to understand how all this works before
I can commit to you that it will definitely come down exactly
the way you have suggested because we do not have the facts
yet. But the law requires us to monitor closely and to respond
in the way you indicate, but I cannot in all honesty commit
that is--
Mr. Bentsen. That answers my question. Thank you, governor.
Thank you, Madam Chair.
Mrs. Kelly. Thank you very much.
It apparently is now my turn to question, and I have a bit
of business I need to do first, and that is I have two letters
that have been handed to me--one from the Information
Technology Industry Council and another from the NAFCU that I
would like, with unanimous consent, to enter into the record.
With unanimous consent, so ordered.
[The following information can be found on page 112--113 in
the appendix.]
Vice Chairman Ferguson, I want to make it clear that I am a
supporter of Congressman Ferguson's bill, but I am wondering
what the Fed would think about going further than the bill?
Currently, the bill allows checks to be truncated when the bank
in which it is deposited receives it. What if we were to expand
truncating to the point of service? Is this something that the
Fed would consider? Would the Fed support further refinement
and clarification of the rules to eliminate the paper checks
from the system at the retail level?
Mr. Ferguson. My view on this is that what we should do
first is observe how this works. This gives a number of
options. It does not mandate truncation. It allows it to
happen. If it turns out that indeed this process works very
well, then I think Congress--not the Fed--the Congress should
be open to thinking further. This bill does not mandate
truncation. So my perspective on this is that we need to see
how this bill works.
The other question that is important here is the question
of these warranties--the consumer protections I talked about.
It is quite important to understand that if the bank is willing
to provide the same kind of consumer protections that are
discussed here, that might make your proposal in some sense
easier. It is quite important that we understand where the
warranties are and that the interaction between benefits and
costs or risks are similar to what is in the bill. So it is
really a possibility. But my advice, frankly, is to work with
the structure that is here, observe it, see if we can expand
quickly, and that may allow us to go in the direction you are
talking about. But I see no reason why we would object to what
you have said. Being a cautious central banker by definition, I
would like to see how this first approach works before I firmly
say that what you propose is the obvious thing that must be
done relatively quickly. And it does depend again on managing
this question of warranty, so we that we can keep the level of
consumer protection at the right level.
Mrs. Kelly. I think there is some concern on the part of
retailers. I think they are concerned about routing information
on the check reflecting the financial institution, where the
check is drawn; intentional mutilation of the checks, the MICR
line on the checks. I think the retailers are also concerned
that they may not be given the customer's identifying
information on a returned ACH item. That is why I brought this
question up. I do not know if you have thought about those
things or have an opinion on them or not, but if you do, I
would appreciate hearing.
Mr. Ferguson. I have thought about it a bit, and I am
obviously being forced to think about it here again. I am not
sure that there is, while I respect everyone's degree of
concern about something new, I am not sure that there are
sufficient facts to support some of these concerns. The current
check procedure, for example, has very little of the kinds of
problems that you have just alluded to, and I see no reason to
think that because we are under this bill allowing the option
of taking a check and turning it into an image, that the kinds
of concerns you have raised, or other fraud or misbehavior
concerns, should necessarily rise. There is nothing inherent in
taking one piece of paper and converting it electronically to
another piece of paper that creates the kinds of problems that
you have alluded to.
The same thing applies with respect to return. In order for
a return item to work smoothly, then you have got to have the
right set of ABA numbers and return identifiers on the check in
order for this whole process to work. And so I again think that
while in a new world that is being discussed in this bill one
might have some concerns, but I do not think the kind of
concerns that the retailers appear to be raising strike me at
this stage as a credible set of concerns that should slow us
down in thinking through this process.
I go back to the other point with respect to warranties.
Again, the incentives on the part of the bank that decides to
use electronics to convert the original checks to a substitute
check are to do it properly because the cost to that
institution, while it is hard to predict at this stage, could
be larger than simply the amount of money to be paid on the
check because of the point that I have made in response to the
earlier question with respect to damages that may flow from it.
So the incentives are all to do it right, and the reality of
this process is such that I do not think it creates any new
opportunities for fraud or misuse of the paper check. So I am
actually, while I always respect those who are concerned, am
relatively calm that the kinds of concerns that you have raised
seem to me very remote and highly unlikely possibilities.
Mrs. Kelly. I want to ask one further question. Since we
are talking about the element of speed here, I want to know
whether or not you would expect the Fed to reduce the amount of
time that banks put holds on deposited checks, if that is
something that you have any idea about or how short this time
could become. It seems to me that that is a potential
possibility that we could look it.
Mr. Ferguson. Well, as I said in response to the earlier
question, the EFAA does require us to continue to monitor this.
We recognize that now we have got holds that, depending on
where the check is written, are in the three-day range. I want
to be careful not to commit to anything at this stage, but on
the other hand I also want to say that the law requires us to
continue to look down this path and we will obviously continue
to do that. If this process as envisioned in the Act if it
becomes law suggests that indeed there is room to reduce the
degree of holds, and by definition that is what we are mandated
to do. And so that is what we will do. The law will not push us
there. I think it is the result of behaviors and observations
of changes in behaviors that may allow us to go to that point.
Mrs. Kelly. Thank you very much.
Mr. Hinojosa?
Mr. Hinojosa. Thank you.
I would like to ask a question of Governor Ferguson. In
following up with the questions that my friend from Texas, Ken
Bentsen, was asking, are there any time limits on how quickly
the banks and the credit unions must respond? If there is not,
should there be one?
Mr. Ferguson. If you look in the proposal as written, the
consumers have 30 days, potentially extended to another 30
days, to inform a bank that they recognize a problem. The banks
then, and I think in this one it is 10 days they have to--10
days in order to respond to that and to do if appropriate an
initial recredit. There are some safe harbors that might allow
the banks not to do that if it turns out that there have been,
for example, any evidence of overdrafts or it is a brand-new
account. But the answer to your question is basically after the
30-day or 60-day notification from a consumer, 10 days for the
original recredit, and the amount to be recredited is either
the lesser of the face amount of the check or $2,500. When we
did some research on this, the $2,500 covers the vast majority
of checks that are being written. So given the fact it is
unlikely to be a major problem, I think again the range of days
here one could argue is certainly a reasonable place to start
discussion.
Mr. Hinojosa. Are small-and medium businesses utilizing
this new technology to try to pay off a bunch of their bills
electronically? If not, why?
Mr. Ferguson. What we have noticed over the history of
checks over the last 25 years or so, one is that the number of
checks seems to have peaked about 1995 and has come down. But
more interestingly, the average value of checks has also come
down, which is suggesting that businesses in general are
starting to use these technologies. The question of small-and
medium-size businesses versus large businesses I think is one
in which our data does not give us a clear answer. However, I
would say that small businesses and medium-size businesses have
exactly the same incentives as any other business to try to
become much more electronic, because if you get the canceled
check back then you have a real question of storage.
If you find that what you have gotten--and this law allows,
by the way, to get paper back, as I have indicated a couple of
times, if what you find is that you are working with an
institution that truncates checks, and about 30 percent of the
checks in the country are now truncated, then you get more than
enough information to link to the books and records of your
system. So from my perspective, I know that businesses in
general, or those who have tended to write larger checks, have
moved more in the direction of electronics. We know that about
30 percent of checks are truncated, and I think small-and
medium-size businesses should have exactly the same incentives
as any other business to go down that path.
