he House Financial Services Subcommittee on Financial Institutions held a hearing on April 20, 2005 on the implementation of the Check Clearing for the 21st Century Act, or Check 21. Several speakers testified on emerging areas of concern since the law's implementation last October. Testimony indicated consensus on one thing: Despite the law's slow rate of adoption, there is still confusion over Check 21 among the financial services industry and consumers.

Testimony in general also showed that improved consumer education is necessary in order to explain the advances in technology the banking industry is counting on to streamline payments, including check processing.

According to Subcommittee Chair, Spencer Bachus (R-Ala.), the purpose of the hearing was to address consumer concerns about Check 21. Because the law was enacted to benefit consumers, its goals should align with their experiences, and the benefits of technology should apply to everyone, he said.

If lawmakers need to modify the terms of Check 21, even though it's barely seven months old, now is the time to consider issues the law doesn't currently address. One of the main issues presented to the Subcommittee in testimony is the amount of time banks are allowed to hold funds before releasing availability, and whether they profit from it.

Consumer advocate groups say that banks have an unfair advantage in being able to hold funds and should share with customers the benefits that result from the faster check clearing times Check 21 creates. However, some speakers recommended that the funds availability schedules not be shortened formally until the check processing system is more efficient.

Testimony overall covered a wide range of topics, including federal regulations governing different types of electronic payments, consumer rights and the difficulty consumers have in differentiating various types of electronic payments.

Check 21's perception problems have as much to do with the proliferation of new payment methods as the often confusing conditions it lays out for replacing paper checks with digital images.

Michael Oxley (R-Ohio), Chairman of the House Committee on Financial Services, addressed the main areas of confusion in a written statement prepared for the hearing. Check 21 allows banks to continue accepting and processing paper checks; it also expands consumer protection beyond existing check law, he wrote.

Supplanting digital images for paper checks, according to Oxley, "does not change the way checks are processed and presented for payment. Because Check 21 merely improves the movement of checks, all of the check law protections that have existed for over 100 years will still apply.

"It is my understanding that a lot of the confusion of late has resulted from the explosion in the use of accounts receivable checks, or ARC. Consumers have not been well informed of what ARCs are and what protections they have under this system," Oxley wrote in his statement.

Elliot C. McEntee, President and Chief Executive Officer of NACHA - The Electronic Payments Association, presented information comparing the use of the automated clearing house (ACH) network for converting checks to electronic transactions, to Check 21.

The ACH network, as well as the federal rules governing those types of payments, could serve as models for any future modifications to Check 21, McEntee said. As the number of checks written continues to decline, ACH payments are experiencing phenomenal growth.

In 2004, 12 billion ACH payments valued at more than $28 trillion were made, which is an increase of 21.6% over 2003. These included all types of direct deposits and payments, and ARC.

ARC payments reached more than 1.25 billion in 2004, a six-fold increase over 2003, and accounted for 54% of all ACH payments.

More than 99% of U.S. financial institutions participate in the ACH network, as do 5 million businesses and 145 million consumers. Additionally, check writing consumers have better protection under ACH regulations set by NACHA and the federal government, McEntee testified.

The use of digital images to replace paper documents is not increasing at nearly such a clip, however. "As the ABA and the banking industry predicted, Check 21 was not a 'flip of the switch' event, in part because moving to electronic check processing is voluntary ... we feel that the industry ramp-up period will most likely occur somewhat slowly over several years," American Bankers Association (ABA) Chairman and Wachovia Bank Executive Vice President Elizabeth Duke testified.

Despite her bank's leadership role in electronic check processing, Duke indicated that Wachovia does not anticipate that any more than 2% - 3% of its checks will be processed via image exchange this year.

Large corporations, however, are requesting that their banks process images of checks; the average amount of a check converted into an image is between $13,000 and $15,000, according to Federal Reserve Board numbers cited by Duke.

The expense and infrastructure required for Check 21's implementation have resulted in most banks adopting the law at a snail's pace. "Most consumers have yet to notice an impact," she said.

In reality, the confusion consumers do notice is not related to Check 21. "Electronic check conversion is sometimes mistakenly associated with Check 21," said Louise Roseman, Director of the Federal Reserve Board's Reserve Bank Operations and Payment Systems, in her testimony.

As electronic payments, including check conversion, proliferate and become less expensive to process (ACH transactions cost less than one-fifth of checks), better information for the industry and consumers is necessary, she said.

"Electronic check conversion does not involve the collection of checks or the use of the authority granted by Check 21," Roseman testified. "In 2004, approximately 1.5 billion checks were replaced by electronic check conversion."

The barrage of new products and ways of transferring funds on the market is responsible for generating much of the misinformation consumers have regarding Check 21, Georgia State University College of Law Professor Mark Budnitz, a specialist in consumer payment systems law, testified. Check 21's intricate rules only contribute to the sense of loss of control many consumers feel, he said.

"It establishes obligations and deadlines that are different from those imposed by other payment law," Budnitz said. "The result is a law that is confusing and unfair. People cannot understand their rights and obligations. Unfairness undermines consumers' trust in financial services institutions and in the law itself."

The Fed will continue to monitor issues around Check 21's progress and implementation, Roseman said. This will include better consumer outreach programs on Check 21 and electronic check conversion procedures.