While cash is convenient for small dollar
transactions, for larger value transactions individuals, businesses, and
governments generally use checks or electronic funds transfers. Measured by the
number used, checks continue to be the preferred noncash payment method.
However, their use has begun to decline in favor of electronic methods. In 2001,
the Federal Reserve conducted an extensive survey on the use of checks and
other non cash payment instruments in the
In 2004, the Federal Reserve conducted
another study to determine the changes in noncash payments from 2000 to 2003.
That study found that the number of noncash payments had grown since 2000 and
that checks were the only payment instrument being used less frequently than in
2000.
Of the estimated 36.7 billion checks paid in
2003, approximately 8.7 billion were “on us checks,” that is, checks deposited
in the same institution on which they were drawn. In 2003, the Reserve Banks
processed more than 58 percent of interbank checks, checks not drawn on the
institution at which they were deposited. Depository institutions cleared the
remaining checks through private arrangements among themselves. These private
arrangements include sending checks directly to the depository institution on
which they are drawn, depositing the checks for collection with a correspondent
bank, or delivering the checks to a clearinghouse for exchange. Processing
interbank checks requires a mechanism for exchanging the checks as well as for
the related movement of funds, or settlement, among the depository institutions
involved.
For checks
collected through the Reserve Banks, the account of the collecting institution
is credited for the value of the deposited checks in accordance with the
availability schedules maintained by the Reserve Banks. These schedules reflect
the time normally needed for the Reserve Banks to receive payments from the
institutions on which the checks are drawn. Credit is usually given on the day
of deposit or the next business day. In 2003, the Reserve Banks collected 16
billion checks with a value of $15.8 trillion
In 2003, the
Reserve Banks, acting as fiscal agents for the
Since it was
established, the Federal Reserve has worked with the private sector to improve
the efficiency and cost effectiveness of the check collection system. Toward
that end, the Federal Reserve and the banking industry developed bank routing
numbers in the 1940s. These numbers are still printed on checks to identify the
institution on which a check is drawn and to which the check must be presented
for payment. In the 1950s, the magnetic ink character recognition (MICR) system
for encoding pertinent data on checks was developed so that the data could be
read electronically. The MICR system contributed significantly to the
automation of check processing.
In the 1970s, the Federal Reserve introduced
a regional check processing program to further improve the efficiency of check
clearing, which resulted in an increase in the number of check processing
facilities throughout the country. In response to the recent decline in overall
check usage, the Reserve Banks began an initiative to better align Reserve Bank
check processing operations with the changing demand for those services. As part
of the initiative, the Reserve Banks standardized check processing, consolidated
some operations, and reduced the overall number of their check processing sites.
Other
improvements in check collection have focused on when a customer has access to
funds deposited in a bank. Until the late 1980s, depository institutions were
not required to make funds from check deposits available for withdrawal within
specific time frames. In 1988, the Federal Reserve Board adopted Regulation CC,
Availability of Funds and Collection of Checks, which implemented the Expedited
Funds Availability Act. Regulation CC established maximum permissible hold
periods for checks and other deposits, after which banks must make funds
available for withdrawal. It also established rules to speed the return of
unpaid checks. In late 1992, the Federal Reserve Board amended Regulation CC to
permit all depository institutions to demand settlement in same day funds from
paying banks without paying presentment fees, provided presenting banks meet
certain conditions.
Substitute check
In addition to processing paper checks more
efficiently, the Federal Reserve has also encouraged check truncation, which
improves efficiency by eliminating the need to transfer paper checks physically
between institutions. To that end, the Federal Reserve worked with Congress on
the Check Clearing for the 21st
Century Act, commonly known as Check 21, which became effective
October 28, 2004. Check 21 facilitates check truncation by creating a new
negotiable instrument called a substitute check, which is the legal equivalent
of an original check. A substitute check is a paper reproduction of an original
check that contains an image of the front and back of the original check and is
suitable for automated processing, just as the original check is. Check 21
allows depository institutions to truncate original checks, process check
information electronically, and deliver substitute checks to depository
institutions if they require paper checks. In 2004, the Board amended Regulation
CC to implement Check 21.