One of the things that has been difficult in the world of
electronification of payments overall is the linkage between
the payment system and the back office books and records of
many businesses is at this stage pretty much nonexistent. So it
makes it very hard to have end-to-end electronics. This bill as
proposed would do nothing about that, and I am not suggesting
that it should, but perhaps one of the challenges for small-and
medium-size businesses is indeed that it is very hard to get
the kind of interfaces that some large institutions have at
this stage because the services, while they are available on
the part of the banks, the investment on the part of a small
business may be more than they want to take on.
Mr. Hinojosa. How do you feel if our committee were to
request that the banks do whatever it takes, through surveys or
through forms, to be able to tell us whether the small and
medium businesses, and even we could go further and say those
that have the small business designation, are utilizing it, so
that if they are not, that we can try to possibly earmark some
money and do some education and help to those so that they can
keep up with all of this technology that is available.
Mr. Ferguson. Obviously, I think in large part you should
ask the banks what they think about that. Obviously, one of the
things that is proposed here that one could talk about is the
need to have consumer education broadly defined. So insofar as
that consumer education includes any customer that comes into
the bank, I think it is written as "customer"--then that would
pick up small-and medium-size enterprises as well, so they
would be educated as are you and I with respect to what at
least a substitute check is insofar as that becomes part of
what they are doing. But certainly, I would say talk to the
banks about their willingness or interest in doing this, and
obviously if the wisdom of Congress suggests that there be
money put forward from Congress to help in the process, that is
always something to which I obviously could not object.
Mr. Hinojosa. Thank you, Mr. Ferguson. And thank you, Madam
Chair.
Mr. Grucci. Thank you for your statements and your
comments. Madam Chair has left and she will be back shortly.
[Laughter.]
Mr. Hinojosa. I apologize.
Mr. Grucci. That is okay.
The chair recognizes Mr. Watt for his questions.
Mr. Watt. Thank you, Mr. Chairman. I will be brief. I want
to apologize to the witnesses for missing their testimony, and
just have one question of Mr. Ferguson. If I understand
correctly from your response to earlier questions, about 30
percent of the process is currently using some variation of
this?
Mr. Ferguson. About 30 percent of checks are currently
truncated.
Mr. Watt. In the same way that this bill basically provides
for?
Mr. Ferguson. Well, this bill does not mandate truncation,
as you know. It just simply makes that an option or makes it
perhaps a more attractive option because it allows for this new
form of paper called a substitute check. What is currently
happening with truncation is not that substitute checks exist.
There are two things that are happening with truncation at this
stage, and our credit union friend may also want to comment on
this. One is that it is just purely electronic from end to end,
if you will, and paper does not follow. More of the truncation
I believe is a truncation with the original check to follow.
And so we have some experimentation with truncation--some of
the experimentation is 30 percent.
Mr. Watt. So would it be fair to say that you do not view
this as being anything radical that is being proposed?
Mr. Ferguson. I do not view this as being radical in the
least. I view it as moving things forward.
Mr. Watt. You made some passing reference to possibilities
of improprieties taking place in the system as it exists now.
Are you satisfied that the technology is such that those
possibilities are either not increased or even reduced?
Mr. Ferguson. I am satisfied that those possibilities are
certainly not increased. They may be reduced because this
process allows what is called the return side of the process to
go much more quickly, which is just saying if the individual
finds that he or she has been given a check to which there is
insufficient funds in the account on which the check is drawn,
or that account has been called, will learn about that more
quickly under this process.
Mr. Watt. I understand the advantages of that. What I am
concerned about is it does--I just want to be clear on whether
you think the possibility of other forms of inappropriate
activity such as hacking into the electronic process--things
that I guess if you hack into the system now, you hack into it
and you take the check. Are you satisfied that the electronics
of this do not increase the risk to customers? I guess that is
the bottom line.
Mr. Ferguson. To be very clear, I am satisfied--to answer
the question the way you phrased it--I am satisfied that the
electronics of this--
Mr. Watt. The technology, I guess. Electronics is not the
future word--the technology, yes.
Mr. Ferguson. I am satisfied that risks do not go up.
Mr. Watt. Okay. I appreciate your response, and unless Mr.
Fenner has some affirmative response, I will yield back the
balance of my time.
Mr. Grucci. The gentleman yields back the balance of his
time.
I have just one quick question for the vice chairman. We
are going to change a policy that people who have been
accustomed to doing for a number of years, and in fact when we
have questions now in our own personal home financing, my wife
will go back to the checks or I will go back to the checks and
pull that one out. People have become very accustomed to that.
I understand that in the modern age we try to speed things up
and we try to make them even more efficient than what they have
been.
By truncating the check process and allowing it to be done
through the Internet, how do we compensate, A, for those people
who may not have access to an Internet, or have access to a
public library or do not live in a community, or simply do not
know how to use that system? What will be happening to those
people? How will they track their checks and their records?
Mr. Ferguson. Let me be very clear. This bill that we are
discussing now does not require truncation. For an individual
who has received a piece of paper called a check, this bill
still allows that individual to receive a piece of paper that
shows exactly the image of the check front and back as it has
gone through the system. It also will have a little stub on it
that basically says, this is an image of your check and it is
the lawful equivalent of your check. So while 30 percent of the
people do not get checks back under truncation currently or 30
percent of checks are truncated, for those who want to hold
onto a piece of paper to prove that indeed a bill was paid,
nothing in this law as far as I can read I will stop them from
doing that if their bank continues to offer that service. There
is nothing in this law that requires a bank to stop offering
that service.
So if you are with a bank today that will give you your
check back, as long they do not change their policy, and this
law does not require them to change their policy, then you can
get either, depending on what happens in their system, the
original check if they have just only gone with the original,
or you can get another piece of paper that is about the same
size of the check that has all of the information on it. So
those who are used to getting back month to month a small
packet of paper that has gone through the system will get once
a month a small packet of paper that has gone through the
system. Now, I happen to not do that, and I have heard Ms.
Waters describe that she does not do that, but there are people
who do and there is nothing in this bill that will mandate any
bank to stop doing that.
Now, the bill would allow banks to decide if it is in their
business interest to try to encourage or incent their customers
to move away from getting those pieces of paper and some of the
benefits that might accrue to the banks may also accrue to
customers, which is true of many services in banks, for example
ATMs. But for an individual who wants that paper and must have
that piece of paper, they can get a piece of paper that shows
them all of the information they need to sleep comfortably at
night. I therefore think that from your standpoint, if anyone
is attached to a canceled check, they will get something that
should give them exactly the same degree of comfort.
Mr. Grucci. Providing that the bank continues that kind of
a policy. If the bank chooses not to, how would they then get
that document?
Mr. Ferguson. Well, there are a couple of things. One is
they can always call the bank and get the information, if that
is very important. Individuals will keep track of, presumably
if they fill out their check register properly, the check
number and the amount and the payee. They can always call the
bank and ask for the image, and that image because it would
either be the best evidence available if they needed some
evidence; it would be potentially a substitute check if they
have gone down the path of creating substitute checks; or they
can go back to the process and get the original check if it
still exists.
The other point to make, if you look at the indemnity
section here, if the original check still exists, there would
be incentives for the bank to bring that forward. If the
original check does not still exist, there are still important
warranties and indemnities about the quality of the substitute
check and the information thereon. So if something has gone
wrong in the system, the fault will go back to the institution
that originally got rid of the original check and went to the
substitute. So there is plenty of room to get all the
information that either will come to you regularly or through a
simple phone call you can get it, or on the Internet or going
to your bank to get it. So if you have a banking relationship,
the bank still has the information, if they have not sent it to
you in one form or another, and it is a simple question of
picking up the phone, going to the bank, going to the Internet,
et cetera. And there are many different ways, and in some cases
on the ATMs, I suspect, may emerge--you may hear from the NCR
representative about that.
So I would say insofar as information matters, you need not
worry. My staff has just send me a note here that part of the
answer I was not going to give you, but to make them happy, I
will.
[Laughter.]
By definition, if you do not like what your bank has done,
you can go to another bank. The reason I did not give that
answer originally, is having been in the process of opening and
closing checking accounts, I know it is not an easy thing, but
by definition if you do not like what your bank has done, you
can always move to another bank. So when all is said and done,
all these centers are to serve customers fully through a range
of services that respond to their needs, either to encourage
them to stay or to go to another bank.
Mr. Grucci. For the benefit of your staff, if all the banks
are doing the same thing, it really does not matter which bank
you would go to. If they are all competing with each other and
one bank is not, then they all are not going to do--
Mr. Ferguson. Let me jump in and defend something here,
though. If there is a broad demand among consumers for getting
pieces of paper back, banks are profit-maximizing institutions,
there will be banks that provide that. There will be banks that
will advertise that as a service if there are sufficient
numbers of consumers that want it. Under this law and under
basic economics, the probability that all banks would do only
one thing is very low if there are consumers who want some
other service, just as we know all shirts are not white, though
I happen to wear white shirts all the time.
Mr. Grucci. I see that my time has expired. I will take the
liberty, though, of just asking one final question. What
happens to all of these checks? Where do they go?
Mr. Ferguson. There is a process called safekeeping, where
the bank that originally receives them may store them for a
period. I think frankly to be honest with you, in the credit
union and other systems, that period in which they are stored
is a relatively short period of time. In other cases, it may be
a very long period of time, but there need be no concern about
that because the way laws in general operate, there is a
concept called "best available evidence." If the original check
is no longer available, then the image becomes the best
available evidence and everything flows off of that. So the
existence or lack of existence of the original check from the
standpoint of anything that a consumer might care about really
should not be that major a deal because laws are structured to
allow for whatever the best evidence is to come forward.
Mr. Grucci. Thank you.
Are there any other further questions from any of the
members? Hearing none, I would like to thank the panel for
their time and their consideration and their insight on this
issue. The chair notes that some members may have additional
questions for the panel which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for the members to submit written questions to
these witnesses and to place their responses on the record. I
will adjourn the first panel and convene the second panel.
Let me take the liberty of introducing our next panel. We
have first Mr. Curtis "Curt" Hage, chairman and CEO of the Home
Federal Bank; Ms. Gail Hillebrand, senior attorney, Consumers
Union; Mr. David Walker, president and CEO, Electronic Check
Clearing House Organization; Mr. Lee Schram, vice president and
general manager of Payment Solutions, NCR Corporation. For the
purposes of our final introduction, I yield to my colleague,
Mr. Pat Tiberi.
Mr. Tiberi. Thank you, Mr. Chairman.
It is a pleasure for me to introduce a constituent of mine.
Joe Biggerstaff has served as the AirNet Systems chairman of
the board since August of 2000, and has served in other
capacities since March of 1999. He has worked in the
transportation industry for 23 years. AirNet is an integrated
air transportation network based in Columbus, Ohio in my
congressional district, and the system operates between 100
cities in more than 40 states and delivers over 18,000 time-
critical shipments each working day. It is the leading
transporter of canceled checks and related information for the
U.S. banking industry, meeting more than 2,200 daily deadlines.
So it is great to have you here, Joe.
Mr. Grucci. Thank you, Pat.
Without objection, your written statements will be made
part of the record. You will each be recognized for five
minutes in summary of your testimony, and we will start with
Mr. Hage.
STATEMENT OF CURTIS ``CURT'' L. HAGE, CHAIRMAN AND CEO, HOME
FEDERAL BANK
Mr. Hage. Mr. Chairman and members of the subcommittee, I
am Curt Hage, chairman and CEO of Home Federal Bank in Sioux
Falls, South Dakota. I am chairman of America's Community
Bankers and I am here today representing the five major banking
and financial services trade associations--ACB, the American
Bankers Association, the Consumer Bankers Association, the
Financial Services Roundtable, and the Independent Community
Bankers of America.
I am pleased to present our views on the proposed Check
Clearing for the 21st Century Act--Check 21. It is somewhat
exceptional that all of our groups fully agree on any topic.
However, we all support efforts to increase the efficiency of
the nation's payments system that benefit both consumers and
financial institutions. I would like to extend our appreciation
to both Chairman Bachus for holding this hearing, as well as to
Congressman Ferguson and Congressman Ford for introducing this
legislation. We also appreciate the outstanding efforts of the
committee and Federal Reserve staffs who have worked tirelessly
to address the issues of all concerned.
While electronic payments are increasing, traditional paper
checks remain the dominant form of non-cash payment. Checks
will continue to play a significant role in the payment system
for years to come. Processing these checks is enormously
expensive and labor-intensive. Current law generally requires
physical checks to move through the entire clearing process
from the bank of first deposit to the payer bank. While
physical checks continue to move through this process, an
increasing number of consumers do not have their original
checks returned to them. Instead, they receive detailed
information about their check transactions in their monthly
account statement. Passage of legislation like Check 21 will
build on this experience and facilitate efforts to remove paper
checks from the settlement process. Those banks that choose to
process paper checks could use substitute checks that would
retain the legal equivalence of the original.
Most importantly, the proposal does not require the
industry to adopt a fully electronic check clearing system. We
could adapt to electronic check clearing over time without
interfering with the existing paper check process. Expanding
electronic check processing will also minimize the effect of
unexpected disruptions to air and ground transportation
systems. It will result in faster check collection, make funds
available sooner, and help combat fraud.
Check 21 will also help increase the use of check imaging.
Many consumers already benefit from this process. Rather than
dealing with bundles of canceled checks, consumers receive
concise and convenient summaries of their transactions. Many
can access check images on the Internet, helping them to
quickly verify their transactions, identify potential errors,
and detect fraudulent transactions sooner. Identifying errors
and potential fraud quickly helps banks minimize customer
inconvenience, control losses, and gives law enforcement an
important time advantage.
Check 21 could provide real benefits to rural communities.
In South Dakota, we are constantly challenged to meet our
federally mandated funds availability deadlines due to adverse
weather conditions and limited access to air courier services.
One Home Federal branch operates in a remote part of the state
that is nearly a five-hour drive from our central processing
point. We often have just enough time to meet the federal funds
availability requirements. Home Federal customers pay a premium
for moving checks across the state. Check 21 would allow Home
Federal and other rural community banks to transmit electronic
images of checks rather than sending them on unnecessary
physical journeys.
Some critics are concerned about relying too heavily on
check images. Our industry's experiences show that these
concerns are unfounded. Home Federal began offering checking
accounts around 1980. From the beginning, we provided customers
with the convenience of check safekeeping. They receive
detailed information about checks drawn on their accounts,
while the original physical check is microfilmed and stored at
our check processing facility. Consumers receive a convenient
summary of transactions and avoid the burden of receiving and
storing reams of canceled checks. Banks reduce mailing and
handling costs. These savings can be passed on to our
customers.
Home Federal began offering the option of having checks
retained several years ago. Still, fewer than 10 percent of our
customers choose this service. Home Federal will soon offer
full image statements of processed check and online access to
images. We expect that once these image products are available,
almost all or our customers will choose not to have their
original checks returned.
Check 21 makes no fundamental change in existing check law,
so we believe that new consumer protections are not necessary.
The banking industry and millions of consumers have an
established history of dealing with truncated checks and image
documents. This experience demonstrates that existing law
provides adequate protections. Check 21 establishes a
complicated expedited recredit and reversal and recredit
structure for consumers and banks. The banking and financial
services trade associations believe this provision is
unnecessary and may result in unintended consequences.
Today, banks respond to customer claims of check fraud or
processing errors in a timely and effective manner. Complaints
are rare. In fact, Federal Reserve staff has indicated that an
informal review of the consumer complaints filed with all the
banking regulatory agencies reveal no significant consumer
issues relating to existing check protections. Complicated new
recredit procedures would confuse customers, create compliance
headaches for banks, and expose banks to fraud.
Our associations support the general principle outlined in
the Check 21 Act to facilitate innovation in the check
collection system. We believe, however, that existing law and
regulations work. We urge Congress to preserve existing law
with respect to substitute checks authorized under this
proposal.
Thank you for considering our views.
[The prepared statement of Curtis ``Curt'' L. Hage can be
found on page 70 in the appendix.]
Mr. Grucci. Thank you, sir.
I should have pointed out at the beginning of the testimony
that there are a series of lights. We try to stay within five
minutes. We are not going to ask you to truncate your
statements, but certainly we would ask you to monitor the
lights, and if you can stay within the five minutes, that would
be great.
Let's move now to Ms. Hillebrand.
STATEMENT OF GAIL HILLEBRAND, SENIOR ATTORNEY, CONSUMERS UNION
Ms. Hillebrand. Thank you, Mr. Chairman and members. I am
Gail Hillebrand from the West Coast regional office of
Consumers Union. Since 1936, Consumers Union has been in the
business of protecting U.S. consumers and their interests. Our
mission is to test, inform and protect. Needless to say, I am
in the protect part of our organization. My written testimony
today is joined by several other national consumer
organizations--Consumer Federation of America, U.S. PIRG, and
the National Consumer Law Center.
Let me start by saying we are not against technology and
efficiency. However, we are against the Check 21 Act in its
present form. I will tell you why. We think that Congress needs
a very good reason before disturbing the existing payment and
financial management habits of somewhere above 45 million U.S.
households. We are concerned that the Check 21 Act essentially
changes the processing of checks to be much more similar to the
processing of electronic payments of other kinds--debits and
electronic funds transaction acts such as your regular
recurring mortgage debit, without providing the same
protections to all consumers.
The Act is ingenious in that each consumer who now gets
their original paper check will get a different piece of paper
called the substitute check. But the Act does not guarantee
that any consumer can receive a substitute check, and you heard
Governor Ferguson say that will be up to the marketplace. The
Act also does not guarantee that any consumer can get the
original if the consumer needs it for a particular reason, such
as a landlord or a phone company who does not understand the
"best evidence" rule and wants to see the original, not
whatever the bank has on hand.
The original will not even be at the consumer's bank
anymore. It will be somewhere else in the check processing.
Quite a bit earlier in the processing scheme than today, where
usually if you have truncation at all, you have got it right
there at your own bank or at the pass through bank. Passing
this Act would permit banks to blame any customer
dissatisfaction with this change on Congress. Sorry, we cannot
give you original checks back anymore. Congress says we can
give you this piece of paper instead. That will not be quite
true, but if your bank no longer has the original check, they
will not be able to give it back to you.
We estimate 45.8 million U.S. households are now getting
their checks back. That is a very conservative estimate,
because it is based on numbers that were provided by members of
the banking industry about the percentage of consumers who get
so-called voluntary truncation now. The numbers we heard this
morning from Dr. Ferguson would suggest quite a higher number
of households getting their checks back, because he said it was
only 30 percent nationwide who have truncation.
So what is the difference? What is the new error rate--the
new potential error? We do not know because this system has not
been used. But we do know that Congress has said when we have
electronic funds transfers, we have consumer protections in the
nature of a 10-day recredit under regulation E, and an ability
to get that money back into the consumer's hands for use very
promptly. You have something in your Act in section six that
looks very much like the reg E 10-day recredit. The reason it
does not work and cannot work for consumers is banks can take
it away simply by saying to the consumer, look, you are not
going to get back your original check anyway, so we would like
you to just say we are not going to send you these foolish
paper substitutes either. Instead, we will give you electronic
image; we will give you online image; we will give you a set of
copies, but they will not be the legal equivalent to your
original check and you will not get that protection of the 10-
day recredit.
We do not know exactly what the new risks are. We suspect
they could include duplication of the electronic image so that
the check is paid twice, or what was described at one of the
many meetings on this Act before the Fed, leakage of the
original check back into the check system, so that both the
original and the image might move through and at some point
become two electronic images.
Since the Fed estimates only one-quarter of checks are
subject to electronic presentment now, that through bank-to-
bank agreement, we cannot know what will happen if that is 100
percent of checks, or some number higher than the current
level. But we do know that existing law gives us rights as
consumers when we pay with our debit card and we do not think
it makes any sense to say, if you pay with a check, you have
one set of rights; if you get not your original, but these
substitute checks back, and a different set of rights if you do
not get your substitute checks back.
I would also note an important issue related to consumer
privacy. There is a lot of personal information on a check. It
is available now. People could pick it up off the check. But it
is expensive to pick information up off of paper, and when that
information can be picked up off of electronic images, we have
a greater risk for privacy.
You will be hearing from my colleagues, the bankers, that
check truncation has been around for decades--it is not really
a problem. We do not know whether it will be a problem because
consumers have been able to choose yes or no to check
truncation up to now. This will essentially prevent the
consumer from getting the original returned on a regular basis.
That means it would not be surprising to have a small number of
complaints from consumers who have chosen check truncation
voluntarily, but when it is imposed on them, we may see some
different results. But even taking the bankers' numbers--they
gave us an estimate in one meeting of 1.1 billion checks and
480,000 customers asking for their checks back--if you take
that same ratio on the 35 billion checks written per year in
the U.S. or maybe a little higher according to the Fed's
testimony, that is 15 million consumers a year who need their
original check for one purpose or another. That is a lot of
people.
I would like to close by talking about what is not in this
Act. We see the key thing that is not in the Act is a right of
recredit that applies to every check which is not returned to
the customer--every check that is electronically imaged along
the way, regardless of what the very last step is where
something is or is not returned to the customer. We also see
that it has no privacy protections for the use or creation of
databases containing information about consumers' payment
habits in checks. It has no requirement that checks be credited
to consumers any sooner. You heard Governor Ferguson say quite
accurately that the Fed is not making any commitments at this
time in that regard. It places no obligation on the bank to
every provide the original check when the customer feels that
they need that check. It places no obligation on the bank to
provide the substitute check if the customer is not previously
set up for substitute check returns. It places no obligation on
the bank to offer accounts that the customer can use for
substitute checks, and it places no restriction on how much
more those accounts might cost than other accounts.
We respectfully suggest that if Congress is going to revamp
the check system to give all of us the benefits of additional
electronic efficiencies, it needs to do so in a way that gives
consumers the same protections for electronically imaged checks
that we have for other electronic payments.
Thank you.
[The prepared statement of Gail Hillebrand can be found on
page 77 in the appendix.]
Mr. Grucci. Thank you very much for your testimony.
Mr. Walker?
STATEMENT OF DAVID WALKER, PRESIDENT AND CEO, ELECTRONIC CHECK
CLEARING HOUSE ORGANIZATION
Mr. Walker. Mr. Chairman and members of the subcommittee,
my name is David Walker. I am the president of the Electronic
Check Clearing House Organization known as ECCHO. I am very
pleased to be here today on behalf of ECCHO to discuss the
Check Clearing for the 21st Century Act. ECCHO applauds
Congressmen Ferguson and Ford for introducing the Act. We also
commend Chairman Bachus and this subcommittee for holding a
hearing to consider this important legislation.
I would first like to provide some information about ECCHO
and our role in the check clearing process. ECCHO is a
nonprofit nationwide bank clearing house. Our member financial
institutions hold approximately 60 percent of the total U.S.
deposits. ECCHO has developed an extensive set of clearing
house rules. These rules cover multiple check electronification
scenarios, including electronic check presentment and check
image programs. During 2001, ECCHO member institutions
exchanged approximately two billion checks totaling
approximately $3 trillion under one of the various check
electronification programs supported by the ECCHO Rules. In
addition, the Federal Reserve also provides check
electronification services. The Fed used these services to
process about 37 percent of the 17 billion or so checks they
collected in 2001.
Because of our involvement with electronic check programs,
ECCHO has been working with our members and other interested
parties on issues relating to substitute checks since the
Federal Reserve first introduced the concept a few years ago.
For example, we have for some time been working with the
standard-setting organizations to develop technical and
operational standards for substitute checks. As I indicated a
few moments ago, check electronification and check imaging are
in wide use today. However, check images can be exchanged only
if the bank on which the check is drawn and its customer have
agreed to accept the image instead of the original check.
Accordingly, banks today must support two check collection
processes. They need one process for checks they send to banks
and their customers who have agreed to check imaging, and they
need another process for checks they send to banks and their
customers who have not yet agreed to check imaging.
The Act will encourage even more check electronification.
Banks will be able, if they so choose, to convert all of their
paper checks to images and deliver substitute checks only when
necessary. In short, the Act will help bridge the gap to a
fully electronic check collection system. As a result, the Act
will significantly benefit all stakeholders in the check
collection process. These benefits include exciting new
products and services for customers, a significant reduction in
the cost of check collection, and better insulation of the
nation's payments system from disruptions to the air
transportation network, such as occurred after September 11.
ECCHO supports the Act as it has been introduced by
Congressmen Ferguson and Ford. We do have concerns with a few
provisions of the Act, and we have provided a detailed
discussion of these concerns in our written statement. There is
one significant concern with the Act that I would like to
address here today--the January 1, 2006 effective date. There
is no need for delayed implementation. Sending banks will
create substitute checks only when they are ready to do so. The
receipt of the substitute check also will have no adverse
effect on the receiving bank or its customer. This is because
the substitute check can be processed just like the paper
check, and because the Act provides that the substitute check
is the legal equivalent of the paper check.
The financial services industry will shortly be ready to go
with substitute checks. The industry standards for substitute
checks have already been under development for over a year. We
anticipate that they will be ready for use within the next few
months. A delay in the effective date until January 1, 2006
will only delay the many benefits that the Act provides to
banks, their customers, and the nation's payments system.
ECCHO appreciates this opportunity to present our views to
the subcommittee on the Check Clearing for the 21st Century Act
and I would be pleased to answer any questions the subcommittee
might have. Thank you.
[The prepared statement of David Walker can be found on
page 91 in the appendix.]
Mr. Grucci. Thank you, Mr. Walker.
Mr. Schram?
STATEMENT OF LEE SCHRAM, VICE PRESIDENT AND GENERAL MANAGER OF
PAYMENT SOLUTIONS, NCR CORPORATION
Mr. Schram. Chairman Grucci and members of the
subcommittee, thank you for the invitation to testify today. My
name is Lee Schram and I am the vice president of payment and
imaging solutions at NCR Corporation. We are a global provider
of financial and retail technology solutions, with over 100
years of experience in consumer transactions. NCR is the
world's leading provider of ATMs and a global market leader in
retail point-of-sale products. For over a decade, NCR has been
providing imaging technology to banks and our solutions touch
more than 70 percent of check transactions in the United
States.
Mr. Chairman, I represent NCR as well as a consortium of
high-tech companies, including IBM, Unisys and others. In fact,
I have submitted this morning a letter from the Information
Technology Industry Council in full support of House Resolution
5414. This legislation will make the check payment system more
efficient, user-friendly, and provides clear direction and
adequate protection for all parties involved.
Imaging technology is critical for successful bill
implementation. Thus, it is important to understand the
advanced state of this technology to demonstrate its readiness
and to dispel concerns. Check imaging was introduced in the
late 1980s. Most major and over 50 percent of community banks
have been using it for over a decade. Internationally, many
countries truncate checks. Imaging technology is readily
available, secure and reliable today. Image quality is superior
to checks, better than microfilm, and each image can be
uniquely identified and linked to the original check.
While the required technology is ready, concerns have been
raised which I will address. First, while consumers may not be
able to readily access the original check, image technology
provides them with more options to access information,
including online banking and image statements, while
maintaining an audit trail to the original check transaction. A
second concern is the number of times a substitute document may
be converted to a digital check. Ideally, truncation would
occur at original point of presentment with no subsequent
conversion. However, at least initially substitutions will
occur, but digital checks can be reliably created from
substitute documents. Auditing processes exist to prevent
duplicate entries prior to account posting, thereby maintaining
consumer protection.
A third concern, check readability, is eliminated as
technology allows these images to be displayed in a wide range
of sizes to meet consumer needs. The benefits of the bill far
outweigh these concerns. Changes in banking laws written in an
era when checks were cleared across town, rather than
nationwide, have not kept up with technology advances,
resulting in a costly, time-consuming, and fraud-ridden check
clearing process. Today, a check presented to a retailer or a
bank is typically handled over 15 times. Check 21
implementation would utilize technology advances to streamline
the payment process, and at the same time provide new value-
added services to the consumer, like image-enabling ATMs in
more convenient locations.
With Check 21, retailers, where over a third of all
consumer checks are written, will now know within seconds if a
check is good and fraud-free. Consumers and retailers will gain
quicker access to deposits as transactions clear electronically
in minutes, not days. Image-based transactions can be archived
for years and quickly accessed by customers online via the
bank's web site. For consumers not having online access, bank
service centers will access images instantaneously upon
request.
The elimination of moving paper checks around the country
will take significant cost out of the system, from couriers
transporting checks to mail handling. One major banks spends
$25 million annually on courier service, while another spends
$20 million opening envelopes. Market forces will ensure that
consumers realize the savings that result from imaging. The
bill will also virtually eliminate payment system logistical
interruptions such as the grounding of commercial air service
for several days following 9-11.
Now is the time to leverage advances in communications and
information storage to facilitate a more efficient payment
clearing system. The benefits of check imaging should not be
withheld from consumers and financial institutions for another
three years, as currently proposed.
NCR commends Director Roseman of the Federal Reserve and
the Financial Services Committee staff who have worked in a
cooperative manner to deliver a bill that is balanced, protects
consumers and recognizes the immediate and future needs of the
payment system. Through existing proven technologies,
consumers, financial institutions and businesses can enjoy the
benefits of checking accounts with the more effective payment
system.
Mr. Chairman, I thank you and the subcommittee for your
time and attention.
[The prepared statement of Lee Schram can be found on page
86 in the appendix.]
Mr. Tiberi. Thank you.
Mr. Biggerstaff?
STATEMENT OF JOEL BIGGERSTAFF, CEO, AIRNET SYSTEMS, INC.
Mr. Biggerstaff. Good afternoon, Chairman Tiberi. I
appreciate the opportunity to appear before this distinguished
subcommittee in order to testify on proposed legislation known
as the Check Clearing of the 21st Century Act. I am Joel
Biggerstaff, CEO of AirNet Systems, Inc., a critical time-
shipment carrier based in Columbus, Ohio.
With over 130 aircraft and with Department of Defense
certification, AirNet is recognized as an industry leader in
the transportation of checks, time-sensitive medical shipments,
cargo charter, passenger charter, critical parts and other top
priority deliveries. AirNet employs over 1,100 team members
nationwide, with over 300 ground couriers supplementing
industry-leading door-to-door service.
As a participant in the payment system for some 30 years,
AirNet applauds your efforts to improve the overall efficiency
of the nation's check clearing system. We are proud of the part
our company has always played in ensuring the swift and
reliable collection and processing of our checks. We estimate
that AirNet flies 65 to 70 percent of all checks that are flown
from point to point throughout the nation on a nightly basis.
The remaining checks are flown either on the Federal Reserve's
check relay network by large integrators such as UPS, or on
commercial airlines.
On September 11, 2001, we, like you, were in shock at the
news that our country was under attack from the air. The
Federal Aviation Administration's response, of course, was
immediately to ground all aircraft nationwide that morning.
This was the one and the only time the FAA has ever acted to
close domestic national airspace, hereafter referred to as NAS.
Despite the closing of the NAS, however, we at AirNet were
called upon to make several flights on September 11 for the
American Red Cross under what is known as lifeguard flight
status. We were in the air at 3:37 that afternoon on the first
of four flights that day.
The next day, September 12, we flew another eight lifeguard
flights while NAS was still closed. Our banking customers, of
course, still had checks to move. To solve that challenge, we
put into place a massive ground operation to cover as much
territory as possible for our bank customers while NAS was
closed. On September 13, with the reopening of NAS scheduled
for that evening, AirNet received a call from the Federal
Reserve. The Federal Reserve was requesting our assistance to
coordinate the massive movement of checks that had been
awaiting processing since the 11th. We were happy to respond.
In fact, Mr. Chairman, we were in contact with this committee
during that time to advise of our ongoing work plans and to
seek logistical assistance with the Department of the Treasury
in clearing our aircraft. On the evening of the 13th, AirNet
helped move over 500,000 pounds of checks, five times the
normal amount transported on a typical night, and moved another
275,000 pounds later that weekend.
One letter of thanks from a customer illustrates the
quality of our performance, and I quote, on behalf of float
management at Bank of America, I would like to express our
sincere thanks for your dedication to service during the recent
tragedy. Your commitment to your customers has always been
evident in your customer service and delivery quality, and
recent events have proved your competent staff to be
exceptional. Thank you again for your dedication to keeping the
payment system moving, end quote. That quote is from the senior
vice president, Bank of America. With your permission, Mr.
Chairman, we would also like to offer for the record a number
of similar commendations from our customers, including the Red
Cross.
[The following information can be found on page 115--126 in
the appendix.]
The FAA took the right and necessary decision on September
11. It was essential that NAS be closed. However, with all due
respect to some in support of the measure being considered,
reducing the impact of air service dispruption to the payment
systems does not require the passage of new legislation. The
impact of the disruption could have been significantly reduced,
and perhaps been completely avoided had the transportation of
checks in the payment system been given lifeguard status. The
electronic transmission of check images is no guarantee of
uninterrupted check processing. Electronic systems are much
more sensitive to disruption than air transportation, and
indeed cyber-terrorism is perhaps one of the greatest threats
we now face.
Moreover, even with passage of the Check Clearing for the
21st Century Act, truncation would not be mandatory and air
transportation would continue to be critical. Should events in
the future ever cause the closing of NAS again, the air
transportation of checks can be guaranteed by the simple
designation of lifeguard status to these critical shipments.
The electronic transmission of check information, side by side
with air transportation, represents a fundamental principle of
safe and sound banking redundancy. The full functioning of
these two methods of check processing ensures the long-term
integrity of the payment system. Indeed, a policy that
dismantles the air transportation infrastructure could
represent a threat to the integrity of the payment system.
In this regard, the Federal Reserve along with other
agencies recently requested comment on a draft white paper
entitled Sound Practices to Strengthen the Resilience of the
U.S. Financial System. The white paper refers to core clearing
and settlement organizations which it defines as firms that
provide critical clearing and settlement services for critical
financial markets in sufficient volume or value to present
systemic risk and their sudden absence, and for whom there are
no viable immediate substitutes. The events of last September
illustrate that AirNet is a core clearing and settlement
organization. Its ability to operate was and is essential to
the functioning of the U.S. financial system. We therefore urge
that this subcommittee during future deliberations on this
legislation seriously consider conferring lifeguard status for
air transportation activities associated with the payment
system.
Mr. Chairman, by supporting the lifeguard designation for
the payment system, by supporting the policy to protect
redundancy in check processing infrastructure, and by
supporting transportation as a core clearing function, you will
promote and improve the overall efficiency of the payment
system, which is the stated goal of the legislation.
Thank you, Mr. Chairman, for this opportunity to testify. I
would be happy to answer any questions of you or members of the
subcommittee.
[The prepared statement of Joel Biggerstaff can be found on
page 48 in the appendix.]
Mr. Tiberi. Thank you, Mr. Biggerstaff. Without objection,
Mr. Biggerstaff's documents will be included in the record. No
objections.
Mr. Biggerstaff, first question is for you. You mentioned
the first lifeguard flight on September 11 was approximately
3:30 in the afternoon of September 11. When do you normally
take off on any given day with checks?
Mr. Biggerstaff. Our system goes into operation basically
at the close of the banking day. Our initial flights occur late
afternoon and continue through the night until mid-morning the
following morning, moving checks around the country, hubbing
three times through Columbus, Ohio in the process.
Mr. Tiberi. So your point being in your testimony that if
lifeguard status had been issued for that day, there would have
been no interruption of service.
Mr. Biggerstaff. That is absolutely correct. Our system
operates independently of other systems and is very
specifically tailored to the payment system needs. We could
have easily functioned in a normal manner that night.
Mr. Tiberi. In your testimony, you mention that the Fed had
called upon AirNet to help the day that airspace was reopened,
to handle the backlog. Would AirNet be able to run its own
system and the Fed system?
Mr. Biggerstaff. Absolutely. The Fed system and our system
are basically duplicative at this time, operating from the same
points of origin and serving the same end points at the same
time. With capacity availability in both systems, it would be
very easy for a single management structure to create
significant efficiency and improve the service of the system. I
found it interesting earlier that I think the percentage of
checks cleared overnight is 93 percent, as mentioned by the
Federal Reserve. For those checks that flow through our system,
we consistently average in excess of 98 percent in terms of on-
time delivery and subsequent clearance of those financial
instruments.
Mr. Tiberi. Mr. Schram, I am sorry I missed part of your
testimony. I was voting. Can you talk to us about the costs for
implementing a comprehensive system of electronic check
presentation and truncation?
Mr. Schram. The cost really depends on the size of the bank
and the size of the check volume. So if you look at a large
major bank in the United States--the Bank of America, for
example, being the largest check volume today, about 15
percent. Their cost is going to be more just because of the
volume in terms of putting the system in, versus a cost that is
in, let's say, a smaller community bank. Really, volume drives
the imaging technology in terms of the cost.
It depends also on how far you are going with
electronification. Let me give you an example of what I mean by
that. If you are just capturing the check image at truncation
point, that is the capture piece of the check. There is a cost
involved in that piece and again that depends very much on the
size of the bank and the volumes. Then there is also a cost to
store the check in terms of the archive application. Again,
that is dependent on the volume and the size of checks going
into that archive.
So what we see today in our company is the size of putting
in these systems. I will give you a general range. It ranges
between maybe $4 million and $5 million, to $15 million. Again,
it depends very much on the size. Those would be for a major
bank application. Again, a smaller community bank would be--we
do check imaging applications for them that are well under $1
million, as an example. So again, you have to look at check
volume, the through-put, the bank process in order to really
get to a finite number in terms of the cost to put in a check
imaging solution.
And what we have to do in order to do this today with the
banks is to prove a business case payback. We have to be able
to go back to the banks and say, by putting in our check
imaging solution, we are able to give you a more cost-effective
operation. Generally what we do with the banks is sit down and
go through how much is it costing to do an application today or
run their operation today, and we have to make business-case
paybacks that they put on our technology. I think that is a
very important thing here. So they have to get the proof that
our solutions can actually provide benefit to them and their
customers.
Mr. Tiberi. So your belief is that the cost to community
banks would not be prohibitive.
Mr. Schram. I do not believe so at all. In fact, like I
said, we are providing this technology today and similar to the
major banks, they go through a payback analysis with us, and we
sit down and cost-justify our solution and our technology
versus the benefits it provides to the banks and their
consumers. It runs the same whether you a major bank or whether
you are a very small community bank.
Mr. Tiberi. NCR is a leader in technology. Some would say
that if we went to this system tomorrow, because of some
vulnerabilities in technology networks, peer networks, the
computer infrastructure would be vulnerable from maybe some
sort of cyber attack. Can you give your thoughts on that issue?
Mr. Schram. Security is a major concern. It comes up often.
But there is encryption technology, closed network technology
that basically surrounds what we do in terms of imaging
technology today that is very similar to ACH and debit and
credit card technology. So the technology exists out there
today. I think it is important that as you also follow the
check through the capture point of the image all the way into
the archive, there is archive security around not being able to
change the check image that is in the archive; not be able to
move things around. I mean, there is all sorts of technology
both in the hardware and the software side that supports the
security around the check. So it is all things that we are
readily doing today and that are available today.
I might also make a comment on ANSI standards, because one
of the things that we are working with is the ANSI standards
committee basically to draft and develop standards around check
signatures, to make sure that those signatures are only and can
only be assigned to one check. That is very important as well.
So we are not only pushing the encryption and the closed
network technology and strengthening that. We are also working
with them on other standards that we can continue to do to even
improve security even more.
Another final comment I think is very important is, paper
checks today are not totally secure either. We continue to read
where courier services, checks are stolen from them. There are
a lot of stories out on check washing. Finally, there is a lot
of fraudulent paper checks and signature forgeries that can be
done as well. So I think you have to look at the balance
between this. We really believe that the security is there
today around imaging.
Mr. Tiberi. Thank you, sir.
I am just going to continue to ask questions here. This is
a pretty good position to be in.
[Laughter.]
Mr. Walker, opponents of the legislation have objected to
allowing recredits to be granted only to customers that request
substitute checks instead of other forms of check truncation or
safekeeping. Can you address the objections and share with me,
at least, your views of why additional notification would not
be a viable option?
Mr. Walker. The history and the experience in the industry
is that for the last 30 years, banks and other financial
institutions have been involved in check truncation and
safekeeping processes. As Vice Chairman Ferguson indicated
earlier, approximately 30 percent of existing check volume does
not get returned back to customers today. We would suggest that
this history indicates that there really is not a need for
additional protections for the consumers; that consumers are
adequately protected today when they receive check images. In
fact, the experience that we have gained from the banks as well
as from the Federal Reserve and from credit unions and other
organizations would indicate that there are very few customer
complaints in the area of check truncation and imaging.
So the difference that you are talking about is in fact
created by the Act itself. If there is a need for some
additional protections in this more electronic process, the
additional protections should only be provided to the customers
where they have not agreed to get their original checks back,
and they only receive substitute checks back. So the difference
in consumer protections that you are asking about is in fact
created by the Act itself. Even in the absence of lsuch
protections, we think there is adequate protection under the
existing check law, and there is no significant evidence to the
contrary.
Mr. Tiberi. Thank you, Mr. Walker.
Ms. Hillebrand, I was here for most of your testimony, and
your primary concern seemed to rest with the consumer's
ability, the customer's inability to receive their original
check back under this proposed legislation. Don't the benefits
of the security issue that we talked about, the increased
effectiveness, the expedited check presentation--do not those
things outweigh the concern that you have, based upon the fact
that we can at the end have a substitute check?
Ms. Hillebrand. Let me respond to that, and then amend
slightly your question. We have two primary concerns, and you
identified one of them, which is getting the checks back. There
are a lot of possibilities that have been raised about benefit,
but the statute does not require that those benefits be
delivered to consumers. In the Federal Reserve Board summary of
the Act, they say I think quite candidly that this could reduce
bank operating costs, quote, with savings passed on to
shareholders in the form of higher returns, or to consumers in
the form of lower fees, unquote. We do not know whether these
so-called benefits will exist for all consumers.
Certainly, some consumers are in the electronic age and
want imaging and there is some customer demand for that. Those
consumers are being served today in the marketplace. But other
consumers who do not want that are going to lose something that
they now have, which is the paper check. But more importantly,
even those consumers who have said no thank you, I do not need
to get my checks back, their checks will be processed
differently. Their checks will be processed more
electronically. You have that exhibit that Governor Ferguson
gave you that shows, bank one, bank two, bank three, bank four.
Today, when truncation occurs, it occurs right there at the end
at bank four. Under the Act, it is going to occur somewhere
near the beginning, probably at bank one or maybe at bank two.
And then it will be converted in and out of electronic and
substitute form. We think that that process creates for
consumers the same kinds of risks that we face when we pay with
a debit card. We should get the same kinds of protections.
And the Act does have some protections, but it sort of
gives them in section six, and then it takes them away by
saying, well, if your account agreement does not call for
substitute checks, you do not get those protections after all.
I have a hard time explaining this to my colleagues, and I
cannot imagine explaining it to my mom, or you explaining it to
your constituents. If you insist on your original checks back,
you will not actually get them, you will get something else,
but you will have certain rights that you will lose if you say,
oh, no thank you, the copy the bank is going to send me looks
just like the substitute check. I cannot get my original checks
back anyway; I may as well agree to the copy; maybe the account
is a dollar a month cheaper. Consumers are not going to know
that they are losing that important recredit right.
So the Act kind of creates the right and then takes it away
at the same time through what is essentially a waiver by
agreeing to voluntary truncation. We do not think that makes
any public policy sense.
Mr. Tiberi. Mr. Hage, could you comment on the same issue?
Mr. Hage. Our experience at Home Federal has been that 90
percent of our customers have chosen to do business with us and
have their checks truncated since the beginning of our offering
checks. Ten percent of our customers have elected to keep a
paper form. The feedback that we are getting from our customers
is that when we go to check imaging, those 10 percent who are
now getting the paper back have a high propensity to convert to
check imaging. So the notion that there is a mass of consumers
out there who are clinging to the paper as a security blanket I
think is unfounded in today's world.
This Act does not require nor force any bank to refuse to
process paper. It only allows those banks who find it
advantageous for themselves and for customers to now have a
legal choice to use a substitute check, which facilitates then
the use of the electronic form of transmitting those checks.
When you think about the number of times that paper is handled,
and at a minimum it is five to six times per check, think about
all the risks that are embedded in that. If you can transmit
this information electronically, you reduce that down to two to
three handlings, and from that point on the data is secure in
an electronic form that cannot be altered and can be passed on
to any point of use in the system. There is certainly a lot
more security in an electronic form of transmitting this kind
of information. There is a lot less risk of losing, mutilating,
losing, otherwise inadvertently destroying or having limited
access to the paper.
I also encourage you as a committee to think in terms of
the private sector forces, the market forces that are in play
here that are very real. My company spends several hundred
thousand dollars a year in marketing to attract customers to
come and do business in our bank. We are not going to turn our
backs on them and we are not going to fail to give them the
quality of service that they are going to demand in order to
continue to stay loyal customers to our bank. I think that is
true in every bank in this country. We pay dearly to get
customers, and we work very hard to keep them. So if there is a
sentiment among customers that they are being mistreated or
misrepresented, we are going to respond to that.
Mr. Tiberi. Just to follow up on your comments, then--you
believe that if there is an outpouring of customers who say, I
want my paper check, you think there will be some banks who may
respond to that? Is that what you are saying?
Mr. Hage. Absolutely, and my bank is one of them. The
reason we added paper check processing to our system was
because we acquired a bank where the majority of the customers
at that bank were used to getting paper back. And we did not
want to lose contact with those customers or drive them out of
our bank to another bank. So we incurred the expense to provide
paper check returns to satisfy that segment of customers, and
they are very happy with the way we have done it. Our response
to them now is that more competitors in our marketplace are
offering check imaging, and our customers are saying, when will
Home Federal do that? We are going to offer it in the next 30
to 45 days.
Mr. Tiberi. Responding to the market.
Mr. Hage. Responding to the market.
Mr. Tiberi. Mr. Walker, do you have any thoughts on the
same subject?
Mr. Walker. I do not recall, sir, whether you were here at
the time that Mr. Bentsen was describing scenarios that he had
experienced earlier.
Mr. Tiberi. I was not.
Mr. Walker. In his scenarios, he described checks that he
had written and some difficulty he had in being able to get
back information about those checks. These scenarios involved
traditional paper checks. One of the key benefits that we think
customers would begin to see with check imaging very early on
in the cycle would be improved customer service on the part of
the bank, because having access to electronic records of all of
those checks would make it much easier to find and then provide
the answers to customers about their questions than if you had
to find either a microfilm copy in storage someplace, or
physically go find the paper check, if the check is safe-kept.
In this world where you would have electronic images,
including pictures of all of those check's front and back, the
banks' customer service areas would more readily have access to
that information, and frequently would be able to answer a
customer's questions while they are still on the phone, not
several days or weeks later when the bank might be able to
physically access the piece of paper.
Mr. Tiberi. You guys are not in the banking business, but
any thoughts?
Mr. Schram. Just one other thing. Think about yourself
personally and if you have a check that you want to cash today,
or if you want to deposit it today. You walk up to an ATM
machine. The technology is coming right now and available where
you can basically put that check into the ATM machine and what
will happen is an image of the check will automatically come up
on the screen, and it will ask you to confirm whether the
deposit amount is correct or whatever. And it will
automatically then be able to start flowing down the check
payment system. Whereas today, you walk in, you put an envelope
in and you do not necessarily know where it is going, where it
is flowing. You know you put the paper in, but what you will
get immediately at that point of presentment is the opportunity
to know, yes, I deposited that; yes, I validated the amount;
and yes, I now know that once it has left my hands now and it
is going down the payment system, I will be able to know that
that image is a good image and I will know immediately at that
point in time, rather than waiting, and did that black hole
that is just went into actually accept my check and what
happened to it, and so on and so forth.
So we believe the technology is a real nice place for all
parties involved in this, especially for the consumers.
Mr. Tiberi. Joe, any comments on this issue?
Mr. Biggerstaff. I would like to address one comment made
relative to justification from a security standpoint, from
migration to an electronic platform. In our company's history,
we have never had a theft of canceled checks that we carry in
the form of consolidated cash letters. So from a security
standpoint, we do not have that issue of losing checks in
transit.
Mr. Tiberi. A good way to end it. Just a note, again to
thank Chairman Bachus for having this hearing today. He was
pretty excited yesterday about kicking this off and beginning
this debate. Let's think of him as he helps his mother in the
coming days. I know this issue will be on our plates in the
coming weeks and coming months. I really appreciate you all
coming out today and spending some time and talking to us about
the issue.
The chair notes that some members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for members to submit written questions to these
witnesses and to place the response in the record.
This hearing is adjourned. Thank you.
[Whereupon, at 12:53 p.m., the subcommittee was adjourned.]
A P P E N D I X
September 25, 2002
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